TSH Resources Berhad (TSH)’s 1H17 Core Net Profit (CNP*) at RM52.2m made up 39% of consensus forecast and 43% of our estimate, which we deem broadly within expectation as historically 1H earnings made up 44% of full-year CNP on the average. No dividend was announced, as expected. No change to FY17-18E CNP of RM121-143m. Maintain OUTPERFORM at unchanged TP of RM2.20.

Broadly within expectations. TSH recorded 1H17 CNP of RM52.2, making up 39% of consensus RM135.4m and 43% of our RM120.5m estimate, which we deem as broadly within because TSH traditionally records stronger production and earnings in 2H. Historically 1H CNP makes up 44% of five-year average full-year earnings. FFB production at 48% of our full-year forecast is within expectations. No dividend was announced, as expected.

Production pickup. YoY, CNP improved 34% to RM52.2m on stronger FFB production (+29% to 325k metric tons (MT)) and better prices (+21% to RM2,805/MT). However, effective tax rate was higher at 22% (from 11%). QoQ, CNP slipped 9% largely on lower CPO prices (-11% to RM2,656/MT) while FFB volume improved 18% to 176k MT. This was compounded by higher interest charge of RM8.8m (+52%), which we expect should moderate in 2H17.

Yields to rebound. Management noted that production yields should continue rebounding in 2H17 “as the impact of El Nino has waned”. We agree and note that TSH production tends to peak in 4Q at a five-year average of 30% of full-year production. Accordingly, 4Q earnings have contributed 32% of earnings, based on historical average. Furthermore, TSH has announced the completion of its private placement of 25.0m shares or c.1.8% of share capital at RM1.65/share, raising RM41.25m gross proceeds. We believe the effect should be immaterial on share price given the small degree of dilution. We also note that TSH is currently trading at the lowest levels since Nov 2013, which we think is not justified considering TSH’s prime average tree age at c.9 years and above-average recovery trend.

Maintain FY17-18E CNPs at RM120.5-142.8m as results are in line with our expectations. Remain OUTPERFORM with unchanged TP of RM2.20 as we roll forward our valuation base year to FY18E (from average FY17-18E) for higher applied EPS of 10.5 sen (from 9.7 sen) while updating our Fwd. PER to 21.3x (from 22.5x with unchanged valuation basis of +0.5 SD. This is in line with planters with above-average FFB growth expectations. With prices currently trading at multi-year trough valuations and better earnings outlook in 2H17, we believe TSH is ripe for the picking and maintain our OUTPERFOM view on the stock.

Source: Kenanga Research - 25 Aug 2017