1FY20 CNP of RM34.9m (+53% YoY) is deemed within both our (55%) and consensus’ (56%) expectation. 1HFY20 FFB output is also within at 46%. Sequential earnings improvement is anticipated in 3QFY20 on higher CPO prices (QTD 3QFY20: +17%). No changes to earnings estimate. Still a MARKET PERFORM with an unchangedTP of RM1.10 on FY21E PBV of 0.9x, reflecting mean. Reward-to-risk favours the latter at this juncture as CPO price, the leading indicator, is likely to come under pressure on rising inventory.

Deemed within expectations. 2QFY20 Core Net Profit (CNP) came in at RM10.6m (+19% YoY; -57% QoQ), which brought 1HFY20 CNP to RM34.9m (+53% YoY) - deemed within both our (55%) and consensus’ (56%) estimates. 1HFY20 FFB output of 427k MT (+5% YoY) is within our expectation, accounting for 46% (5-year average: 45%) of full-year estimate. The absence of dividend is as expected.

Results’ highlight. YoY, 1HFY20 CNP leapt (+53%) on the back of: (i) higher average CPO price (+23%), and (ii) higher FFB output (+5%). As a result, plantation EBIT margin expanded (+9.2ppt) to 18.6%, leading to a 137% increase in plantation segment profit. QoQ, 2QFY20 CNP fell (-57%) as lower average CPO price (-19%) overshadowed higher FFB output (+5%). Plantation EBIT margin contracted (-14.5ppt) to 10.7%, while segmental plantation profit fell (65%).

Earnings to improve in 3QFY20. Premised on higherCPO prices (QTD 3QFY20: +17% QoQ), we expect sequential improvement in 3QFY20 earnings. However, 4QFY20 earnings could suffer as we expect rising inventory as a result of peak production period and normalization of demand (as inventory replenishment efforts from countries like India and China have been completed) to exert downward pressure on CPO price.

No changes to earnings estimate as results were in line.
Maintain MARKET PERFORM with an unchanged Target Price of RM1.10 based on an unchanged FY21E PBV of 0.9x, reflecting mean. Given our view that CPO price is likely to come under pressure in anticipation of rising inventory in the coming months, we believe reward-to-risk favours the latter at this juncture and our tactical MARKET PERFORM rating is appropriate. Having said that, we view floor valuation to be at -1.0SD (0.74x PBV), translating to a price of RM0.900. At 0.74x PBV or lower, TSH is a steal.

Risks to our call include sharp increase/decline in CPO prices and a precipitous rise/fall in labour/fertiliser/transportation costs

Source: Kenanga Research - 21 Aug 2020