TSH’s 1HFY23 results disappointed on higher cost and weak CPO prices. Its 1HFY23 core net profit plunged 85% due to weaker CPO price and FFB output, coupled with losses from a refining JV with Wilmar. We cut our FY23-24F net profit forecasts by 50-41%, reduce our TP by 9% to RM1.00 (from RM1.10) but maintain our MARKET PERFORM call.

Its 1HFY23 core net profit of RM20.9m disappointed at only 18% and 16% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from weaker-than-expected CPO price realised and FFB output.

Indonesia’s export levy and duties continued to dampen net CPO prices attributable to TSH, resulting in 2QFY23 realised CPO of only RM3,493 per MT (-2% QoQ, -31% YoY). Its 1HFY23 net profit also included a disposal gain of RM27.6m which stemmed from the agreed disposal of 13,898 Ha land (only 28% planted) in NE Kalimantan for RM731m cash in June 2022. RM429m worth of lands was transferred before FY22 ended, with a realised gain of RM311m then. In Jan 2023, a small parcel (575 Ha) was transferred resulting in a gain in 1QFY23. The sales of the remaining pieces of land (along with divestment gain of RM120m-RM140m) is now likely to be in 2024 as both parties agreed to extend the agreement till mid-2024.

Cost stayed high in 1HFY23. Its 2QFY23 CPO price was flattish QoQ while FFB output improved 11% QoQ to 0.222m MT (-7% YoY) but plantation earnings dipped 34% compared to the first quarter, an indication of the cost pressures in 2QFY23 and 1HFY23 compared to the operating environment just a year earlier.

Earnings should bottom out in FY23. CPO prices in 2023 have softened due to recovering supply but rising demand and the threat of El Nino, which is looking likely in 2HFY23, should provide some firmness in CPO prices moving ahead. We are revising up our average CPO price from RM3,700 per MT back to RM3,800 per MT in general. However, as TSH’s harvest is mostly in Indonesia, a lower CPO price of RM3,600-RM3,700 is now expected over FY23-24. 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 moving into FY24, hence the recovery in earnings.

Long-term expansion: Prior to FY22, its high borrowings slowed the planting for up of 20k ha the group already owned. 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 by early to mid-2024.

Forecasts. We cut our FY23-24F net profit forecasts by 50-41%.

Correspondingly, we reduce our TP by 9% to RM1.00 (from RM1.10) based on 11x FY24F PER (at a discount to integrated PER of 15x due to the group’s smaller market capitalisation) and P/NTA of 0.7x (lower than sector range of 1x-2x due to its Indonesian landbank). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3).

However, we maintain our MARKET PERFORM rating as much negative news has probably been factored into its current share price. TSH’s long-term upstream expansion plans is encouraging but it needs to first overcome the near-term headwinds.

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

Source: Kenanga Research - 24 Aug 2023