Investment Highlights

• We downgrade our recommendation on TSH Resources to HOLD from BUY with a lower fair value of RM1.16/share (vs. RM1.35/share previously). We believe that TSH’s FFB output and profitability would be affected by the sale of oil palm estates to Kuala Lumpur Kepong (KLK) in the future. We think that the disposal would be completed in 2HFY21.

• We have not accounted for the sale of the 10,816ha of oil palm estates to KLK, in TSH’s FY21F net profit yet. The estates recorded a net profit of RM17.6mil in FY20. The disposal of the oil palm estates would reduce TSH’s FFB production by 7% to 10% in the future.

• Our fair value for TSH is based on an FY21F PE of 18x vs. 22x previously. To arrive at TSH’s fair value, we have assumed a lower PE as ESG concerns are expected to affect the valuations of palm oil companies in Malaysia.

• In terms of earnings however, we have raised TSH’s FY21F net profit by 4.0% to account for a higher average CPO price of RM2,700/tonne vs. RM2,500/tonne originally. Due to TSH’s large exposure to Indonesia, we believe that TSH’s average CPO price realised would not be as high as other companies.

• TSH’s FY20 core net profit (ex-forex gain of RM1.6mil) was 7.1% below our forecast but within consensus. The results fell short of our estimate as effective tax rate surged to 31.9% in 4QFY20. Included in TSH’s core net profit in FY20 was a RM10.5mil loss on commodity futures contracts.

• TSH’s core net profit jumped by 97.8% to RM77.5mil in FY20 on the back of higher palm product prices. Average CPO price realised rose by 23.0% to RM2,478/tonne in FY20 from RM2,015/tonne in FY19. FFB production growth was 1.4% in FY20. Indonesia accounted for 89% of TSH’s FFB output in FY20. TSH’s FFB production in Indonesia inched up by 0.9% in FY20 while in Malaysia, FFB output rose by 5.3%.

• EBIT of the “others” division (cocoa, wood flooring and biomass) slid by 46.2% to RM16.1mil in FY20 dragged by weaker biomass and cocoa earnings. Biomass was affected by a shortage of feedstock due to lacklustre industry CPO production in Sabah. Cocoa earnings was hit by a drop in chocolate demand resulting from Covid-19.

• TSH’s net gearing stood at 78.9% as at end-FY20 compared with 90.8% as at end-FY19. Gross borrowings declined to RM1.1bil as at end-FY20 from RM1.4bil as at end-FY19. About 34.1% of TSH’s RM1.3bil gross borrowings were denominated in foreign currencies.

Source: AmInvest Research - 26 Feb 2021