Investment Highlights

• We are upgrading our recommendation on TSH Resources to HOLD from SELL with a slightly lower fair value of RM1.20/share vs. RM1.24/share previously. Our fair value for TSH is based on a FY22F PE of 18.0x.

• We have reduced TSH’s FY22F net profit by 2.5% to account for lower earnings from the “Others” division (cocoa, wood flooring and biomass activities). Demand for chocolates is expected to be soft due to the slow recovery of cross border travelling. The “Others” unit swung into a loss of RM0.9mil in 1HFY21 compared with an EBIT of RM14.3mil in 1HFY20.

• However for FY21E, we have raised TSH’s net profit by 44.0% to account for a higher average CPO price of RM3,300/tonne and palm EBIT margin. TSH’s annualised 1HFY21 core net profit (ex-unrealised forex loss of RM12.4mil) was 49.1% above our forecast and 25.3% above consensus estimates.

• Recently, TSH proposed to sell 2,933ha of oil palm estates and a palm oil mill in Sabah to Sharikat Keratong Sdn Bhd for RM248.0mil. We believe that the proposed disposal would not affect TSH’s earnings significantly as the loss of FFB would be compensated by lower interest expense. FFB from the estates, which would be sold off, accounted for 5% of TSH’s FY20 FFB output. We have not accounted for the effects of the proposed disposal in TSH’s FY22F net profit yet.

• TSH’s core net profit climbed by 75.3% YoY to RM72.9mil in 1HFY21 underpinned by higher palm product prices and production. TSH realised an average CPO price of RM3,242/tonne in 1HFY21 vs. RM2,350/tonne in 1HFY20. FFB production growth was 13.2% YoY in 1HFY21.

• TSH’s Indonesia division recorded a FFB output growth of 16.7% YoY in 1HFY21. However in Malaysia, FFB production fell by 14.4%. Indonesia accounted for 91.5% of group FFB in 1HFY21.

• TSH’s earnings would have been stronger in 1HFY21 if not for Indonesia’s CPO export tax and levy. The CPO export tax and levy brought down TSH’s revenue by RM124.9mil in 1HFY21 vs. RM19.4mil in 1HFY20. The impact of the CPO export tax and levy was RM72.2mil in 2QFY21 compared with RM52.6mil in 1QFY21.

Source: AmInvest Research - 25 Aug 2021