Investment Highlights

• Maintain HOLD on TSH Resources with an unchanged fair value of RM2.00/share, which implies a FY18F PE of 21x. TSH's 1QFY17 results were within our expectations but below consensus estimates.

• Compared with 4QFY16, TSH's 1QFY17 results were cleaner. Effective tax rate was lower at 20.5% in 1QFY17 vs. 305.9% in 4QFY16 while impairments on inventories and trade receivables amounted to RM0.27mil in 1QFY17 against RM7.8mil in the previous quarter. Also, TSH recorded fair value gains on commodity futures contracts of RM4.2mil in 1QFY17 vs. losses of RM7.3mil in 4QFY16.

• TSH's core net profit climbed by 67.7% YoY to RM26.1mil in 1QFY17 as group revenue expanded by 42.6%. The group benefited from higher CPO price and production.

• Revenue of the palm division improved by 50.0% YoY to RM252.5mil in 1QFY17 as average CPO price realised rose by 39.3% from RM2,143/tonne in 1QFY16 to RM2,985/tonne in 1QFY17.

• FFB grew by 9.5% YoY in 1QFY17. FFB of the Indonesia unit climbed by 5.7% YoY in 1QFY17 while in Sabah, FFB output expanded by 31.4%. Indonesia accounted for 82% of group FFB production in 1QFY17.

• TSH's FFB output growth of 5.7% in Indonesia in 1QFY17 lags its peers, which recorded increases in FFB production of more than 15% in the country. The exception is Wilmar International, which registered a 4% growth in FFB production (Malaysia and Indonesia) in 1QFY17.

• The "others" division, which consists of cocoa, biomass and wood-flooring activities, recorded a smaller EBIT of RM4.1mil in 1QFY17 compared with RM4.5mil in 1QFY16. The YoY decline in earnings in 1QFY17 was due to lower biomass profits as one of the power plants was closed for maintenance for a month.

• The privatisation of 67.5%-owned Ekowood International, which undertakes the wood-flooring activities, was completed in April 2017. After the privatisation exercise, TSH is expected to expedite restructuring and cost-cutting measures in Ekowood.

• TSH's net gearing eased from 93.1% as at end-December 2016 to 89.4% as at end-March 2017. About 24% of TSH's borrowings were denominated in USD. Capex increased from RM37.8mil in 1QFY16 to RM43.2mil in 1QFY17.

Source: AmInvest Research - 25 May 2017