- We are downgrading TSH Resources Bhd from BUY to HOLD with an unchanged fair value of RM2.40/share. TSH’s share price is close to our fair value. The group is currently trading at a FY14F PE of 17x.

- In the past seven years, TSH’s PE band ranged from 4.5x to 27.9x. Average PE was 15.4x.

- Unlike other plantation companies, which registered decline in earnings, TSH recorded a 25.3% YoY increase in net profit in 1HFY13.

- This was underpinned by improvements in the share of profits in the TSH-Wilmar palm oil refinery and robust FFB production growth, which partly offset lower CPO price.

- TSH’s profitability was also strengthened by higher earnings from the “others” division (mainly cocoa), which swung from a break-even position in 1HFY12 to a positive RM6.8mil in 1HFY13.

- Share of profits in the refinery almost doubled from RM7.6mil in 1HFY12 to RM13.8mil in 1HFY13.

- TSH’s FFB output rose by 38.5% YoY in 1HFY13 against a 24% fall in average CPO price realised. Average CPO price realised was estimated at RM2,177/tonne in 1HFY13 versus RM2,864/tonne in1HFY12.

- Indonesia accounted for roughly 73% of the group’s FFB output while Sabah accounted for the remaining 27%. The group’s FFB production in Indonesia rose by 41.9% YoY in 1HFY13.

- The wood-based and “others” divisions recorded EBIT of RM1.5mil and RM6.8mil in 1HFY13 respectively. Costcutting measures contributed to stronger performances from the two divisions.

- New export markets such as India and Australia supported the 19.8% YoY revenue growth in the wood division in 1HFY13.

- Net gearing was relatively unchanged QoQ at 1.08x as at end-June 2013. Going forward, we expect net gearing to decline to 1.02x due to the private placement proceeds of RM47.6mil. The placement was completed in July 2013.

- Net gearing is envisaged to ease further to 0.8x if the RM195.8mil sale of TSH’s 16.2% stake in Pontian United Plantation Sdn Bhd were to be successful.

- Recall that Felda Global’s general offer for Pontian is conditional upon acceptances of more than 50% from Pontian’s shareholders.

Source: AmeSecurities