Period

1Q15

Actual vs. Expectations

TSH Resources (TSH)’s 1Q15 core net profit (CNP*) at RM30m came in within street’s expectation at 21% of the RM141m forecast, but below ours at 17% of the RM180m forecast.

The variance to our forecast was mainly due to softer 1Q15 FFB volume of 143k metric tons (MT) (- 9% YoY) on seasonally unfavourable weather conditions.

Dividends

No dividend announced, as expected.

Key Results Highlights

YoY, 1Q15 CNP declined 12% on lower FFB volume (-9% to 143k MT) and CPO prices (-13% to RM2,201/MT). EBIT margin was also lower at 16% (against 1Q14’s 19%) which we think is due to lower FFB volume which reduced milling efficiency.

QoQ, 1Q15 CNP improved 14% to RM30m despite flat CPO prices (+2% to RM2,201/MT) and lower FFB volume, although EBIT margin slightly improved to 16% (from 14%) due to seasonality of operating cost factors including milling margin, labor and fertiliser costs.

Outlook

We expect CPO prices to continue trading rangebound at our FY15 forecast of RM2,200/MT, which is 8% lower YoY. However, we believe TSH’s FY15E FFB growth of 21% (well above the sector average of 5%) could help offset weaker CPO prices.

Change to Forecasts

We trim our FY15E earnings by 4% to RM173m as we tweak our Indonesian yield forecast (-4% to 26.0MT/ha) to account for the lower-than-expected 1Q15 production. No change to our FY16 estimates.

Rating

Maintain MARKET PERFORM

While we like TSH for its high FFB growth potential of 21%, its upsides may be capped by challenging sector dynamics on expected weak FY15 average CPO price of RM2,200/MT (-8% YoY).

Valuation

Despite our slightly lower earnings forecast, our TP of RM2.30 is unchanged as we partly roll forward to FY16E using the average FY15-16E EPS of 13.4 sen. Our Fwd. PER is maintained at 17.2x which reflects 3-year mean valuation. However, we may consider upgrading to +0.5SD valuation basis should FFB volume bounce back in 2Q15, putting TSH on par with other planters with high FFB growth prospects such as IJMP.

We observed that plantation counters have been gaining some interests due to the onset of El-Nino. However, we caution investors that near-term earnings disappointments will remain obstacles while the El-Nino effect will only be felt in early 2016.

Risks to Our Call

Lower-than-expected CPO prices.

Lower-than-expected FFB growth.

Source: Kenanga Research - 21 May 2015