1HFY22 Core Net Profit (CNP) of RM139.9m (+79% YoY) which was lifted by strong CPO prices came in 8% below our expectation, despite accounting for 68% of our FY22F CNP and 70% of consensus’ as we are expecting lower CPO prices moving forward. Hence, we are revising down FY22F and FY23F Core EPS (CEPS) by 8% and 13%, respectively, on higher cost and lower production expectations. We also revise down its TP from RM1.90 to RM1.80 but are keeping our OUTPERFORM recommendation.

Continual strong CPO prices in 2QFY22 helped lifted 1HFY22 earnings as FFB production lagged a year ago for both 2QFY22 and 1HFY22. Nonetheless, after a weak first quarter, 2QFY22 production improved 21% QoQ to 239k MT (-6% YoY), lifting 1HFY22 production to 437k MT but still 6% lower YoY. Output was affected by the divestment of two Sabah estates (3,001 Ha) in March 2022 which typically yielded 4-6K MT of FFB a month. A repeat of the strong average CPO price of RM4,941/mt (+52% YoY) enjoyed in 1HFY22 is not likely as improving supply of edible oils worldwide, including palm oil, is weighing down future prices. As such, operating earnings have probably peaked in 2QFY22 but overall earnings are more likely peak in 2HFY22 due to net disposal gain from the sale of 13,988 Ha (72% unplanted) in NE Kalimantan for RM731m with a net gain of RM422m. About 70% of the deal consideration was settled in Aug 2022 and the remaining should be completed by the end of FY22.

CPO price outlook: CPO prices have corrected by over 30% since early-June due to aggressive actions by Indonesia as it faces storage constraints, seasonal supply improvement as well as still subdued recovery in off-take. Nevertheless, demand which has been dampened by Covid-19 since 2020 should be reverting to the more usual 3-4% YoY growth by 2023. Equally important, 2H 2022 seasonal supply improvement is not likely to be able to fully address the current supply shortfall. Instead, a good 2023 harvest will be the key factor. Therefore, firm CPO prices of around RM4,000/MT is likely to stay into 2023 on fragile global edible oils supply situation, and demand recovery as the world progresses towards a new post-Covid normal while still-elevated fossil fuel prices indirectly prop up demand for biofuel. We are maintaining average CPO prices of RM4,500/MT for FY22F and RM4,000/MT for FY23F.

Of longer-term and strategic consequence is the Group’s disposal of its NE Kalimantan landbank. The sales enable the Group to de-gear and re-capitalise significantly to accelerate the planting of up of 20K-25k Ha of undeveloped land belonging to TSH. Having received about RM500m of the RM721m net proceed (RM731m gross proceed – RM19m in expenses), TSH is expected to pare down debts further in 2HFY22. During 1HFY222, thanks to robust operating cashflow and RM248m of proceeds from the disposal of two Sabah estates, net borrowings already fell from RM816m (50% net gearing) at the end of Dec 2021 to RM561m (32% net gearing) at end-June 2022.

Maintain OUTPERFORM. TSH’s long-term and visible growth prospects are attractive coupled with strengthening balance sheet. Essentially, TSH is now ready to expand its upstream oil palm planting from nearly 40k Ha currently to around 60-65k Ha over the next 6-8 years. However, having toned down nearer term FY22F/FY23F CEPS, our TP is also trimmed from RM1.90 to RM1.80 as we adopt FY23F CEPS instead of FY22F’s across the sector. The target PER of 11x takes in consideration its: (i) flattish to slower earnings after FY22F, (ii) smaller capitalisation compared to integrated peers which trades at 15x PER, and (iii) 3-star or marginally above average ESG score.

Source: Kenanga Research - 23 Aug 2022