Investment Highlights

• Maintain BUY on TSH Resources with an unchanged fair value of RM1.90/share. Our fair value implies a FY18F PE of 20x. Although TSH's 1HFY17 results were below our expectations and consensus estimates, we are keeping the group's net profit forecast in anticipation of a better 2HFY17. CPO prices have been resilient so far in 2HFY17.

• We have assumed an average CPO price of RM2,600/tonne for TSH, which is RM100/tonne below that of the pure Malaysian planters as CPO prices in Indonesia are lower. More than 80% of TSH's FFB production are in Indonesia.

• TSH's core net profit (ex-unrealised forex changes) rose by 30.2% YoY to an estimated RM50.5mil in 1HFY17 on the back of a surge in FFB production and CPO price. Comparing 2QFY17 against 1QFY17, the group's core net profit eased by 6.4% due to a weaker CPO price.

• TSH's FFB improved by 28.8% YoY in 1HFY17. This was in line with most of its peers in Malaysia and Indonesia, which recorded FFB production growth of more than 15% YoY in 1HFY17. On a quarterly basis, TSH's FFB expanded by 18.3% in 2QFY17.

• Comparing 1HFY17 against 1HFY16, average realised CPO price rose by 21.5% from RM2,309/tonne to RM2,805/tonne. Average realised CPO price slid by 11.0% from RM2,985/tonne in 1QFY17 to RM2,656/tonne in 2QFY17.

• About 82% of TSH's FFB output came from Indonesia in 1HFY17 while the balance 18% are from Tawau, Malaysia. The group's FFB grew by 31.1% YoY in Indonesia in 1HFY17 while in Malaysia, FFB output increased by 19.1%.

• Share of profits in the TSH/Wilmar palm refinery swung from a positive RM5.2mil in 1HFY16 to a negative RM0.7mil in 1HFY17. Share of profits in the palm refinery was a negative RM1.3mil in 2QFY17 vs. a positive RM0.6mil in 1QFY17. The palm refinery's weak performance is due to unfavourable refining margins.

• The "others" division, which comprises cocoa, biomass and wood-flooring operations swayed into the black with an EBIT of RM8mil in 1HFY17. The division benefited from higher sales of cocoa butter with better prices and improved biomass revenue in 1HFY17.

• TSH's net gearing inched up from 89.4% as at end-March to 90.9% as at end-June 2017. About 23.4% of TSH's borrowings were denominated in foreign currencies. Capex increased from RM74.2mil in 1HFY16 to RM89.6mil in 1HFY17.

Source: AmInvest Research - 25 Aug 2017