TSH Resources Berhad (TSH) FY17 Core Net Profit (CNP*) of RM101.1m missed both consensus estimates at 86% and our forecast at 92% on weaker-than-expected margin recovery. A final dividend of 2.0 sen was declared, in line with our forecast. Lower FY18E CNP by 5% as we introduce FY19E CNP of RM126m (14% earnings growth). Maintain MARKET PERFORM with lower TP of RM1.60 (from RM1.75).

FY17 misses expectations. TSH CNP in FY17 of RM101.2m came in below consensus’ RM116.9m forecast at 86%, and below our RM110.4m estimate at 92%. While FFB production at 676k metric tons (MT) is within our forecast at 104%, margin setbacks in 1H17 due to low yields led to a full-year earnings disappointment. A final dividend of 2.0 sen was announced, meeting our expectation.

Margins lagging behind. YoY, CNP recovered 29% as FFB volume jumped 19% in conjunction with higher CPO prices (+10%). However, despite stronger top-line Palm performance (+26%), core segment EBIT (ex-forex movement) rose slower at +18% to RM190.2m as production setbacks in 1H17 led to higher unit cost, explaining the flat margins seen for the full year (20% vs. 21% in FY16). QoQ, CNP weakened 35% due to lower Palm core EBIT (-21% to RM45.3m). FFB volume fell 20% led by weak Indonesia production (-25% to 169k MT) on heavy rainfall, which overwhelmed strong Sabah production (+19% to 27.2k MT). CPO prices were largely flat (+2%). Margin-wise, the weaker production led to core EBIT margin declining to 19% (from 25%).

2018 to see yield improvement. Management expects crop production to improve in FY18 as maturing area increases, while newly matured areas continue to see yield expansion. Accordingly, we expect TSH to record consistent FY18-19E FFB growth of 11-14%, generally above the sector average of 8%. However, with 1Q typically seeing weakest production due to fewer working days and rainy season, we expect better results to be seen from 2Q18 onwards. Meanwhile, management plans to continue efficiency measures to reduce its unit cost of production, which should lead to CNP growth for the year.

Reduce FY18E CNP by 5% to RM110.6m as we introduce FY19E CNP of RM126.3m. We trim our FY18E CNP by 5% as we tweak our unit cost assumptions, while we introduce FY19E CNP of RM126.3m implying 14% YoY earnings growth.

Maintain MARKET PERFORM with lower TP of RM1.60 (from RM1.75) after adjusting for lower earnings and rolling forward our valuation base year to average of FY18-19E for lower applied EPS of 7.8 sen (from 8.4 sen). Our Fwd. PER is unchanged at 20.8x based on +0.5SD valuation basis. 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. We expect to see better performance in the medium term, as maturing yields and the sector-wide production rebound lead to improvement in unit costs, although wet weather in the short-term may dampen this effect. Thus, we maintain our MARKET PERFORM call on TSH.

Risks to our call include: lower-than-expected CPO prices, weaker- than-expected production recovery, and higher-than-expected cost of production.

Source: Kenanga Research - 28 Feb 2018