Investment Highlights

• Maintain BUY on TSH Resources with an unchanged fair value of RM1.90/share. Our fair value implies an FY18F PE of 20x.

• TSH's 9MFY17 results were within our expectations but slightly below consensus estimates. Included in TSH's 9MFY17 results was a fair value gain on commodity derivatives of RM6.8mil.

• TSH's core net profit (ex-unrealised forex gains of RM1.1mil) rose by 21.1% QoQ to RM29.6mil in 3QFY17 due to an increase in CPO production. On the back of higher CPO production, which offset the impact of a lower CPO price, TSH's gross profit margin expanded from 35.8% in 2QFY17 to 40.7% in 3QFY17.

• Average CPO price realised slid by 3% from RM2,656/tonne in 2QFY17 to RM2,576/tonne in 3QFY17. FFB production surged by 20.6% QoQ in 3QFY17. TSH's FFB output in Indonesia increased by 30.9% QoQ in 3QFY17, which cushioned a 27.2% fall in FFB production in Sabah.

• Comparing 9MFY17 against 9MFY16, TSH's core net profit expanded by 38.7% to RM80.1mil underpinned by higher CPO production and price.

• FFB production surged by 33.2% YoY in 9MFY17 while average CPO price realised was RM2,727/tonne in 9MFY17 vs. RM2,356/tonne in 9MFY16.

• TSH's Indonesia division drove the YoY increase in FFB production in 9MFY17. Indonesia accounted for 85% of group FFB output in 9MFY17. FFB output in Indonesia climbed by 39.4% YoY in 9MFY17 while in Sabah, FFB production rose by 6.3%.

• TSH's share of net profit in the TSH/Wilmar refinery swung from a negative RM1.3mil in 2QFY17 to a positive RM2.4mil in 3QFY17. We attribute the improved refining margins in 3QFY17 to timely purchases of feedstock.

• Comparing 9MFY17 against 9MFY16 however, share of net profit in the palm refinery was smaller at RM1.7mil compared with RM9.3mil.

• TSH's net gearing declined from 90.9% as at end-June to 84.9% as at end-September 2017 on the back of higher operating cash flows and a stronger MYR vs. the USD. About 22.5% of TSH's borrowings were denominated in foreign currencies as at end-September. Capex increased from RM116.9mil in 9MFY16 to RM132.5mil in 9MFY17 due to higher purchases of property, plant and equipment.

Source: AmInvest Research - 23 Nov 2017