TSH’s Core Net Profit (CNP) of RM64m (-6% QoQ, +87% YoY) for 1QFY22 came below our expectation by 9% but 24% above consensus. Although production was disappointing (flat QoQ and down YoY), stronger palm oil prices supported earnings. Nevertheless, we are expecting CPO price to ease on seasonally higher production in 2H but CPO prices are expected to remain firm due to tight global edible oils market. We are revising down FY22E/FY23E Core EPS by 9%/12% on higher cost. We are maintaining our OP rating but revising down the TP from RM2.08 to RM1.90.

Below our expectation: Strong CPO price of RM4,779/MT (+10% QoQ, +59% YoY) in 1QFY22 helped offset the flat-to-weak FFB output of 0.198m MT (+1% QoQ, -13% YoY). FY22 fruit output will see some weakness YoY as TSH had sold 3,001 Ha of matured oil palm area which was bearing about 4-6K MT of FFB per month. Even if the two Sabah estates were not sold, fruit output is likely to dwindle anyway as 2/3 of the planted area is in need of replanting. However, with the sales, TSH can further de-gear and accelerate the planting of new oil palm estates in Kalimantan instead.

Outlook: The two leading vegetable oils, palm and soyabean, are expected to see improving seasonal supply in 2H of CY22. This should alleviate some of the current tightness but is probably not enough to address the imbalance. Meaningful improvement in supply is more likely in CY23 (or even beyond that depending on demand). As such, whilst CPO price should ease as 2H approaches, CPO prices should still stay robust on the following factors:

a) Tightness in the current edible oils and fats market will probably spill over into CY23 even with decent 2H CY22 harvests projected and some demand destruction due to high prices and prospective economic slowdown.

b) Exports to China could strengthen in the coming months as inventory is believed to below. Also, as China gradually reopens and transits to normalcy, demand is expected to pick up as well as China is one of the top international buyers of palm oil.

c) Current high oil and gas prices also provide some cushion to any sharp correction in vegetable oil prices as it will then spur greater demand for biofuels.

We are maintaining TSH’s average CPO price of RM4,500/MT for FY22 and RM4,000/MT for FY23 but nudged up cost to reflect higher export levy and duties in Indonesia. Contribution from 22%-owned associate, Innoprise Plantations, is also expected to improve from RM19m to RM23m on better CPO prices while prospects of the wood division should improve on firmer timber prices following Russia’s ban on log export in Jan 2022.

Strong operating cash flow coupled with the RM248m proceeds from the 3,001 Ha estate disposal saw net borrowings falling from RM816m (50% net gearing) as at end of Dec 2021 to RM637m (37% net gearing). Further net debt reduction is anticipated as it is in the midst of divesting 13,898 Ha (only 27% planted to date) in North East Kalimantan for RM712m cash.

We continue to like TSH’s longer-term growth prospects – essentially to develop its oil palm upstream business on its own land bank. However, due to the 9% downgrade in earnings for FY22, we are revising down our TP from RM2.08 to RM1.90 based on 11x PER against FY22 EPS.

Source: Kenanga Research - 25 May 2022