Investment Highlights

• We are downgrading TSH Resources from BUY to HOLD with a lower fair value of RM1.70/share (vs. RM1.90/share previously). We have reduced TSH's FY18F net profit by 11% to account for a higher depreciation expense arising from the implementation of the MFRS141 accounting standard.

• Under the MFRS141 accounting standard, mature palm oil areas will have to be depreciated. Previously, only replanting expenses were recognised in the P&L when the oil palm trees were replanted. We think that TSH's depreciation expense will increase by more than 50% in FY18F as a result of the MFRS141 accounting standard.

• Operationally, we have assumed an FFB production growth of 9% in FY18F compared with 19% in FY17E. TSH's FFB output climbed by 21% YoY in 11M2017.

• We understand that TSH's FFB production in Indonesia peaked in October. FFB output in Indonesia has slowed down in November and December 2017. In Sabah, FFB production may have peaked in December 2017. There is a possibility that group FFB production in 1QFY18 may be flat or lower than 1QFY17.

• TSH's production cost per tonne (ex-mill) may inch up from RM1,500 in Indonesia in FY17F to RM1,550 in FY18F due to higher wages and fertiliser costs. A few industry players have indicated that their fertiliser costs would increase by 9% to 12% in FY18F. Average minimum wage will rise by 8.9% in Central Kalimantan and 8.7% in most of the other provinces in Indonesia in 2018F.

• New plantings are anticipated to be 1,000ha in FY18F compared with less than 900ha in FY17. In spite of this, TSH's capex is expected to be relatively unchanged at RM172mil in FY18F. This is due to the near completion of the RM50mil palm oil mill in Indonesia in FY17E.

• We reckon that TSH's net gearing ratio would decline from 90.4% in FY17E to 89.1% in FY18F underpinned by higher free cash flows. We forecast TSH's free cash flows to improve from -5.9 sen per share in FY17E to -0.8 sen per share in FY18F. Also, TSH's balance sheet may benefit from a stronger MYR as about 22.5% of group borrowings are denominated in foreign currencies.

• TSH's operations in Malaysia and Indonesia are expected to be fully certified by the RSPO (Roundtable for Sustainable Palm Oil) in three years' time. Currently, five of the group's oil palm estates in Malaysia and Indonesia have already been certified by the RSPO.

Source: AmInvest Research - 8 Jan 2018