Investment Highlights

• We maintain SELL on TSH Resources with an unchanged fair value of RM0.85/share. Our fair value for TSH is based on a FY23F PE of 15x. We ascribe a 3-star ESG rating to TSH. In spite of TSH’s positive 1HFY22 results, we are negative on the stock as we believe that CPO prices would continue weakening on rising palm supply.
• TSH’s annualised 1HFY22 core net profit (excluding disposal gains of RM85mil, impairments of RM30.6mil and unrealised forex losses of RM23.6mil) was 16.9% above our forecast and 11.2% higher than consensus estimates. This was mainly due to an effective tax rate of 9.4% in 1HFY22 vs. our assumption of 26% for FY22E. We raise TSH’s FY22E net profit by 18.6% to account for a lower effective tax rate of 15%.
• TSH’s effective tax rate was low at 9.4% in 1HFY22 vs. 28% in 1HFY21 due to reversal of temporary differences and recognition of deferred tax assets.

• TSH’s core net profit surged by 68.7% YoY to RM123mil in 1HFY22 underpinned by robust palm product prices, an increase in the share of net profit in associate i.e. Innoprise Plantations and a lower effective tax rate.

• Average CPO price realised climbed to RM4,941/tonne in 1HFY22 from RM3,242/tonne in 1HFY21. TSH could have enjoyed a stronger positive impact of higher CPO prices if Indonesia did not implement the CPO export tax and levy. The Indonesian CPO export tax and levy affected TSH’s palm revenue by RM146.4mil in 1HFY22 vs. RM124.9mil in 1HFY21.

• The impact of the CPO export tax and levy widened to RM100.5mil in 2QFY22 from RM45.9mil in 1QFY22. This is in line with the 20.9% QoQ surge in TSH’s FFB production in 2QFY22. It appears that Indonesia’s ban on CPO exports in May did not affect TSH’s operations in 2QFY22.

• Comparing 1HFY22 against 1HFY21 however, TSH recorded a decline in FFB production of 9.5% YoY in 1HFY22. This was due to replanting and wet weather in Indonesia in 1QFY22.

• The “others” division (biomass, wood flooring and cocoa) recorded a larger loss of RM6mil in 1HFY22 vs. RM0.9mil in 1HFY21 as the PPA of the biomass plant expired in 1Q.

• Comparing 2QFY22 against 1QFY22 however, the “others” division registered a smaller loss of RM1.7mil compared with RM4.3mil as the new PPA for the biomass plant was executed in March 2022.

Source: AmInvest Research - 23 Aug 2022