Excluding land sale (which is still undergoing due diligence), we expect FFB output growth trajectory to improve from FY21 onwards (from FFB output growth of 1.4% in FY20), underpinned by young age profile at its Indonesia operations. All in, we lower our FY20 core net profit forecast by 2.8% (mainly to reflect the actual FFB output registered), but leave our FY21-22 forecasts largely unchanged. Maintain our BUY rating on TSH, with a slightly lower sum-parts derived TP of RM1.35 (from RM1.38 earlier), as we updated our valuation parameter on its 21.9%-owned listed associate. TSH remains as one of our preferred pick within the sector, supported by (i) its high earnings sensitivity to CPO price swing, which will more than mitigate muted near-term earnings prospect at the cocoa processing and marketing segment, (ii) young age profile, and (iii) improving balance sheet.

FFB output growth of 1.4% in FY20. TSH clocked in FFB output growth of 1.4% in FY20, as replanting activities in Malaysia operation (-0.7%) and lagged impact from drought were more than mitigated by an increase in harvesting area in Indonesia (which has in turn resulted in FFB output in Indonesia operations increasing by 2.3%).

FFB output to grow further from FY21 onwards. Excluding land sale (which has yet to be concluded and still undergoing due diligence process), we expect FFB output growth trajectory to improve from FY21 onwards (7-11% based on management’s guidance, with an estimated ~2,000 of land bank to be graduated into mature bracket in FY21), underpinned by young age profile at its Indonesia operations.

Assessing impact from land sale. Recall in Aug-2020, TSH entered into conditional sale and purchase agreements to dispose 22,975 ha of plantation land (of which 10,816 ha has already been planted with oil palm) for ~RM517m, and the disposal is still undergoing due diligence process. Based on our estimates, the disposal (once completed), will result in TSH’s total planted area and FFB output reducing by ~25% and ~20% respectively. In terms of financial impact, earnings loss from the disposal will be partly mitigated by finance cost savings, while reducing TSH’s net gearing status to 0.48x from 0.78x (as at 30 Sep 2020).

On a less positive side, near-term weakness at cocoa segment may remain for a while. The weak demand sentiment for cocoa products (as a result of Covid -19 pandemic, which has hampered demand for cocoa butter, which in turn is widely used in chocolates and skin care products) will likely be protracted into the next few months, as demand for chocolates remains slow (evident by high cocoa bean inventory in Ivory Coast, the world’s leading cocoa producing nation).

Forecasts. We lower our FY20 core net profit forecast by 2.8% mainly to reflect the actual FFB output registered. Our FY21-22 core net profit forecasts, on the other hand, remain largely unchanged. Note that our forecasts have yet to reflect the land sale, pending completion (expected by end-1Q21).

Maintain BUY, with slightly lower TP of RM1.35. We maintain our BUY rating on TSH, with a slightly lower sum-parts derived TP of RM1.35 (from RM1.38 earlier), as we updated our valuation parameter on its 21.9%-owned listed associate (Innoprise Plantations). TSH remains as one of our preferred pick within the sector, supported by (i) its high earnings sensitivity to CPO price swing (with earnings sensitivity of RM10m PBT p.a. for every RM100/mt change in CPO price), and this will more than mitigate muted near-term earnings prospect at the cocoa processing and marketing segment, (ii) young age profile (with ~52% of its planted area ageing below 8 years, after taking into account of its land sale), and (iii) improving balance sheet (net gearing has declined to 0.78x from 0.98x as at 31 Dec 2018).

Source: Hong Leong Investment Bank Research - 15 Feb 2021