TSH 1H16 CNP at RM39m missed both consensus (34%) and our forecast (33%) as FFB volume declined 15% YoY-Ytd. No dividend declared, as expected. FY16-17E earnings reduced by 16%-13% on lower Indonesian fullyear outlook. We downgrade our call to MARKET PERFORM (from OUTPERFORM) with lower TP of RM1.95 (from RM2.05) post-earnings cut.

1H16 below expectations. TSH Resources (TSH) 1H16 Core Net Profit (CNP*) at RM39m missed consensus forecast (RM115m) at 34% and our forecast (RM119m) at 33%. This was mainly due to slower-than-expected FFB production improvement, which only made up 39% of our full-year forecast (669k metric tons (MT)). Note that our CNP calculation excludes unrealised forex losses of RM8.5m, mainly due to fair value change in TSH’s USD borrowings. No dividend was announced in the quarter, as expected.

Weaker production. YoY-Ytd, 1H16 CNP weakened 18% mainly on lower FFB volume (-15%) in both Sabah (-18% to 49k MT) and Indonesia (-14% to 204k MT) which offset higher CPO prices (+7%). As a result, higher production cost per ton reduced core margin to 9% (from 11%). QoQ, 2Q16 CNP rose 33% as higher CPO prices (+16%) boosted production recovery in Sabah (+40% to 28k MT) and helped offset weaker production in Indonesia (-24% to 88k MT) which continued to be affected by the mid-2015 droughts.

Expect stronger 2H16. We expect full-year production to partly recover from 1H16’s 15% YoY decline, supported by TSH’s young average tree age in Indonesia and supportive CPO prices (averaging RM2,500/MT quarter-to-date). With 2015 droughts pushing peak production to later parts of the year, we expect 4Q16 to post the strongest FFB production, similar to FY15 performance. However, given the production setbacks seen in 1H16, we reduce our FY16 Indonesian FFB growth forecast from +6% to a slight decline of 2%. As a result, FY16E and 17E Group FFB growth is reduced to -4% and +15% (from +3 and 14% previously).

Reduce FY16-17E CNP by 16-13% to RM100-125m as we reduce our Indonesian FFB growth outlook as mentioned above.

Downgrade to MARKET PERFORM with lower TP of RM1.95 (from RM2.05) as we account for lower earnings as described and roll forward our valuation base year to FY17E (from average FY16- 17E) for lower Fwd. EPS of 9.3 sen (from 9.7 sen). Our Fwd. PER of 21.0x is unchanged, reflecting +0.5SD valuation basis as we remain long-term positive on TSH’s FY17E FFB growth prospect (+15% vs. sector average of +9%) due to its maturing plantations. However, we downgrade our call to MARKET PERFORM as we believe the market has fairly priced in the near-term weakness in FFB production due to last year’s droughts.

Source: Kenanga Research - 30 Aug 2016