Investment Highlights

• We upgrade our recommendation on TSH Resources to HOLD from SELL with a higher fair value of RM1.24/share vs. RM0.85/share previously. Our fair value for TSH is based on an unchanged FY23F PE of 15x. The PE of 15x is in the middle of the 10-year PE band of 10x to 20x of medium-sized plantation companies. We ascribe a 3-star ESG rating to TSH.

• We raise TSH’s FY23F net profit by 47% to account for a lower interest expense and stronger palm EBIT margin of 15% vs. 10% originally. TSH’s production costs are expected to fall in FY23F due to lower cost of fertilisers. TSH’s fertiliser costs are envisaged to decline by 15% to 20% YoY in 1HFY23. However on a per tonne basis, we reckon that TSH’s cost of production would be flat in FY23F as FFB production is expected to fall.

• TSH’s FFB production is expected to contract by 6% to 7% in FY23F due to the disposal of oil palm estates in Sabah and Kalimantan, which took place in FY22. We think that TSH’s ex-mill cost of production in Indonesia would be unchanged at RM2,000/tonne in FY23F.

• TSH’s FFB production was flat in FY22 (FY21: 1.4%). Although the weather was wet in Indonesia in 4QFY22, TSH was still able to harvest and evacuate FFB. In Sabah, TSH does not face a shortage of labour as its oil palm estates are small at 3,000ha.

• Incidentally, in spite of Indonesia’s frequent revision of the domestic market obligation (DMO) ratio and export taxes/levies, TSH’s Indonesia operations are running smoothly. The group does not face problems selling CPO to its main customer i.e. Wilmar International.

• New plantings of oil palm in Indonesia are estimated to be 1,000ha in FY24F. Cost of new plantings until maturity is envisaged to be RM25,000/ha. TSH has about 15,000ha of plantable reserves in Indonesia.

• We forecast TSH’s capex to be unchanged at RM40mil in FY23F. Bulk of the capex are anticipated to be for new plantings, replanting of ageing oil palm trees and upgrading of workers’ housing.

• TSH is expected to swing into a net cash position of RM116mil in FY23F vs. a net gearing of 7% in FY22E. This is due to RM300mil cash inflows from the disposal of the remaining parcel of landbank of 3,800ha in Indonesia.

• TSH is currently trading at a FY23F PE of 13x vs. its 2-year average of 12x.

Source: AmInvest Research - 30 Jan 2023