Investment Highlights

• We maintain HOLD on TSH Resources with an unchanged fair value of RM1.20/share. Our fair value of RM1.20/share is based on FY23F PE of 18.0x. We ascribe a three-star ESG rating to TSH. TSH is expected to be flush with cash after the completion of the proposed disposal of 13,215ha of land in East Kalimantan to PT Kalimantan Industrial Park for RM679.0mil. We think that the proposed disposal would be completed in FY22F.

• TSH’s oil palm estates in Tawau and Kalimantan have not been affected by the wet weather so far. Estate workers are still able to harvest FFB from the oil palm trees currently. In spite of this, we expect TSH’s FFB production to soften QoQ in 4QFY21 due to seasonal factors. We believe that TSH’s FFB production had already reached its peak in June 2021.

• We forecast TSH’s FFB production growth to be 7.0% each in FY21E (10MFY21: 6.6%) and in FY22F. The increase in TSH’s FY21E FFB production is expected to be driven by a recovery in FFB yields in Indonesia after being affected by the lagged impact of the drought in FY20. We expect TSH’s group FFB yield to be 23.0 tonnes/ha in FY21E vs. 22.8 tonnes/ha in FY20.

• Our FFB output growth assumption of 7.0% for FY22F has not accounted for the proposed disposals of 16,148ha of planted land to PT Kalimantan Industrial Park (planted areas 3,700ha) and Sharikat Keratong Sdn Bhd (2,933ha). On a full-year basis, we estimate that the proposed disposals of the land would result in a 4% to 8% fall in TSH’s FFB production. TSH’s planted landbank would decline from 42,272ha as at end-FY20 to 35,639ha.

• On a positive note, the disposal proceeds of RM907.0mil (from the sale of land to PT Kalimantan Industrial Park and Sharikat Keratong Sdn Bhd) are anticipated to reduce TSH’s net gearing to 20%–30% from 78.9% as at end-FY20.

• Also excluding the one-off gain on disposals, there is minimal impact on TSH’s net earnings as the loss of FFB would be compensated by lower interest expense from the repayment of borrowings.

• We reckon that TSH’s ex-mill cost of CPO production in Indonesia would increase to a range of RM1,700/tonne to RM1,800/tonne in FY22F from about RM1,600/tonne in FY21E due to higher costs of fertiliser and wages. We believe that the 7.0% increase in CPO production in FY22F would not be enough to offset the rise in the cost of production. Fertiliser costs have surged by over 30% due to a global shortage.

Source: AmInvest Research - 7 Jan 2022