1HFY21 CNP of RM60.1m is above our (70%) and consensus’ (58%) expectations on higher CPO prices. We expect its 3QFY21 to ride on higher CPO prices and FFB improvement. Thereafter, CPO price and FFB could decline. Raise FY21-22E CNP by 62-7%. Maintain MP with a higher TP of RM1.17 @ rolled-over FY22E PER of 16x. A revision (higher) to levy and tax structure in Indonesia could further cap realized prices.

Above expectations. 2QFY21 Core Net Profit (CNP) came in at RM44.0m (+174% QoQ; +317% YoY), bringing 1HFY21 CNP to RM60.1m (+161% YoY) - above our (70%) and consensus’ (58%), estimates. 1HFY21 FFB output of 483k MT (+13% YoY) at 50% of our estimate and absence of DPS are as expected.

Results’ highlight. YoY, 1HFY21 CNP rose (+161%) boosted by higher average CPO price (+38%) and FFB output (+13%), resulting in a 103% surge in palm segmental profit. QoQ, we see a similar trend. 2QFY21 CNP leapt (+174%) on higher average CPO price (+14%) and higher FFB output (+12%).

Outlook. We expect its earnings in 3QFY21 to improve sequentially on higher CPO prices (QTD 3QFY21: 4% QoQ) and FFB improvement. Thereafter, earnings should moderate in line with an expected decline in CPO prices. Production in Indonesia could taper off in 4QFY21 should the trees begin to rest. Note that TSH’s estates are concentrated in Indonesia (~90% of production) where the group will be unable to fully enjoy the high CPO prices due to the biodiesel levy and export tax structure. Any revision (higher) to the levy and tax structure (given elevated prices) could further cap realized prices.

Raise FY21-22E CNP by 62-7% on higher CPO price of c.RM3,300-2,800/MT (vs. c.RM2,650/MT previously).

Maintain MARKET PERFORM with a higher TP of RM1.17 (from RM1.05) based on a lower rolled-over FY22E PER of 16x (from 17x), reflecting -0.5SD from mean on an additional 6% ESG discount. At this juncture, we think the stock lacks catalysts – it is unable to fully benefit from elevated CPO price (due to lower Indonesia prices), while traded at 15% premium to peer, making it a less attractive upstream play. ESG score for TSH is 71%.

Risks to our call include: (i) adverse dry weather impact on Indonesia’s production, (ii) revision to Indonesia’s biodiesel levy and export tax structure, and (iii) logistics disruptions (virus-led).

Source: Kenanga Research - 25 Aug 2021