Investment Highlights

• We maintain BUY on TSH Resources with an unchanged fair value of RM1.21/share. Our fair value for TSH is based on an FY21F PE of 25x.
• Excluding the one-off gain of RM38.8mil from the disposal of two oil palm estates in East Kalimantan to KL Kepong, we do not expect TSH’s operational profits to be significantly affected at the end of FY22F. In FY21F however, there may be a small earnings deficit as TSH may be repaying only 50% of the targeted borrowings (our assumption) while the loss of earnings from the two oil palm estates is immediate.
• In an announcement to Bursa, TSH said it would be repaying its borrowings within a 24-month period. The two oil palm estates recorded a combined net profit of US$1.8mil in 1HFY20 (FY19: loss of US$1.0mil) on the back of an increase in palm product prices.
• Assuming an interest rate of 4% and TSH repays 50% of the borrowings or RM256.6mil each in FY21F and FY22F, we estimate interest savings to be RM10.3mil per year.
• We have not accounted for all these changes in TSH’s FY21F and FY22F earnings forecasts. The one-off disposal gain is expected to be RM38.8mil, which will be recognised in FY21F.
• We estimate TSH’s net gearing to decline to 67.1% at endFY21F (end-FY19: 90.8%) assuming RM256.6mil worth of borrowings are repaid in FY21F. When all of the RM513.1mil borrowings have been repaid, we think that TSH’s net gearing would fall to 50%.
• In spite of the loss of the two oil palm estates in East Kalimantan, we believe that TSH would not be acquiring landbank anytime soon. We reckon that the group would not be increasing its net gearing ratio after bringing it down.
• Operationally, we have assumed that TSH’s FFB production would improve by 2.0% in FY20E (1HFY20: 5.2%) and 7.3% in FY21F. Unlike other plantation companies, TSH’s FFB production in 2HFY20 may soften compared to 2HFY19 as FFB yields weaken after last year’s robust productivity. In 2HFY19, TSH’s FFB production jumped by 7.0% YoY.
• Due to a higher cost of wages, we think that TSH’s ex-mill cost of production would rise to RM1,490/tonne (FY19: 1,466/tonne) in Malaysia and RM1,750/tonne (FY19: RM1,723) in Indonesia in FY20E. TSH’s fertiliser costs are expected to be flat in FY20E.

Source: AmInvest Research - 10 Sept 2020