TSH’s 1HFY20 core net profit of RM37.3m (+317.7%) beat expectations, accounting for 59.6-62.2% of consensus and our full-year estimates, and we believe it was due mainly to better-than-anticipated JV contribution. We raise our FY20-22 core net profit forecasts by 2.8%, 2.5% and 2.7%, respectively, mainly to account for higher JV earnings assumptions. Post upward revisions to our earnings forecasts, we maintain our BUY rating on TSH, with a higher TP of RM1.14 (from RM1.12 previously).

Above expectations. 2QFY20 core net profit of RM13.6m (QoQ: -42.5%; YoY: +100%) took 1HFY20 core net profit to RM37.3m (+317.7%). The results beat expectations, accounting for 59.6-62.2% of consensus and our full-year estimates, and we believe it was due mainly to better-than-anticipated JV contribution.

Exceptional items (EIs). During the quarter, we adjusted for RM6.2m worth of EIs, which include, amongst others, RM6.7m forex translation gain, RM13.1m insurance claim, RM0.6m fair value gains on derivatives, RM12.2m inventories inventories written down and written off, and RM1.9m PPE written off.

QoQ. Core net profit declined by 42.5% to RM13.6m in 2QFY20, as stronger earnings contributions from associate (i.e. Innoprise Plantations Bhd, which TSH has a 21.9% stake) and JV unit (a palm oil refinery, which TSH has a 50% stake), and 5.5% increase in FFB output were more than negated by a 19.2% decline in average CPO price realised.

YoY. Core net profit doubled to RM13.6m in 2QFY20, boosted by stronger earnings contributions from associate and JV units, a 9% increase in FFB production, and higher average CPO price realised (+10.1%).

YTD. Core net profit more than quadrapuled to RM37.3m in 1HFY20 (from only RM8.9m SPLY), due mainly to improved performance from associate (arising from stronger palm product prices), higher FFB output (+5.2%) and average CPO price realised (+23.6%).

FFB output. FFB output grew 5.2% to 426.8k tonnes in 1HFY20, as lower FFB production in Sabah operations (due to lagged impact from dry season experienced in early 2019) was more than mitigated by FFB production growth at its Indonesia operations (thanks to its young age profile). We maintain our FY20 FFB output growth assumption of 6.7% (to 954k tonnes) as we anticipate a stronger FFB output growth momentum in 2H, underpinned by its Indonesia operations (which are expected to see an additional 4,000 ha moving to higher yielding bracket in FY20).

Forecast. We raise our FY20-22 core net profit forecasts by 2.8%, 2.5% and 2.7% to RM61.6m, RM77.1m and RM80.3m, respectively, mainly to account for higher JV earnings assumptions.

Maintain BUY; TP: RM1.14. We maintain our BUY rating on TSH, with a higher SOP derived TP of RM1.14 (from RM1.12 earlier) following an upward revision to our earnings assumptions. 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

Source: Hong Leong Investment Bank Research - 21 Aug 2020