TSH Resources Berhad (TSH)’s 9M17 Core Net Profit (CNP*) at RM81.2m missed expectations at 60% of consensus and 65% of our forecast on higher-than-expected production cost. No dividend was announced, as expected. We lower FY17-18E CNP by 7-12% to reflect higher cost. We lower our call to MARKET PERFORM with lower Target Price of RM1.75 (from RM2.20) after accounting for softer earnings.

9M17 below expectations. 9M17 CNP of RM81.2m came in below expectations, at 60% of consensus’ RM135.4m and 65% of our RM126m forecast on higher-than-anticipated production cost, although FFB production at 676k metric tons (MT) is in line at 79% of our full- year estimate. No dividend was announced, as expected.

Good volume. YoY, CNP improved 35% thanks to higher FFB production (+33% to 537k MT), largely arising from stronger yield in young Indonesian area (+39% to 456k MT), as well as better CPO prices (+16%). QoQ, CNP rose 17% due to continued strong FFB production (+21%) though this was again driven by Indonesia (+31%) while Malaysia saw weaker production (-27%) due to the lingering drought effect in Sabah. CPO prices were largely flat for the quarter (- 3%).

Yields vs. costs. Management expects production trend to remain favourable as their Indonesian areas reach prime producing age and more planted areas enter the harvesting stage. We expect the double- digit growth pattern to continue in Indonesia for 2018 resulting in group FFB growth of 13-13% in FY17-18, exceeding the sector average of c.8%. However, we note that profitability is not yet at our expected levels, likely due to slower recovery in Sabah estates leading to higher unit cost per ton, while younger Indonesian estates have similar problem with early-stage yields. However, management plans to continue focusing on productivity and efficiency to reduce unit cost of production.

Reduce FY17-18E CNP by 8-18% to RM110.4-116.5m, reflecting higher cost assumptions.

Lower call to MARKET PERFORM on lower Target Price of RM1.75 (from RM2.20) post-earnings adjustment for lower FY18E EPS of 8.4 sen (from 10.5 sen) while updating our Fwd. PER to 20.8x (from 21.3x) with unchanged valuation basis of +0.5 SD. This is in line with planters with above-average FFB growth expectations. While we are long-term positive on TSH’s earnings growth prospects, we adjust our medium- term expectations as production setbacks have led to stubbornly high costs and thinner margins. Thus, we adjust our call to MARKET PERFORM with a rebound in Sabah production acting as a potential catalyst.

Source: Kenanga Research - 23 Nov 2017