During our recent small group virtual meeting with TSH’s management, we gather that (i) FFB output in FY21 will likely exceed management’s earlier target of 7- 11%, (ii) new planting activities will likely pick up post FY22, (iii) demand sentiment for cocoa butter has been gradually improving since Mar-21 and (iv) 2Q21 results (due out on 24 Aug) will likely come in stronger (on YoY and QoQ basis). All in, we maintain our FY21 core earnings forecasts, but raise our FY22- 23 core earnings forecasts by 3.1-9.4%, to reflect lower production cost assumptions. Post earnings revision, we maintain our BUY rating on TSH, with a higher sum-of-parts TP of RM1.24 (from RM1.20 earlier).

Upside to earlier FFB output growth guidance of 7-11% for FY21. TSH clocked in FFB output growth of 13.2% in 1H21, boosted mainly by an output growth of 16.7% in Indonesia operations. Management is optimistic that the superior FFB output growth achieved in 1H21 will sustain into 2H21 (hence surpassing its earlier output growth guidance of 7-11% for FY21), supported by favourable age profile at its Indonesia operations. Besides, we understand the recent surge in Covid-19 cases Indonesia has not affected its productivity in there.

Labour shortfall in Sabah. To mitigate labour shortfall in its Sabah operations (arising from border closure), TSH has been incentivising and training its existing workers for harvesting activities, in an attempt to minimise productivity loss.

New planting activities will likely accelerate post FY22. The disposal of oil palm plantation in Sabah (once materialises), sustained palm oil product prices, coupled with less future replanting expenses (post land disposal, as a significant portion of the estates are due for replanting) will result in TSH’s net gearing declining significantly (to 0.4-0.5x from 0.71x as at 31 Dec 2020), and this will likely result in TSH stepping up its new planting efforts post FY22.

Prospects on cocoa segment improving (albeit gradually). Demand sentiment for cocoa butter (which is widely used in the production of chocolates and skin care products) has been gradually improving since Mar-21 (witnessed by a recovery in cocoa butter ratio in Europe, see Figure #2), as major economies have started gradually returning to normalcy from Covid-19 pandemic. Taking cue from the gradual increase in cocoa butter ratio, we believe contribution from cocoa products will start improving (albeit gradually) from 2Q21.

2Q21 results preview. We believe TSH’s 2Q21 results (due out on 24 Aug 2021) will come in stronger on a QoQ basis, due mainly to (i) improved FFB output and palm product prices at upstream plantation segment, (ii) our anticipation of earnings recovery at refinery segment (through JV), (ii) an expected recovery in JV earnings contribution (taking cue from the qoq FFB output improvement in Sabah), and (iv) gradual improvement in demand sentiment for cocoa products. On YoY basis, earnings will likely come in higher on higher palm product prices and FFB output (but partly weighed down by weaker contribution from cocoa processing segment).

Forecasts. We keep our FY21 core earnings forecast largely unchanged, following marginal adjustment to our FFB output and production cost assumptions (in line with management’s guidance). We raise our FY22-23 core net profit forecasts by 3.1-9.4%, to reflect lower production cost assumptions.

Maintain BUY rating, with higher TP of RM1.24. Post earnings revision, we maintain our BUY rating on TSH, with a higher sum-of-parts TP of RM1.24 (from RM1.20 earlier). While we are maintaining the view that current high CPO price will not sustain over the longer term (palm oil prices will start retreating once supply outlook for major vegetable oils improve), we believe valuation of TSH remains undemanding even after factoring in much lower CPO price assumptions. At RM1.05, TSH is trading at FY22-23 P/E of 14.8x and 14.5x (based on CPO price assumption of RM2,800/mt). Besides, we like TSH for its favourable age profile (with ~40% of its planted areas are aged below 9 years), which indicates favourable output growth prospects).

Source: Hong Leong Investment Bank Research - 27 Jul 2021