- Maintain BUY on TSH Resources with a lower fair value of RM2.20/share. Our fair value is based on an FY16F PE of 25x. In the past seven years, TSH’s PE ranged from a low of 4.5x to a high of 38.3x. Average PE was 17.8x.

- TSH’s 1HFY15 core net profit was below our expectations and consensus estimates due to weak FFB production, a higher-than-expected effective tax rate and losses in the TSH/Wilmar refinery. We have reduced TSH’s FY15F EPS by 15% to account for these. TSH’s operating profit was flat QoQ at RM32.5mil in 2QFY15.

- Included in TSH’s 1HFY15 net profit was an unrealised translation forex loss of RM34mil on USD borrowings. Unrealised forex loss was RM11mil in 2QFY15 versus RM23mil in 1QFY15.

- Effective tax rate rose from 20.1% in 1QFY15 to 48.1% in 2QFY15 due to a prior year adjustment and an increase in expenses, which were not tax deductible. Share of earnings in the refinery swung from a positive RM1.9mil in 1QFY15 to a negative RM3mil in 2QFY15.

- Average CPO price realised fell by 14.0% from RM2,501/tonne in 1HFY14 to RM2,152/tonne in 1HFY15. Comparing 2QFY15 against 1QFY15, average CPO price realised inched down by 4.3% to RM2,107/tonne.

- TSH’s FFB output slid by 6.9% YoY in 1HFY15. On a quarterly basis however, FFB production improved by 7.5% in 2QFY15. Comparing 2QFY15 against 2QFY14, the group’s FFB production shrank by 5.4% YoY.

- In Sabah, FFB output decreased by 7.0% YoY in 1HFY15 while FFB production in Indonesia eased by 6.9%.

- We reckon that TSH’s FFB yields were affected by tree stress in 1HFY15. In addition, Sabah faced dry weather in 1HFY15. We believe that Indonesia accounts for about 80% of TSH’s FFB production and more than half of the group’s earnings.

- EBIT margin of the palm division eased from 24.0% in 1HFY14 to 18.7% in 1HFY15. We attribute the erosion in EBIT margin to the fall in CPO price and higher fertiliser costs.

- EBIT of the biointegration and others division climbed from RM6.0mil in 1HFY14 to RM15.1mil in 1HFY15 in spite of a 22.9% drop in revenue. The increase in the earnings was due to a write-back in impairment of property, plant and machinery as they have been disposed.

Source: AmeSecurities Research - 26 Aug 2015