9MFY20 CNP of RM51.7m (+59% YoY) is within both our (72%) and consensus’ (75%) expectations. 9MFY20 FFB output is also within at 72%. Sequential earnings improvement is anticipated in 4QFY20 on higher CPO prices (QTD 4QFY20: +13%) and production recovery in Indonesia. No changes to earnings estimate. Downgrade to MARKET PERFORM with an unchanged TP of RM1.10 on FY21E PBV of 0.9x (- 0.5SD). Reward-to-risk favours the latter at this juncture given expected downside bias towards CPO price. On PER valuation, TSH is traded at 15% premium to peers.

Within expectations. 3QFY20 Core Net Profit (CNP) came in at RM17.3m (+77% YoY), which brought 9MFY20 CNP to RM51.7m (+59% YoY) - within both our (72%) and consensus’ (75%) estimates. Both 9MFY20 FFB output of 505k MT (+1% YoY) at 72% of our full-year estimate and absence of dividend were as expected.

Results’ highlight. YoY, 9MFY20 CNP leapt (+59%) boosted by higher CPO price (+23%). As a result, plantation segmental profit surged (+86%). This would have been more significant if not for the flat (+1%) FFB output, caused by lower 3QFY20 FFB output (-6% YoY). The dip was mainly caused by a lagged impact of the dry season in Indonesia during 3QFY19.

Expecting a strong end to FY20. Premised on higher CPO prices (QTD 4QFY20: +13% QoQ), and our expectations of stronger FFB output in 4QFY20, we expect sequential improvement in 4QFY20 earnings. Note that peak production season in Indonesia is expected in 4QFY20. Based on TSH’s notes to financial statements, the group’s FFB production which was affected in 3QFY20 is expected to normalize in 4QFY20, in line with our expectations of seasonally higher FFB output. Having said that, we highlight our downside bias towards CPO prices, which is the leading share price performance indicator (especially for upstream planters).

No changes to earnings estimate as results were in line.

Downgrade to MARKET PERFORM with an unchanged Target Price of RM1.10 based on an unchanged FY21E PBV of 0.9x, reflecting -0.5SD valuation (in-line with peers). Since our upgrade (report date: 27 Aug 2020), TSH’s share price has risen 12%. At current price, TSH is trading at FY21E PER of 23x (15% premium to peers). Given our view that CPO price is likely to come under pressure in the coming months, we believe reward-to-risk favors the latter at this juncture and our tactical MARKET PERFORM rating is appropriate.

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

Source: Kenanga Research - 19 Nov 2020