Investment Highlights

• We are keeping our HOLD recommendation on TSH Resources with a lower fair value of RM1.35/share. Our fair value is based on an FY19F PE of 20x.

• We have reduced TSH’s FY18F net profit by 18.8% to account for a higher effective tax rate and lower pre-tax margin for the palm division. We are now assuming a pretax profit margin of 14% for the palm division vs. 16% previously. We believe that TSH’s operating profit margin would be under pressure from rising costs. We have also cut TSH’s FY19F net profit by 3.7% for similar reasons.

• Overall, TSH’s core net profit (ex-unrealised forex changes) is expected to fall by 29% in FY18F due to languishing CPO prices. Although the group’s FFB production growth is robust, this would not be enough to compensate for the fall in CPO price.

• We have assumed that TSH’s FFB production would climb by 15% in FY18F underpinned by an improved FFB yield and an increase in mature areas. We have imputed an average FFB yield of 25.0 tonnes/ha for FY18F vs. 24.2 tonnes/ha in FY17. Mature areas are anticipated to increase by 3,000ha in FY18F.

• We believe that TSH’s FFB production in 2QFY18 would be weaker than 1QFY18. The group’s FFB output surged by 21.6% YoY in 1QFY18.

• A two-week break for Hari Raya Aidilfitri in Indonesia in June is expected to affect harvesting of fruits. Last year, the break for Hari Raya Aidilfitri was only a week in Indonesia. We reckon that TSH’s FFB output would pick up again in 3QFY18. More than 80% of TSH’s FFB production are from Indonesia while the balance 20% are from Malaysia.

• TSH’s capex is anticipated to decline from RM165mil in FY17 to RM150mil in FY18F. TSH’s target is to reduce its net gearing to 80% by end-FY18F and 60% in the next three years through internally generated cash flows. We are more conservative. We have forecast TSH’s net gearing to be 92.4% as at end-FY18F. TSH’s net gearing stood at 102.4% as at end-March 2018.

Source: AmInvest Research - 24 Jul 2018