Period

2Q15/1H15

Actual vs. Expectations

TSH Resources (TSH)’s 1H15 core net profit (CNP*) at RM47m came in well below consensus (RM135m) and our forecast (RM173m) at 35% and 27%, respectively.

The variance to our forecast was due to weak 1H15 FFB volume of 297k metric tons (MT) (-7% YoY) due to dry weather conditions in Sabah and parts of Kalimantan and higher-than-expected effective tax rates. 1H15 FFB production made up only 40% of our full-year forecast.

Dividends

No dividend announced, as expected.

Key Results Highlights

YoY, 1H15 CNP dropped 40% to RM47m, hit by lower CPO prices (-14% to RM2,152/MT) as well as lower FFB production (-7% to 297k MT). 1H15 EBIT margin was also lower at 16%, likely due to lower FFB volume, which reduced milling efficiency.

QoQ, 2Q15 CNP declined 41% to RM18m, largely on higher effective tax rates (48% vs 20%). Group EBIT was flat at RM32m on slightly lower Plantation segment’s EBIT (-10% to RM32m) due to lower CPO prices (-4% to RM2,107/MT) and partly offset by higher FFB production (+7% to 154k MT). The Other segment also saw improvement (+53% to RM9m) on better cocoa manufacturing margin.

Outlook

Management expects CPO prices to trade at the current level due to the weak Chinese economy and ample supply of palm oil. We concur with management’s expectations and see limited near-term upside as our revised FY15E FFB growth at 7% is the same as the sector’s average. However, we believe FY16E outlook is better as FFB growth prospect should improve to 18%, while we expect CPO prices to improve 9% to RM2,400/MT.

Change to Forecasts

We lower our FY15-16E CNP by 24-18% to RM132- 174m after reducing our Indonesian yield expectations, resulting in adjusted FY15-16E FFB growth of +7-18% (from +18-15%). However, we maintain our tax rate estimate at 24% as we gather that taxes should normalise by the end of the full-year.

Rating

Maintain MARKET PERFORM

While TSH’s near-term outlook is weakened by poor FFB production and soft CPO prices, we think their long-term outlook is positive on higher CPO prices and FFB production recovery in FY16E.

Valuation

We revise down our TP to RM1.95 (from RM2.45) based on unchanged Fwd. PER of 17.2x on lower average FY15-16E EPS of 11.3 sen (from 14.3 sen). Our target Fwd. PER reflects 3-year mean valuation, justified by TSH’s average short-term FFB growth outlook.

Risks to Our Call

Lower-than-expected CPO prices.

Lower-than-expected FFB growth.

Source: Kenanga Research - 26 Aug 2015