1QFY21 CNP of RM16.8m (+35% YoY) is within our (22%), but below consensus’ (19%) expectation. FFB output and absence of DPS are within expectations. 2QFY21 earnings are set to improve with production recovery, while the impact of higher CPO price remains muted (capped by Indonesia levy and tax structure). Maintain UP with lower ESG-adjusted TP of RM0.970 @ FY21 PER of 17.2x (- 1.0SD). Valuations are unattractive at FY21E PER of 21.4x, making it more expensive than larger integrated players (c.20x).

Within expectations. 1QFY21 Core Net Profit (CNP) came in at RM16.8m (- 33% QoQ; +35% YoY) - within our (22%), but below consensus’ (19%), estimates. 1QFY21 FFB output came in at 228k MT (+10% YoY). However, this includes FFB from discontinued operations which we estimate at c.50k MT. Excluding FFB from discontinued operations, 1QFY21 FFB output accounted for 22% of our full-year estimate. Absence of DPS is as expected.

Results’ highlight. YoY,1QFY21 CNP rose (+35%) boosted by higher CPO price (+10%) and FFB output (+16%). QoQ, despite higher CPO price (+8%), 1QFY21 CNP fell (-33%), attributable to lower FFB output (-11%) and lower contribution from JV & associates (-72%).

2QFY21 earnings improvement to come from production recovery. While CPO prices are higher (QTD 1QFY21: +12% QoQ), TSH’s Indonesia concentrated estates (c.85-90% of production) will result in realized prices capped at c.RM2,600-2,700/MT for the region. As such, the group will be unable to enjoy significantly higher CPO prices (compared to its pure Malaysian upstream peers). Instead, the earnings kicker should come from a recovery in production.

No changes to earnings estimate as results are in line.

Maintain UNDERPERFORM with alower ESG-adjusted TP of RM0.970 based on FY21E PER of 17.2x (-1.0SD). At current price, TSH is traded at FY21E PER of 21.4x which we think lacks appeal. Larger integrated players like KLK are traded lower at PER of c.20x. TSH also has c.85-90% production concentrated in Indonesia where realized CPO prices are capped due to the biodiesel levy and export tax structure. Our in-house ESG score for TSH is 71%.

Risks to our call include changes towards biodiesel mandates, sharp increase in CPO prices and a precipitous decline in labour/fertiliser/transportation costs.

Source: Kenanga Research - 20 May 2021