• TSH’s 1H18 core net profit of RM29m came in below ours and consensus expectation, making up only 33%/38% of ours and consensus’ full year forecast

• Core PBT was down by 31% yoy to RM48.2m as revenue slipped to RM459.1m (-16%) due to lower contribution from palm product segment as well as associate company, Innoprise Bhd.

• We revised our earnings forecast lower for FY18 and FY19 to RM65m and RM87m respectively from RM87m and RM101m (introduced in our recent report dated 9th August 2018) as we believe declining ASP of palm products would continue to be a drag to earnings moving forwards.

• Revised TP to RM1.20 from RM1.19 previously as we rolled forward our valuation to FY19 EPS. Maintain HOLD.

Earnings below estimate

Despite a significantly higher FFB and CPO production recorded in 1H18, revenue declined 16% yoy to RM459m mainly due to lower ASP realised of palm products (Table 2). Accordingly, core PBT declined to RM48m from RM70m in 1H17 as margin was squeezed due to lower average CPO price realised, compounded by 15% higher finance costs of RM21.4m. Lower contribution from share of profit from an associate of RM0.80m (-79% yoy) also aided to the lower result – offsetting the higher contribution from JV, TSH-Wilmar Refinery of RM2.5m vs. a loss of RM0.7m for the same period last year. We reckon that earnings growth moving forward might be impacted by the lower ASP of palm products.

Improved production qoq

On qoq basis, core PBT increased 24% to RM31.2m as revenue increased slightly to RM232.9m from RM226.1m in 1Q18 due to higher FFB and CPO production and lower operating expenses of RM35.8m (- 45% qoq). FFB and CPO production increased 21% and 9% respectively to 219.8k MT and 76.9k MT. However, ASP realised for CPO decreased slightly by 1.4% qoq to RM2,283/MT.

Change in earnings forecast

Given the challenging business environment and lower trend of palm product prices, we adjusted our margin and ASP lower and hence, revised our earnings forecast for FY18 and FY19 to RM64.6m and RM87m respectively from RM86.8m and RM101.4m.

Valuation and recommendation.

We peg a target price of RM1.20 (RM1.19 previously) and maintain our HOLD recommendation for TSH. Our target price is based on TSH’s 5- yrs average PER of 19x and FY19 EPS as we rolled forward our valuation to financial year 2019.

Source: BIMB Securities Research - 23 Aug 2018