TSH’s 1HFY24 results met both Kenanga and street expectations. FFB output was weaker but CPO and PK prices performed better YoY while cost eased. Margins were mixed due to lumpy depreciation charges after the remaining NE Kalimantan land sale was aborted. We revise down FY24-25F net profit forecasts slightly on margin adjustments, but maintain our TP at RM1.30 and OUTPERFORM call.

Good 1HFY24 core net profit. Excluding fair value gains (RM0.6m), unrealised exchange gain (RM1.4) and various write-downs (RM0.5m), 1HFY24 core net profit grew 83% YoY to RM38.2m, accounting for 39% of Kenanga and consensus full-year forecasts. 1H core earnings was deemed within expectation due to a lumpy RM22m depreciation charge after the sale of remaining NE Kalimantan land was aborted. Operationally, revenue was flat (-2% YoY) as firmer CPO (+3%) offset weaker FFB production (-5%). EBIT and PBT margins dipped on the lumpy depreciation, while GP margin improved YoY.

Lumpy depreciation adjustment dampened 2QFY24 earnings. Excluding the depreciation adjustment, 2QFY24 earnings would have strengthened QoQ and YoY from better CPO and PK prices while FFB harvest of 0.205m MT was mixed (+4% QoQ, -8% YoY). Net debt fell QoQ, from RM16m to RM5m but no 2Q dividend was declared, which is within our expectation.

Outlook. FY24-25 earnings are likely to stay firm on relatively steady CPO price which is expected to trade sideways as global edible oil demand is likely to grow by 3%-4% this year and the next, slightly outstripping supply growth. Consequently, inventory levels are set to dip marginally YoY, albeit still a supportive environment for edible oil prices. Average CPO prices of RM3,800 per MT is expected for the sector but TSH should see realized prices of closer to RM3,400 to RM3,600 per MT as most of its crops are from Indonesia where CPO trades at discounts, distorted by local levies and duties. Input costs such as fertiliser and fuel have also been easing while PK prices have started picking up, combining to help contain production cost.

New planting work has started. Having divested less-strategic assets to de-gear, its net debt has eased from RM816m at the start of FY22 to RM4m (0.3% net gearing) as of end-June 2024, TSH is now back to focusing on expansion again. It has started working to planting up land the group already owns but had not been able to develop earlier due to gearing constrains. TSH’s planted oil palm area should expand from around 40k to 47k-50k Ha over the next 2-3 years.

Forecasts. We lower FY24-25 core net profit forecasts slightly, by 4% and 1%, respectively to reflect slight margin adjustments.

Valuations. TP of RM1.30 is maintained, based on FY24F P/NTA of 0.8x which reflects 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 - 23 Aug 2024