Kenanga Research & Investment

TSH Resources - Firm Earnings Outlook

Publish date: Tue, 21 May 2024, 10:37 AM

TSH’s 1QFY24 results met our forecast but disappointed the market. While its FFB output and average CPO price realised were flattish, Its 1QFY24 core net profit surged multiple times YoY from a low base last year. We fine-tune down our FY24-25F net profit forecasts by 4% and 1%, respectively, but keep our TP of RM1.30 and OUTPERFORM call.

Its 1QFY24 core net profit of RM22.4m (-18% QoQ, +526% YoY) met our expectation at 24% of our full-year forecast but disappointed the market at only 19% of the full-year consensus estimate. The core net profit excluded: (a) fair value loss (RM1.4m), (b) unrealised foreign exchange loss (RM1.3m), and (c) assets impairment along with insurance claims (RM0.4m). As expected, no dividend was declared for 1QFY24.

YoY, its 1QFY24 top line eased 3% as weaker FFB output of 0.197m MT (-1%) more than offset a slightly higher average CPO price realised of RM3,587/MT (+1%). However, its core net profit surged multiple times from a low base a year ago (due to elevated operating cost and other lumpy expenses).

QoQ, its 1QFY24 top line declined 7%, similarly as weaker FFB output (-13%) more than offset a higher average CPO price realised (+7%). Its core net profit eased by a steeper 18% due to losses at its wood-based operations.

Outlook. Its earnings are likely to remain firm over FY24-25 on relatively steady CPO prices while production cost eases. CPO prices are expected to stay rangebound, between RM3,500-4,000 per MT over FY24-25 as global edible oil demand is expected to grow at 3%- 4% YoY while supply outlook may struggle to match; thus, inventory is expected to stay flat or even dip slightly in 2024 and possibly into mid- CY25. Average CPO prices of RM3,800 per MT is expected for the sector but TSH should average closer to RM3,400 as most of its crops are from Indonesia where CPO prices are lower due to levies and duties. Input costs such as fertiliser and fuel have been easing since mid-CY22 but could be bottoming of late. However, palm kernel (PK) prices could be picking up, helping to reduce CPO cost pressures than a year ago.

Expansion in progress. In Jun 2022, TSH sold 13,898 Ha of plantation land (72% unplanted) located in NE Kalimantan for RM731m cash on a staggered basis. Thus far it has received RM457m with the balance due this year. Compounded with other divestments and operating cashflow, TSH’s net debt fell significantly, from RM816m at the start of FY22 to RM48m (2% net gearing) at end-1QFY24. More importantly, TSH has already set up the nursery and team to plant 8k-10k Ha or expand its planted oil palm area by 20%-25% over the next 2-3 years.

Forecasts. We fine-tune down our FY24-25F net profit forecasts by 4% and 1%, respectively.

Valuations. However, we keep our TP of RM1.30 based on FY24F P/NTA of 0.8x which reflect the sector PBV for the smaller to mid-sized plantation players. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3). Maintain OUTPERFORM call.

Risks to our call include: (i) EU hostility towards palm oil on sustainability and bio-diversity issues, (ii) impact of weather and labour shortages on production, and (iii) cost inflation particularly fertilisers.

Source: Kenanga Research - 21 May 2024

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