Period

3Q15/9M15

Actual vs. Expectations

TSH Resources (TSH)’s 9M15 core net profit (CNP*) at RM72m missed both consensus (RM106m) and our forecast (RM132m) at 68% and 54%, respectively. Note that 9M15 reported net loss of RM35m included RM106m of unrealised translation losses.

The variance to our forecast was due to weaker-thanexpected 9M15 FFB volume of 450k metric tons (MT) (- 7% YoY) given the dry weather conditions in Sabah and parts of Kalimantan and compounded by lower CPO prices at RM2,099/MT (-12% YoY).

Dividends

No dividend announced, as expected.

Key Results Highlights

YoY, 9M15 CNP declined 35% to RM72m mainly on Palm segment’s EBIT halving to RM88m, as TSH was hit by both lower FFB volume and CPO prices as mentioned above.

QoQ, 3Q15 CNP improved 39% mainly on tax credits on its net losses (RM48m). Note that the previous quarter was also impacted by higher-than-average tax rate (48%). Operationally, Palm segment’s EBIT declined 37% due to lower CPO prices (-6% to RM1,987/MT) while FFB volume was flat at 153k MT due to very dry weather in Kalimantan negating peak production season.

Outlook

We expect 4Q15 earnings to be better than 3Q15 as we gather that weather conditions have improved, leading to better production outlook in the year-end.

However, we are overall neutral on the medium term. Although we expect CPO prices to improve in FY16 to RM2,400/MT (+9%), this could be offset by softer 1H16 FFB production as a result of recent dryness.

Change to Forecasts

We lower our FY15-16E CNP by 16-12% to RM110- 152m after reducing our Indonesian yield expectations, resulting in adjusted FY15-16E FFB growth of +1-16% (from +7-18%).

Rating

Downgrade to UNDERPERFORM (from MARKET PERFORM)

We downgrade TSH to UNDERPERFORM as we think the market has yet to fully price in the weaker near-tomid- term production outlook.

However, we may review our call if there are sharp share price corrections given its promising long-term outlook arising from TSH’s young average tree age of 7.4 years.

Valuation

We maintain our TP at RM1.95 based on unchanged Fwd. PER of 17.2x on Fwd. EPS of 11.3 sen, which is maintained although we trimmed earnings, as we roll forward our valuation base year to FY16E.

Our target Fwd. PER reflects 3-year mean valuation, which we think is fair as TSH’s positive FY16E FFB growth (16% vs peers’ 6%) is offset by its weak FY15E FFB growth (1% vs. peers’ 5%).

Risks

Lower-than-expected CPO prices.

Lower-than-expected FFB growth.

Source: Kenanga Research - 19 Nov 2015