TSH’s 1QFY23 results disappointed due to its surprisingly low CPO  prices achieved, about RM500 below average spot prices. Its  refining JV with Wilmar also swung into losses but otherwise FFB  production managed to stay flat despite the divestment of two  matured Sabah estates in Mar 2022. We cut our FY23-24F net profit by 33-11%, reduce our TP by 19% to RM1.10 (from RM1.35) and  downgrade our call to MARKET PERFORM from OUTPERFORM.

The anaemic 1QFY23 CNP of RM3.6m made up <3% of both our full-year forecast and the full-year consensus estimate. Spot CPO prices for  the quarter were even higher than what TSH realised but we believe their forward position should unwind with the group achieving prices  closer to market levels. 1QFY23 NP also included a disposal gain of  RM27.6m which stemmed from the agreed disposal of 13,898 Ha (only  28% planted) in NE Kalimantan for RM731m cash in June 2022.  RM429m worth of lands was transferred before FY22 ended with  realised gain of RM311m then. In Jan 2023, a small parcel (575 Ha)  was transferred resulting in the gain in 1QFY23. The remaining pieces  of land should be sold within this financial year with total divestment  gain of RM120m-RM140m.

Firm FFB harvest. 1QFY23 CPO price of RM3,550 per MT (+0.4%  QoQ, -26% YoY) was flattish but RM500 below spot prices for JanMarch 2023, hence the downswing in earnings. FFB output of 0.199m  MT (-11% QoQ, +1% YoY) was better than seemed as two matured  Sabah estates with annual production of 60K MT of FFB were divested last March. If harvest from these two estates were included, 1QFY23 FFB output would be 6%-7% higher YoY. As for the 11% QoQ dip in  FFB, it is seasonal. Historically, TSH’s first quarter harvest is 13% QoQ  weaker rather than the 11% achieved in 1QFY23.

Earnings should bottom out in FY23. Due to the poor 1QFY23 price  which was realised, we are toning down TSH’s FY23F average CPO  price from RM3,800 per MT to RM3,700. Softer 2023 CPO price is due  from recovery in supply but the threat of El Nino which is looking likely  in 2HFY23 and recovering demand (which stagnated during Covid  years) should provide some firmness in CPO prices moving ahead. Rising costs have also tightened margins since mid-2022 but this could  be plateauing on softer fertiliser and fuel costs with higher FFB yields tempering wage inflation to result in earnings recovering come FY24.

Long-term expansion: Prior to FY22, high borrowings slowed the  planting for up of 20k-25k Ha the group already owns. Strong FY22  operating cash flows, part disposal of the NE Kalimantan land (RM429m)  and RM258m from the two matured Sabah estates divesture have pared  net debt from RM816m at the end of FY21 to RM131m (7% net gearing)  as of 31 March 2023. New planting should start within 6 to 12 months.

Downgrade to MARKET PERFORM (from OUTPERFORM) as we  revised down FY23-24F net profit by 33-11% and TP from RM1.35 to  RM1.10 based on FY24F CEPS at 11x PER after considering the group’s  smaller market capitalisation (integrated target PER is 15x), 3-star ESG  rating and the risk of its long-term upstream expansion plans. We still like  its longer-term growth outlook and the value creation potential of  expanding its planted area from 40K Ha to 60-65K Ha. Rating of 0.6x  P/NTA is not demanding either.

Risks to our call include: (i) weather impact on edible oil supply, (ii)  unfavourable commodity prices fluctuations, and (iii) cost inflation.

Source: Kenanga Research - 23 May 2023