• TSH has the highest oil yield per hectare among its peers, recorded at 4.77MT/ha in FY20.

• About 59% of its planted area is in prime yielding age – set to benefit from a surging palm oil products price. Another 42% are immature-to-young mature area that provide visible revenue and earnings ahead.

• We upgrade our recommendation to BUY with unchanged TP of RM1.23. The valuation is based on P/B of 1.1x and average FY21/22F BV/share of RM1.12 which in our view, is more reflective of its potential, and fully justified given earnings are lifted significantly by improvement in production and better CPO price.

Higher FFB production and price expected

We believe the higher CPO and PK price will amplify the revenue and earnings growth momentum for TSH in FY21-FY22F. The higher palm product price realised in 2021/22 against 2020 should see TSH fetching better margins in FY21/22; with EBITDA and PBT margins estimated at 25% and 14% respectively. This will be backed by the expected 10% improvement in FFB production of 997k/1.0m tonnes in FY21/22 against 906k tonnes achieved in FY20 and about 5% per annum over the next 2- 3 years mainly supported by higher yields, in view of more planted areas come into maturity and harvesting due to better age profile (Indonesia: 10yrs; Malaysia: 12.7yrs; and Group: 10.6yrs).

Earnings outlook is appealing

We foresee that TSH is set to record stronger earnings, estimated to grow at 3-yrs CAGR of 30.2% for FY19-FY22F on the back of 11.7% increase in revenue mainly supported by higher production, ASP of palm products and costs efficiencies. We forecast a PATAMI of RM90.8m and RM87.7m for FY21/22F assuming an average CPO price realised of RM2,950/MT and RM2,500/MT for the same period. In addition, the recent downward revision in Indonesia’s export levies would also be an added advantage to TSH’s CPO price realised in Indonesia.

Upgrade to BUY, TP of RM1.23

Upgrade to BUY from HOLD previously on the stock with unchanged TP of RM1.23, based on P/B of 1.1x and BV/share of RM1.12. We believe the stock is currently carrying an attractive valuation as its valuation implies 16.2x its 12-months forward PE, below the sector’s average of 17.4x and its 5-years average forward PER of 28.2x. This suppressed PER level implies the market has not fully accorded the growth to be generated by the company, as well as its leverage potential on rising CPO price. We like the stock as its one of the cheapest proxies for CPO price in Malaysia. Meanwhile, TSH continues to abide by its Shariah status and also has three stars on ESG rating assessed by FTSE Russell.

Source: BIMB Securities Research - 6 Jul 2021