Investment Highlights

• We maintain BUY on TSH Resources with a higher fair value of RM1.25/share vs. RM1.21/share previously. Our fair value for TSH is based on an FY21F PE of 25x. We have raised TSH’s FY21F net profit by 2.8% to account for a higher average CPO price of RM2,500/tonne compared with RM2,400/tonne originally.
• TSH’s 9MFY20 core net profit of RM57.3mil (ex-forex loss of RM10.9mil) was slightly above our forecast but within consensus. We have raised TSH’s FY20E net profit by 5.3% to account for a higher-than-expected plantation operating profit margin.
• We believe that TSH’s results in 9MFY20 would have been stronger without the RM9.0mil loss on commodity futures contracts and 57.3% QoQ plunge in the net profit of the palm refinery in 3QFY20. EBIT of the “others” division (cocoa and biomass) also plunged to zero in 3QFY20 from RM7.5mil in 2QFY20.
• TSH’s core net profit of RM49.2mil in 9MFY20 included insurance claims of RM13.3mil in respect of the fire at the Ekowood plant in Gopeng, Perak. These were partly offset by write-offs on inventory, property, plant and equipment of RM13.4mil.
• TSH’s gross profit rose by 5.2% YoY to RM191.1mil in 9MFY20. The 86.3% YoY climb in the EBIT of the palm division in 9MFY20 was partly negated by a 43.7% plunge in the earnings of the “others division. “Others” was affected by a weaker demand for cocoa products and drop in the sales volume of biomass resulting from insufficient feedstock in 9MFY20.
• Average CPO price realised grew by 24.7% to RM2,377/tonne in 9MFY20 from RM1,906/tonne in 9MFY19. FFB production grew a mere 0.6% YoY in 9MFY20. TSH’s Malaysia unit posted a 3.6% YoY rise in FFB output in 9MFY20 while that of Indonesia slid by 0.8%. Indonesia accounted for 88.7% of TSH’s FFB output in 9MFY20.
• We attribute the weak FFB production growth in 9MFY20 to tree stress after a productive 2HFY19. TSH’s FFB output rose by 7.0% YoY in 2HFY19 in spite of the haze and drought, which took place in 3Q.
• The share of net profit in the TSH/Wilmar palm refinery fell to RM13.8mil in 9MFY20 from RM18.5mil in 9MFY19. On a quarterly basis, the share of net profit in the palm refinery dived by 57.3% to RM3.5mil in 3QFY20. We believe that the refinery was affected by the surge in CPO prices in 3QFY20.

Source: AmInvest Research - 19 Nov 2020