TSH Resources Berhad (TSH)’s 9M18 CNP* of RM15.1m is broadly within our forecast at 83%, but below consensus estimate at 60%. No dividend was announced, as expected. We expect softer earnings in 4Q18 as declining CPO prices overshadow production uptick. No changes in FY18-19E CNP at RM48.9-72.8m as earnings came in line. Maintain MARKET PERFORM with unchanged TP of RM1.05 based on FY19E PER of 20.2x.

Broadly within ours, but misses street’s. TSH’s 9M18 core net profit (CNP*) of RM15.1m is broadly in line with our forecast (RM48.9m) at 83% but below consensus estimate (RM68.1m) at 60%, likely due to lower-than-expected CPO prices. Note that we have stripped out an unrealised forex loss of RM12.2m in our CNP calculation. FFB output of 652k MT is in line with our full-year forecast of 874k MT at 75%. No dividend was announced, as expected.

Dragged by weaker CPO price. YoY, despite FFB growth of 21%, 9M18 CNP halved as CPO prices declined 19% to RM2,205/MT. In addition, effective tax rate was significantly higher at 43% (from 23%) due to under-provision in respect of prior year’s deferred income tax and higher non-deductible expenses. QoQ, 3Q18 EBIT improved 8% as FFB growth of 13% outweighed the effect of an 11% decline in CPO prices to RM2,037/MT. This resulted in an EBIT margin expansion of 2ppt to 19.5%. However, this was more than offset by higher interest expense (+6%), resulting CNP to decline 18%.

Expect soft patch in 4Q18. We expect FFB output to slow down sequentially in 4Q18 as Indonesian production taper off, partially cushioned by Sabah’s recovery from the impact of El Nino last year. Coupled with declining CPO prices, we believe TSH will hit a soft patch in 4Q18 given their higher-than-average production unit cost compared to larger planters.

No changes in FY18-19E CNP at RM48.9-72.8m as results were in line with our expectations.

Maintain MARKET PERFORM with unchanged TP of RM1.05 based on Fwd. PER of 20.2x (-1.5 SD) applied to FY19E EPS of 5.24 sen. The Fwd. PER reflects the company’s CY19E FFB growth outlook of 6% (vs. sector average of 5%) and its small-mid cap status. Note that our plantation valuations are now pegged at -1.0SD to -2.0SD levels currently. While production outlook is decent, we continue to expect high production costs to eat into profit margins in the near-term due to full overhead charges on its very young estates in Indonesia.

Risks to our call include sharp rises/falls in CPO prices and a precipitous rise in labour/fertiliser/transportation costs.

Source: Kenanga Research - 30 Nov 2018