Following our recent virtual meeting with TSH management, we foresee that TSH’s earnings growth moving forwards would be driven by maturing palm tree plantations especially from Indonesian estates given more planted areas coming into maturity and harvesting due to better age profile (average age for Indonesia: 9.0 years; Malaysia: 13.2 years; and Group: 9.8 years) supported by higher ASP of palm products anticipated. Its FFB production for 3Q20 from Indonesian estates increased 3.95% qoq to 198.5k MT, whilst Malaysia estates dropped 8.07% to 25.8k MT. Nonetheless, for the nine-month period of 2020, FFB production from the Indonesian estates dropped slightly by 0.78% yoy to 557.3k tonnes whilst its Malaysian counterpart increased 3.6% yoy to 73.8k tonnes. On a much positive note CPO price has risen to multi-year high of RM3,436/tonne. The key take-aways from this meeting are highlighted below.

52% of young trees contributing to production growth

Post-sale of plantation estates in Kalimantan to KLK, TSH oil palm planted area was reduced from 42,109 ha to 32,090ha, with matured area of 27,631ha and immature area of 4,459ha. The average oil palm age profile of 10yrs for the Group is relatively young with approximately 52% immature and young mature age, while the balance consisting of prime mature (30%) and past prime (18%). This relatively young profile may provide visible revenue and earnings growth moving forward. In the medium term, we expect the growth in production will come from a recovery in palm yields, as well as from an increase in new areas coming into production and higher yielding age brackets especially in Indonesia estates.

Production this year was impacted by the 2019 Indian Ocean Dipole

Management guided that they are optimistic of achieving 7% -11% growth in FFB production in 2021. This year’s production is unlikely to meet earlier growth forecast of 8% - 12%, expected at minimal growth yoy or flat. Although for 1H20 FFB growth has increased 5.2% yoy to 426.8k tonnes, nonetheless, for the 10-month period 2020, the Group achieved FFB production growth of 0.1% yoy to 745k tonnes of which Indonesian estates registered growth of 0.3% yoy to c. 680k tonnes whilst Malaysian estates recorded a dropped of 16.7% to c. 65k tonnes – indicating that 2H20 production is possibility lower than 2H19. The lower FFB production for this year is due to the dry weather that has hit Malaysia and Indonesia estates somewhere in July to Oct 2019 and biological tree stress due to bumper crop harvest over the past 3 years as well as low fertilisers usage.

Maintain forecast for now

Maintain BUY with TP of RM1.23 (based on P/B of 1.1x and FY21 BV/share of RM1.12) as we expect better performance in the coming quarters on higher ASP of palm products anticipated on the back of higher CPO prices currently

Source: BIMB Securities Research - 13 Nov 2020