Investment Highlights

• We maintain SELL on TSH Resources (TSH) with an unchanged fair value of RM1.40/share. Our fair value is based on an FY23F PE of 18.0x. We believe that there is limited upside to CPO prices as palm production is expected to improve in the coming months. We have a three-star ESG rating for TSH.

• TSH’s FFB production is expected to increase by 5.0% in FY22F (FY21: 1.4%). Although TSH’s FFB output fell by 13.4% YoY in 2MFY22, FFB yields are expected to improve going forward on the back of seasonal factors. TSH’s FFB in Indonesia slid by 16.0% YoY in 2MFY22. So far, TSH has not faced weather issues at its oil palm estates in Sabah and Indonesia.

• TSH’s FY22F FFB growth would have been stronger if not for the RM228.0mil disposal of 2,933ha of oil palm estates in Sabah to Sharikat Keratong Sdn Bhd. The proposed disposal was completed in March 2022. The 2,933ha of oil palm estates in Sabah used to account for about 4.0% of the group’s FFB output.

• We think that TSH’s ex-mill cost of production inIndonesia would increase to a range of RM2,000/tonne to RM2,200/tonne in Indonesia in FY22F from RM1,630/tonne in FY21 as fertiliser costs are anticipated to double. TSH has locked in fertiliser supply for 1HFY22. We believe that costs of transportation and wages would also rise by about 5% to 10% in FY22F.

• In spite of the increase in TSH’s cash reserves, the group’s new plantings of oil palm are expected to be minimal in FY22F (FY21: a few hundred hectares). This is because the RSPO approval process for new plantings takes a long time. Cost of new plantings until maturity is anticipated to range between RM15,000/ha and RM20,000/ha.

• TSH’s capex is forecast to be higher at RM50.0mil in FY22F vs. RM41.3mil in FY21. The increase in capex is mainlydue to spending on housing, roads and maintenance of palm oil mills.

• On the back of low capex and high CPO prices, TSH’s net gearing is envisaged to decline to 38.2% in FY22F from 49.5% in FY21. TSH’s net gearing is expected to fall further after the completion of the disposal of 13,215ha of land in East Kalimantan to PT Kawasan Industri Kalimantan Indonesia and PT Kalimantan Industrial Park Indonesia. This is anticipated to bring in proceeds of RM679.0mil.

Source: AmInvest Research - 4 Apr 2022