We came away from a meeting with TSH’s executive director, Mr. Frederick Tan, turning positive on the group’s outlook. FY19E FFB growth in Indonesia and Sabah is guided at 12-13% and 3-5%, respectively. CPO price is expected to recover to RM2,400/MT, driven by biodiesel initiatives. Raise FY19E CNP by 22% after revising FFB growth from +6% to +10%, but maintain FY18E CNP. Upgrade to OUTPERFORM with higher TP of RM1.30.

Sturdy production outlook to continue. Although Indonesian oil palms are expected to take a break after a robust year in FY18, management continues to expect sturdy FFB growth of 12-13% in FY19 as >3,000 Ha of palms comes into maturity. In Sabah, FFB growth is likely to be decent at 3-5% as the region fully recovers from El Nino. As such, we are raising our conservative FY19E FFB forecast by 5% from 922k MT (+6% YoY) to 964k MT (+10% YoY).

Costs under control. Despite a potential 5-10% increase in both labour and fertiliser costs, we believe production costs would remain manageable in FY19. Management said that an increase in minimum wage in Indonesia – from current levels of RM550-750/month in Kalimantan and Sumatra – would have a minimal impact on earnings as the majority of estate workers are already receiving RM1,000/month and above. Considering stronger production, we estimate FY19E ex- mill cost of production at RM1,560/MT (excluding the effect of MFRS amendments), a mere 3% increase from c.RM1,520/MT in FY18.

CPO price to recover to RM2,400/MT. Management expects CPO price to average RM2,400/MT in 2019, driven by biodiesel initiatives in both Malaysia and Indonesia. This represents a 7% improvement from 2018’s average of RM2,235/MT, in line with our current forecast. Coupled with a sturdy FFB growth outlook, we expect TSH’s earnings to come back with a vengeance in FY19.

Raise FY19E CNP by 22% from RM72.8m to RM88.5m after revising FFB forecast upwards as noted, while maintaining FY18E CNP.

Upgrade from MARKET PERFORM to OUTPERFORM with higher TP of RM1.30 (previously RM1.05) based on an unchanged Fwd. PER of 20.2x applied to a revised FY19E EPS of 6.37 sen (previously 5.24 sen). The Fwd. PER reflects -1.5SD valuation basis, considering a potential soft patch in 4Q18 earning. Valuations of other planters under our coverage are pegged at -1.0SD to -3.0SD levels. For investors who would like to capitalise on a recovery in CPO prices, we recommend pure upstream planters like TSH given their higher earnings sensitivity to CPO prices. Currently, TSH is the only pure upstream planter under our coverage that is still profitable at a pretax profit level. Its CY19 production outlook (+10%) is also superior to that of its peers’ (+5%).

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

Source: Kenanga Research - 23 Jan 2019