We walked away from a meeting with TSH’s management, reassured of TSH and the plantation sector’s FY20 prospects. Expecting FY20 earnings to return with a vengeance (+116% YoY) on (i) higher FY20 CPO price of RM2,700/MT (+27% YoY), (ii) sturdy FFB growth (management: 8-12%; ours: 4.5%) as c.4k Ha of palms come into maturity, and (iii) production cost under control at c.RM1,600/MT. Consensus’ implied 4QFY19 earnings (-58% QoQ) appears too conservative (vs. our +30% QoQ). No changes to our above consensus earnings estimate. Reiterate OUTPERFORM with a TP of RM1.90 (+1.0SD level).

Our above consensus CY20 CPO forecast of RM2,700/MT remains. The company visit reassured us of TSH and the plantation sector’s prospects. Current CPO prices should be supported by weak production in FY20 (arising from dry weather impact, lower fertilizer application and replanting activities) while demand remains robust. In addition, it appears that management is also comfortable with our CPO forecast of RM2,700/MT.

Sturdy FY20 FFB growth + production cost under control = FY20 earnings returning with a vengeance. Despite industry-wide expectations of weaker production in FY20 (arising from dry weather impact, lower fertilizer application and replanting), management continues to expect sturdy FFB growth of 8-12% in FY20 as c.4k Ha of palms are coming into maturity. However, we are maintaining our conservative FY20 FFB growth of 4.5% premised on our view of weaker production in 1HFY20. Meanwhile, having locked in fertilizer requirements for FY20 (6-7% higher than FY19), management appears confident to keep FY20 cost under control at c.RM1,600/MT. This is in line with our FY20 production cost of RM1,560/MT. Alongside improved CPO price outlook, we expect earnings to return with a vengeance in FY20.

4QFY19 earnings likely to surprise consensus. TSH is scheduled to release its 4QFY19 results in the last week of February. With higher CPO price (+23% QoQ) and only a slight sequential dip in 4QFY19 FFB output (our expectation for 4QFY19 FFB output: c.240k MT), we expect TSH’s 4QFY19 earnings to improve significantly to register around RM15m (+30% QoQ). For 9MFY19, TSH already registered CNP of RM34.2m (87% of consensus) and we highlight that consensus’ FY19E CNP of RM39.1m appears too conservative, implying (-58% QoQ), when in fact, CPO price has risen 23% QoQ.

No changes to our above consensus earnings estimates as updates were consistent with expectations. We underscore that our FY19-20E earnings are 26-48% higher than consensus.

Reiterate OUTPERFORM with an unchanged TP of RM1.90 based on an unchanged Fwd. PER of 24.4x applied on FY20E EPS of 7.69 sen, reflecting +1.0SD valuation basis, justified by: (i) current CPO price of c.RM3,060/MT (TSH was also traded at +1.0SD levels when CPO prices were at RM2,700-2,900/MT in 2017), and (ii) the likelihood of significant sequential earnings improvement ahead. Valuations of other planters under our coverage are pegged at mean to +1.0SD levels.

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

Source: Kenanga Research - 9 Jan 2020