TSH Resources Berhad (TSH) FY16 CNP at RM79m missed consensus RM101m estimate and our RM109m forecast, at 78% and 73%, respectively, due to higher-than-anticipated tax charge in Indonesia. A first and final dividend of 2.0 sen was announced, as expected. We lower FY17E CNP by 6% while introducing FY18E earnings. Maintain MARKET PERFORM with lower TP of RM2.00 post earnings downgrade.

FY16 misses on tax. TSH Resources Berhad (TSH) FY16 Core Net Profit (CNP*) came in at RM79m, missing both consensus RM101m forecast at 78% and our RM109m forecast at 73% due to a larger- than-expected tax charge of RM46m, implying full-year tax rate of 41% against the 5-year average of 15%. This was due to under-provision in its Indonesian estate, which has been expensed, and should not recur going forward. Production at 596k metric tons (MT) was in line with our expected 601k MT at 99%. A first and final dividend of 2.0 sen was announced, in line with our estimate.

Tax reversed price gains. YoY, CNP weakened 36% as taxation jumped 1.4x due to higher Indonesian tax charge as discussed above. However, Palm EBIT improved 23% as higher CPO prices (+18%) offset softer FFB volume (-8%) due to lingering drought impact. Others segment EBIT softened 19% on lower electricity sales as a result of lower biomass input. QoQ, CNP declined 13% on higher tax charge, but Palm EBIT jumped 57% as both FFB volume (+27%) and CPO prices (+13%) improved. Others segment EBIT softened 16%, likely on thinner cocoa margins.

Long-term growth prospect intact. We believe that the higher-than- average tax charge in Indonesia should not recur as the company turns more conservative on its provisioning practices. Hence, we maintain our tax rate expectations at the statutory level. Meanwhile, we remain long-term positive on its FFB growth prospect thanks to its young average tree age of c.9.0 years. We anticipate FY17-18E FFB growth of 13%, exceeding the sector average of 8-10%.

Reduce FY17E CNP by 6% to RM120m as we introduce FY18E CNP of RM143m. We lower FY17E CNP by 6% to RM120m as we adjust up absolute costs in anticipation of production recovery through FY17. FFB growth forecast is maintained at 13%. We also introduce FY18E CNP of RM143m, implying a YoY EPS growth of 19% on the back of FFB growth of 13%.

Maintain MARKET PERFORM with lower TP of RM2.00 (from RM2.12) based on unchanged Fwd. PER of 22.5x on lower FY17E EPS of 8.9 sen (from 9.4 sen). Our Fwd. PER of 22.5x is based on unchanged +0.5SD valuation basis, which we think is fair due to above-average FY17-18E FFB growth prospect of +13%, which is above the sector average of +8-10%. However, we maintain our MARKET PERFORM call as short-term production could still see lingering drought impact in 1Q17.

Source: Kenanga Research - 28 Feb 2017