TSH Resources Berhad (TSH)’s 1H18 CNP* of RM25.5m is broadly within our forecast at 39%, but below consensus estimate at 33%, of full-year forecasts. No dividend was announced, as expected. FFB yields should continue rebounding in 2H18 as the impact of El Nino in Sabah subsides. No changes to earnings. Maintain UNDERPERFORM at unchanged TP of RM1.10 given stretched valuations.

Broadly within expectations. TSH’s 1H18 core net profit (CNP) came in broadly within our expectation at RM25.5m, making up 39% of our RM65.3m full-year forecast, but below consensus’s RM77.2m full-year estimate at 33%. Historically, 1H CNP constitutes 44% of five-year average full-year earnings. Note that we have stripped out an unrealised forex loss of RM3.4m in our CNP calculation. FFB production at 47% of our full-year forecast is within expectations. No dividend was announced, as expected.

Dragged by weaker CPO price. YoY, despite FFB output rising 24% to 402k MT, CNP halved to RM25.5m owing to a 18% decline in CPO price to RM2,299/MT in 1H18. In addition, effective tax rate was significantly higher at 41% (from 21%) due to under-provision in respect of prior year’s deferred income tax and higher non-deductible expenses. QoQ, 2Q18 CNP recovered 167% on FFB production pickup of 22%, while CPO inched down by a mere 1%, resulting in EBIT margin expansion of 6.3ppt to 17.5%. The margin improvement stemmed from lower depreciation expenses (-15%) and higher operating income (+39%). However, this was partially offset by a spike in the effective tax rate to 51% (from 34%) due to reasons above.

Yields to rebound. Management noted that production yields should continue rebounding in 2H18 as the impact of El Nino in Sabah 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 contributed to 32% of full-year earnings, based on historical average. We maintain our above-average FY18E FFB growth assumption of 11% (vs. sector average of 5%), underpinned by maturing area in its Indonesian oil palm plantation (c.8% of planted area). Our CPO price assumption of RM2,400/MT remains valid.

Maintain FY18-19E CNP at RM65.3-82.4m as results are in line with our expectations.

Maintain UNDERPERFORM with unchanged TP of RM1.10 based on Fwd. PER of 20.8x applied to average FY18-19E EPS of 5.3 sen. Our Fwd. PER of 20.8x reflects +0.5SD valuation basis, in line with planters with above-average FFB growth expectations. However, with no foreseeable catalyst in sight while TSH currently trades at lofty average FY18-19E PER of 23.7x (+1.6SD), we maintain our UNDERPERFORM call on TSH.

Risks to our call include higher-than-expected CPO prices, better- than-expected production growth, and lower-than-expected cost of production.

Source: Kenanga Research - 24 Aug 2018