Investment Highlights

• Maintain HOLD on TSH Resources with an unchanged fair value of RM1.70/share. Our fair value implies an FY18F PE of 20x. The group's PE ranged from a low of 15.1x to a high of 22.6x in the past five years. Average PE was 18.8x.

• TSH's FY17 results were below our expectations and consensus estimates due to a high effective tax rate of 31.9% and a loss of RM0.8mil in the wood products unit in 4QFY17. The effective tax rate was high in 4QFY17 due to an under-provision of tax in the previous year.

• Overall, there was a 28.9% YoY improvement in TSH's core net profit (ex-unrealised forex gains of RM16.7mil) in FY17, which was driven by higher FFB production and CPO price.

• Average CPO price realised rose by 10.1% from RM2,454/tonne in FY16 to RM2,701/tonne in FY17. CPO production climbed by 13.6% in FY17 while FFB output increased by 18.5%.

• The 18.5% growth in FFB production in FY17 was driven mainly by the Indonesian division. Indonesia accounted for 85% of TSH's FFB output in FY17.

• The group's FFB production surged by 22% in Indonesia in FY17 while in Sabah, FFB output improved by 3%.

• Comparing 4QFY17 against 3QFY17, TSH's FFB production softened by 20.5% due to seasonal reasons. The oil palm trees in Indonesia achieved their highest FFB production in 3QFY17. 2H accounted for 54% of FY17's group FFB production of more than 700,000 tonnes while 1H made up the balance 46%.

• Average CPO price realised rose by 1.7% from RM2,656/tonne in 3QFY17 to RM2,619/tonne in 4QFY17.

• TSH's share of net profit in the TSH/Wilmar refinery declined from RM10.9mil in FY16 to RM7.5mil in FY17. TSH's share of earnings in the refinery improved from RM2.4mil in 3QFY17 to RM5.9mil in 4QFY17 as refining margins expanded.

• Net gearing rose from 84.9% as at end-September to 88.4% as at end-December 2017. About 18.5% of TSH's borrowings were denominated in foreign currencies as at end-December. Capex decreased from RM181.1mil in FY16 to RM164.6mil in FY17 on the back of a drop in new plantings of oil palm in Indonesia.

Source: AmInvest Research - 28 Feb 2018