We estimate 2QFY20 earnings of c.RM14-16m on lower CPO price, but cushioned by higher FFB output (estimated at 6-11% QoQ). Despite FY20-21E earnings reduction of 18-11% (lower CPO price forecast), we believe value has emerged given the recent 12% share price correction since its May’s high (RM0.930). Upgrade to OUTPERFORM (from MP) with an unchanged TP of RM0.950 (-1.0SD). At current price, TSH is traded at 0.71x PBV (c.11% discount to peers’ average) and even on PER, TSH is traded at merely 15.4x (c.23% discount to peers’ average) despite being one of the more profitable planters around.

FFB production update. 5MFY20 FFB output is estimated at c.357k MT (+3.3% YoY), accounting for 38% (on track) of our full-year estimate with May 2020 FFB output at c.73k MT (-0.2% YoY). The estimated flat YoY output for May 2020 should not be viewed unfavorably as it could be attributed to less working days - Hari Raya Aidilfitri festival on 25-26 May (vs. 5-6 June in 2019). Moving forward, we expect production to pick up, entering into peak season and we estimate 2QFY20 FFB output to range between 220-230k MT (+6-11% QoQ). Our FY20E FFB growth estimate (of +4.3%) remains unchanged.

Production cost expected to remain under control. We believe the group’s manuring program (which is typically carried out uniformly) is currently on track – which translates to less volatile fertilizer costs for each quarter. Having locked in fertilizer requirements for FY20 estimated at 6-7% higher cost than FY19, we expect production cost to remain under control at c.RM1,600/MT. Alongside higher average CPO prices (FY20E: RM2,300/MT post-adjustment vs. FY19 MPOB: RM2,129/MT), we expect FY20 to record considerable earnings improvement.

2QFY20 earnings preview. With lower MPOB CPO price (QTD2QFY20: RM2,250/MT; -16% QoQ) we anticipate a sequential fall in 2QFY20 core earnings, although our estimated increase in 2QFY20 FFB output (+6-11% QoQ) should partially cushion the fall. We expect 2QFY20 core earnings to come in the range of c.RM14-16m, bringing 1HFY20 earnings to c.60-64% of our full-year estimate (post-adjustment). This is premised on our view that rising production during the peak production season in 2HCY20 is likely to exert pressure on CPO prices.

Unperturbed by FY20-21E earnings reduction of 18-11% on lower CY20-21E CPO price assumption of RM2,300-2,400/MT (vs. RM2,550/MT). Despite our earnings reduction, we believe value has emerged in TSH after a 12% share price correction.

Upgrade to OUTPERFORM (from MP) with an unchanged TP of RM0.950 based on an unchanged FY21E PBV of 0.8x, reflecting -1.0SD from mean. At current price, TSH is traded at 0.71x PBV (c.11% discount to peers’ average) and even on PER, TSH is traded at merely 15.4x PER (c.23% discount to peers’ average), reflecting -1.75SD from mean despite being one of the more profitable upstream planters, having recorded decent profits (vs. losses suffered by its peers) during depressed CPO price environment. Our TP implies FY21E PBV of 0.8x and FY21E PER of 18x which is more palatable.

Risks to our call include: (i) adverse dry weather impact on Indonesia’s production, and (ii) logistics disruptions (virus-led).

Source: Kenanga Research - 19 Jun 2020