- Maintain BUY on TSH Resources with an unchanged fair value of RM2.30/share. Our fair value is based on an FY16F PE of 27x. TSH is currently trading at FY15F PE of 27.8x and FY16F PE of 23.6x.

- TSH’s 9MFY15 core results were within our expectations but below consensus estimates. The group reported an unrealised translation loss of RM105.3mil on USD borrowings of US$128.1mil (RM563.1mil) in 9MFY15. In comparison, TSH recorded a forex gain of RM4.0mil in 9MFY14. About 41.5% of TSH’s borrowings were denominated in USD as at end-September 2015. Excluding the forex loss, TSH’s pre-tax profit would have been RM77.9mil in 9MFY15 versus RM146.1mil in 9MFY14.

- The group’s gross profit contracted by 29.8% from RM291.4mil in 9MFY14 to RM204.6mil in 9MFY15 as revenue declined by 29.0%. TSH was hit by falls in the CPO price and FFB production in 9MFY15.

- FFB production slid by 6.8% YoY in 9MFY15. FFB production in Sabah shrank by 7.3% YoY in 9MFY15 while in Indonesia, FFB output declined by 6.7%. In contrast, the group’s FFB output climbed by 27.0% in FY13 and 18.7% in FY14.

- After sliding by 5.4% YoY in 2QFY15, TSH’s FFB output eased by a larger magnitude of 6.6% YoY in 3QFY15. Management attributed this to the haze and drought in Kalimantan. About 80% of the group’s FFB production is from Indonesia.

- Average CPO price realised was RM2,099/tonne in 9MFY15, which was 12.3% lower than the average price of RM2,393/tonne recorded in 9MFY14. On a quarterly basis, average CPO price realised edged down from RM2,107/tonne in 2QFY15 to RM1,987/tonne in 3QFY15.

- Comparing 3QFY15 against 2QFY15, TSH’s net profit was boosted by a turnaround in the earnings of the TSH/Wilmar refinery and a positive tax expense. TSH’s share of profits in the refinery swung from a loss of RM3mil in 2QFY15 to a positive RM4mil in 3QFY15, underpinned by a recovery in refining margins. Tax was positive at RM1.7mil in 3QFY15 vs an expense of RM7.4mil in 2QFY15. This was due to an RM2.1mil reversal of previous year’s tax provision in 3QFY15.

- EBIT of the biointegration and others division expanded from RM8.2mil in 9MFY14 to RM22.4mil in 9MFY15 on the back of reclassification of biomass earnings from the palm division, and the write-back of an impairment of property, plant and machinery.

- Net gearing rose from 82.5% as at end-December 2014 to 108.6% as at end-September 2015 as borrowings increased from RM1.04bil to RM1.36bil.

Source: AmeSecurities Research - 19 Nov 2015