TSH share price has corrected 21% from its 52-week high of RM1.29 to RM1.01 last Friday, in line with the 17% correction of FBM Plantation index, mainly driven by lingering ESG and labour shortage concerns. Nevertheless, we see value resurfacing amid undemanding valuation at 14.6x FY22E PE (28% and 60% discounts to its peers’ 20.2x and 10Y average 36.6x, respectively).

Although the stock may face some near term headwinds amid elevated Covid-19 cases in Indonesia and higher production in 2H21 (which would dampen CPO price), we are not that overly concerned as TSH’s palm oil mills are far away from the major clusters in the city. Meanwhile, we believe the downside risk for CPO price is cushioned by resilient demand from China and increased restocking activities from India (following Indian government’s move to reduce base import tax on CPO).

In addition, the disposal of 3,007 ha leasehold oil palm plantation land would potentially pare down its existing gearing ratio to 0.53x from 0.72x (as at 31 Dec 2020) and save TSH future capex as the weighted average age of the disposal oil palm plantation stands at ~18 years old.

Overall, we expect promising earnings ahead for TSH, driven by (i) recent cut of export levy in CPO from Indonesia government (86% of its palm oil tree located in Indonesia) (ii) resilient demand from China (iii) higher production and CPO price compared to 1Q21 (Figure 2).

Technically, the stock is grossly oversold and building a sound base near RM1.00 psychological level. Mirroring the positive FCPO prices (Fig #1), any weakness in share price is a good opportunity to accumulate (RM0.95-0.98-1.00) in anticipation of a potential relief rally towards RM1.08-1.15-1.20 zones.

Source: Hong Leong Investment Bank Research - 19 Jul 2021