TSH Resources Berhad (“TSH)”) 9M16 CNP at RM60m came in broadly within consensus and our forecast at 59% and 54%, respectively, as we expect stronger 4Q16 contributions on better production and prices. TSH also announced its plan to privatise EKOWOOD though this should have minimal earnings impact. No dividend declared, as expected. No changes to our FY16-17E earnings. We maintain our MARKET PERFORM call and TP of RM1.95.

9M16 broadly within expectations. TSH Resources Berhad (“TSH”) 9M16 CNP at RM60m came in broadly within consensus’ RM102m forecast at 59% and our RM111m estimate at 54% as we expect stronger contribution in 4Q16 in line with historical strong production and better CPO prices. No dividend was announced, as expected.

Hit by taxes. YoY, 9M16 CNP weakened 16% on higher tax charge (+133%). We note that at the EBIT level, earnings were flat YoY with better Palm Product performance (+7%) as weaker FFB volume (-10%) was offset by higher CPO prices (+12%). Bio-integration segment, however, weakened 29% on lower cocoa and electricity sales - the latter likely due to lower FFB volume processed. QoQ, CNP weakened 5% on higher tax (+532%), though EBIT strengthened 14% on better Palm Product performance (+9%) on higher volume (+11%) and CPO prices (+14%). Bio-integration segment saw 30% improvement on better volumes, while Wood segment’s LBIT was trimmed 55% to RM0.5m.

Privatisation of EKOWOOD. TSH also announced its proposal to privatise its 67.5%-owned subsidiary Ekowood International Berhad (EKOWOOD) via a members’ scheme of arrangement. TSH shall pay a consideration of RM0.40/share which shall be satisfied entirely via the issuance of new TSH shares at an issue price of RM1.92/share. The transaction is valued at RM21.9m, equivalent to 11.4m new TSH shares or <1.0% of its existing share base (please refer to details overleaf). While EKOWOOD is a loss-making entity, we note that the privatisation price represents a 31% discount to EKOWOOD’s FY15 BVPS of RM0.58/share, which we think is fair. We gather that the rationale of the acquisition is to facilitate the restructuring of EKOWOOD while allowing existing shareholders to participate in the future growth of EKOWOOD via TSH. We are neutral on the move given the relatively small potential dilution, while earnings impact should be minimal as EKOWOOD’s losses are already consolidated into TSH’s earnings.

Expect a stronger 4Q16. We expect earnings to improve as 4Q16 quarter-to-date (QTD) CPO prices improved to RM2,825/MT (+7% QoQ; 31% YoY). Production should also rise, particularly at the Indonesian area, as we note that 4Q production averaged c.30% of TSH’s full-year production historically. However, we trim our FY16E and 17E FFB growth prospects to -7% and +13%, from -4% and +15%, respectively, due to production setbacks seen earlier in the year after the mid-2015 droughts. Longer term, we expect TSH to recover to above-average production growth in FY17E supported by its young average age of 7.5 years.

Maintain FY16-17E CNP at RM111-125m as we expect 4Q improvements as discussed above.

Maintain MARKET PERFORM and TP of RM1.95 based on unchanged FY17E CNP EPS of 9.3 sen, applied to an unchanged Fwd. PER of 21.0x, which is close to our unchanged +0.5SD valuation basis. We think our valuation basis is fair due to TSH’s above-average FY17E FFB growth prospect of +13% against the sector average of +9% due to its young average age. However, we maintain our MARKET PERFORM call given weaker near-term earnings prospect due to lingering drought impact on production.

Source: Kenanga Research - 01 Dec 2016