Investment Highlights

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

• We consider TSH’s 1HFY18 core results to be within our forecast as the increase in FFB production in 2HFY18 is expected to boost the group’s core net profit further in the following quarters. TSH’s 1HFY18 core results were slightly below consensus estimates.

• Included in TSH’s reported net profit in 1HFY18 was a fair value loss of RM4.0mil on commodity futures contract.

• After a weak core net profit of only RM6.6mil in 1QFY18, TSH’s core net profit (ex-forex losses of RM13.7mil) rebounded by 172.0% to RM17.8mil in 2QFY18. This was underpinned mainly by a 36.6% QoQ increase in FFB production in 2QFY18, which lowered the cost of production per tonne and improved operating profit margin. Operating profit margin rose from 11.2% in 1QFY18 to 17.5% in 2QFY18.

• On a negative note, effective tax rate increased from 34.3% in 1QFY18 to 51.5% in 2QFY18. TSH’s effective tax rate was high in 1QFY18 due to under-provisioning in prior years. We believe that TSH’s effective tax rate remained high in 2QFY18 as unrealised forex losses are not tax deductible.

• The group’s core net profit (ex-forex losses of RM2.4mil) fell by 43.9% YoY to RM24.4mil in 1HFY18 dragged mainly by a lower CPO price. Although TSH recorded a strong FFB production growth in 1HFY18, this was not enough to compensate for the slump in CPO price.

• Average CPO price declined by 18.0% from RM2,805/tonne in 1HFY17 to RM2,299/tonne in 1HFY18. On the other hand, TSH’s FFB production surged by 31.8% YoY in 1HFY18.

• The Indonesia unit drove TSH’s FFB output growth in 1HFY18. Indonesia accounted for 87% of group FFB production in 1HFY18 while Malaysia made up the balance 13%. TSH’s FFB production in Indonesia jumped by 39.1% YoY in 1HFY18 while in Malaysia, FFB output slid by 2.1%.

• Share of earnings in the TSH/Wilmar refinery swung from a loss of RM0.7mil in 1HFY17 to a profit of RM2.5mil in 1HFY18 due to timely purchases of feedstock. Going forward, we reckon that the refinery’s processing margins would strengthen in 2HFY18 on improved CPO supply.

• Net gearing inched up from 102.4% as at end-March to 108.3% as at end-June 2018 as cash reserves dropped due to the payment of dividends. About 21.8% of TSH's borrowings were denominated in foreign currencies as at end-June 2018.

Source: AmInvest Research - 24 Aug 2018