Investment Highlights

• We maintain BUY on TSH Resources with a higher fair value of RM1.35/share. Although we have raised TSH’s FY21F net profit by 27.6%, we have reduced our PE assumption to 22x from 25x.

• We have lowered the PE used to derive TSH’s fair value due to the group’s high exposure to Indonesia. There is risk of higher taxes and levy in Indonesia, which would result in lower selling price compared with Malaysia. More than 80% of TSH’s FFB production are from Indonesia.

• We have increased TSH’s FY20E net profit by 28.7% as TSH’s 4QFY20 palm earnings are expected to be healthy following the surge in CPO prices.

• We have raised TSH’s FY21F core net profit by 27.6%. This is to account for lower interest expense and stronger palm EBIT margin of 15% (FY20E: 15%) as our previous assumption of 12% was too conservative.

• Also, TSH’s reported net profit in FY21F may be higher than the core number due to the one-off gain of RM38.8mil from the RM517.6mil disposal of 10,816ha of planted land in East Kalimantan to KL Kepong (KLK). The proposed disposal has not been completed yet.

• If TSH completes the disposal of the oil palm estates to KLK in 1QFY21, we believe that TSH’s FFB output would fall by 7% in FY21F.

• This may reduce TSH’s FY21F net profit marginally as the loss of earnings from the estates cannot be compensated by higher interest income. The estates, which would be sold off, recorded a net profit of RM8.1mil in 9MFY20 (9MFY19: RM1.1mil). We have not accounted for the disposal of the oil palm estates to KLK in TSH’s earnings forecast yet.

• Currently, we assume that TSH’s FFB production would inch up by 5.0% in FY21F on the back of an increase in mature areas of 2,000ha. We think that the group’s FFB yield would remain flat at 23.0 tonnes/ha in FY21F.

• On a negative note, we forecast EBIT of the “Others” division (mainly biomass and cocoa earnings) to decline by 10% in FY21F. We believe that cocoa earnings would be affected by weak selling prices and sales volume in FY21F.

Source: AmInvest Research - 12 Jan 2021