TSH Resources (TSH)’s 1Q16 Core Net Profit (CNP*) at RM16.7 missed consensus and our forecast at 13% and 11%, respectively, due to weaker FFB volume (-4% YoY) and CPO prices (-3% YoY). No dividend declared, as expected. We maintain our MARKET PERFORM call with lower TP of RM2.05 (from RM2.38) and lower earnings (by 22%-25%) for FY16-17E as we lower our FFB growth outlook.

Below expectations. 1Q16 CNP at RM16.7m came in below expectations as it made up only 13% of consensus (RM130m) and 11% of our forecast (RM152m) due to lower FFB volume at 137.4k metric tons (MT) (-4% YoY)) and average CPO prices at RM2,143/MT (-3%). Note that our CNP calculation excludes unrealised forex gains of RM37.9m, mainly due to fair value change in TSH’s USD borrowings.

El Nino impact. 1Q16 CNP dropped 44% YoY on lower production volume (-4%) due to lagged drought impact, and compounded by weaker CPO prices (-3%). Against 4Q15, a moderate CPO price increase of 7% failed to offset seasonally weaker production (-31%) which was worsened by droughts in both Sabah and Kalimantan throughout mid-2015.

Production to recover. Despite 1Q16 production setbacks, we believe TSH’s young average tree age should support production recovery in 2Q-3Q16. CPO price appreciation to >RM2,500/MT since mid-March should also contribute to stronger 2Q16 earnings. Nevertheless, weaker 1Q16 FFB volumes prompted us to reduce yield expectations in Malaysian and Indonesian areas leading to lower FY16-17E FFB growth expectations at +3-14% (previously +16-18%).

Lowering FY16-17E CNP by 22-25% to RM119-143m after accounting for lower FFB growth as discussed above.

Maintain MARKET PERFORM with lower TP of RM2.05 (from RM2.38) based on unchanged Fwd. PER of 21.0x while we roll forward our valuation base year to 1H17 (from FY16) for updated EPS of 9.7 sen (previously 11.3 sen). Our Fwd. PER of 21.0x reflects +0.5SD valuation, which we think is fair given TSH’s above-average FY17E FFB growth prospect due to its young average tree age. However, we maintain our MARKET PERFORM call as weak 1Q16 FFB volume has set back full-year production growth prospect to +3%, although still slightly above the FY16E sector average (+1%).

Source: Kenanga Research - 26 May 2016