Besides being one of the major beneficiaries to recent CPO price upswing (with earnings sensitivity of RM10m PBT p.a. for every RM100/mt change in CPO price), we note that TSH will continue to see decent FFB output growth for the next few years, underpinned by the young age profile at its Indonesia operations. We raise our FY20-22 core net profit forecasts by 33.7%, 27.6% and 27.9% to RM59.9 - 78.3m, mainly to account for higher FFB output assumptions (in line with management’s guidance), while maintaining our projected average CPO price of RM2,350/mt for FY20 and RM2,400/mt in FY21-22. We upgrade our rating on TSH to BUY with a higher sum-of-parts TP of RM1.12.

High earnings sensitivity to CPO price movement. While we are maintaining our projected average CPO price of RM2,350-2,400/mt for FY20-21 for now, we note that TSH’s earnings are highly sensitive to CPO price movement (with earnings sensitivity of RM10m PBT p.a. for every RM100/mt change in CPO price).

FFB output growth of 5.2% in 1H20. TSH clocked in YoY FFB output growth of 5.2% in 1H20, and management remains confident that it is on track to register FFB output growth of 8-12% in FY20, as it expects FFB output to come in stronger in 2H20, underpinned by its Indonesia operations (which are expected to see an additional 4,000 ha moving to higher yielding bracket in FY20).

... And young age profile will continue to drive FFB output growth beyond FY20.

We believe TSH’s FFB output growth trajectory will continue beyond FY20, underpinned by the young age profile at its Indonesia operations. Based on our estimates, there will be circa 4,000-5,000 ha of planted area moving to higher yielding bracket p.a. until FY24.

CPO production cost to trend down from FY19’s level. Recall, TSH registered blended CPO production cost of circa RM1,400/mt in FY19, and we believe CPO production cost will start declining from FY20 onwards, on the back of higher FFB yield (arising from more areas moving to higher yielding brackets).

Cocoa processing and marketing – demand remains resilient. While the cocoa segment may be affected by Covid-19 in 1H20 (resulting in logistical issues and weaker demand), we understand that demand for cocoa powder remains resilient, and hence allowing TSH to record decent earnings contribution in FY20 (albeit not as strong as FY19).

Net gearing to decline gradually. TSH had net debt and net gearing of RM1.28bn and 0.92x as at 31 Mar 2020. We project TSH’s net gearing to decline gradually over the next few years (to below 0.9x by end FY20 and below 0.8x by end FY22), on the back of minimal new planting and replanting activities, and improving financial performance arising from FFB output growth.

Forecasts. We raise our FY20-22 core net profit forecasts by 33.7%, 27.6% and 27.9% to RM59.9-78.3m, mainly to account for higher FFB output assumptions (in line with management’s guidance), while maintaining our projected average CPO price of RM2,350/mt for FY20 and RM2,400/mt in FY21-22.

Upgrade to BUY, with higher TP of RM1.12. We upgrade our rating on TSH to BUY

(from Hold earlier), with a higher sum-of-parts derived TP of RM1.12 (vs. RM0.87 earlier), mainly to account for (i) higher core net profit forecasts, and (ii) latest market value of its 21.9% listed associate (Innoprise Plantations)

Source: Hong Leong Investment Bank Research - 23 Jul 2020