FY21 Core Net Profit (CNP) of RM217m came in above ours (by 15%), and consensus’ (by 36%), expectations, on higher palm oil prices. 4Q FFB output actually declined on account of wet weather while full-year fruit production was flat. Meanwhile, full- year CPO price surged 46% YoY to RM3,570 per MT and 4Q prices were even stronger. With CPO prices expected to stay higher and longer, we are revising up FY22-23 Core EPS by 139% and 76% on the back of higher CPO price assumptions of RM4,000 and RM3,500 per MT respectively. We are also upgrading our TP from RM1.17 to RM1.80 on PER of 11x, a 30% discount to CY22-23 sector PER of 16x in light of TSH’s flattish FY22-23 earnings, weaker gearing and lower ROEs. However, TSH has pared net gearing from 75% to 50% YoY and with only half its 62K Ha planted, its long-term expansion outlook is positive. Upgrading TSH from MP to OP.

Above expectations. 4QFY21 CNP of RM68m did well mainly on strong CPO prices of RM4,347 (+21% QoQ, +59% YoY) while FFB output declined on account of wet weather to 196k MT (-18% QoQ, -23% YoY). Full-year fruit production was also flat at 919k MT (+1% YoY) but thanks to strong CPO and Palm Kernel (PK) prices full-year CNP grew 160% YoY. For FY21, TSH achieved average CPO price of M3,570 per MT which was 46% stronger than a year ago while PK prices surged to average 71% YoY higher at RM2,363 per MT. Slightly disappointing was the declaration of 3.0 sen dividend for the year when we had expected a little more, at 3.5 sen.

Outlook: International edible oil & fats traders had expected good South America soyabean harvest come early 2022 to ease supply after 2021 ended with only slightly higher inventories compared to a year ago. However, dry weather in Brazil had dashed such hopes with output trimmed by 5-10%. Meanwhile, palm production in Malaysia is still hampered by labour shortfall which leaves 2H 2022 US soyabean harvest and seasonally better palm output to meaningfully ease supply tightness. Therefore, CPO prices are expected to remain elevated and longer than earlier anticipated. CPO prices for TSH should now average at RM4,000 per MT for FY22 (up from RM2,900 previously) and RM3,500 for FY23 compared to our old estimate of RM2,800.

However, 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. TSH has also just concluded the disposal of an old oil palm estate (Ladang Ong Yah Ho) and a 20-year old palm oil mill. Included in the deal is the sale of another estate (Ladang Gomantong) which should be finalised soon. This will reduce annual FFB output by about 50-55k MT a year but the RM248m cash consideration will prove useful in paring down debts further and to develop new estates as the Group has planted only about half its landbank.

We are upgrading TSH from MP to OUTPERFORM with a higher TP of RM1.80 based on 11x FY22E PER, reflecting flattish CNP over FY22- 23, weaker balance sheet and poorer ROEs in the past. However, elevated CPO price is fast re-capitalising TSH with net debt already pared from RM1.15b to RM0.82b YoY and it should be able to accelerate its planting program soon. Risks to our call include: (i) adverse weather (ii) revision in Indonesia’s biodiesel levy and export tax structure, and (iii) volatile CPO prices.

Source: Kenanga Research - 25 Feb 2022