Volumes edging back; offer to privatise Ekowood

• 3Q16 earnings were in-line as higher CPO ASPs met with sequentially recovering volumes
• Earnings to pick up as production recovery continues amid stronger CPO prices
• Announced RM21.9m offer for remaining 32.5% interest in Ekowood in exchange for TSH shares, expect negligible impact to group
• Maintain BUY and RM2.20 TP

What’s New

Meeting our expectations. TSH reported a 3Q16 headline profit of RM11.1m (turnaround y-o-y, -20% q-o-q), which after stripping out unrealised forex losses and impairments gives rise to core earnings of RM21.2m (-3% y-o-y, -5% q-oq). This brings 9M16 core profit to RM60.3m (-8% y-o-y), meeting our expectation but slightly below consensus’. On the same day, TSH also announced a proposal to privatise the remaining 32.54% interest in its listed and loss-making subsidiary, Ekowood International. We detail the proposal in the Appendix overleaf, but ultimately expect negligible impact for current TSH shareholders.

Better pricing lifted margins. 3Q16 topline spiked 18% y-o-y (+0.4% q-o-q) to RM213.3m. This was largely driven by better pricing as CPO ASPs were 23% higher y-o-y (troughed in 3Q15) at RM2,453/MT (-1% q-o-q). Given largely stable costs, EBIT expanded 102% y-o-y (+32% q-oq). The effect carried down to headline PBT (turnaround y-oy, +34% q-o-q), but given its smaller forex losses, the effective tax rate normalised in the quarter thus halting a yo-y bottomline increase.

Sequential production rebound. Volume-wise, CPO production remained 14% lower y-o-y, though it rebounded 11% q-o-q. This tracked FFB volumes which were 13% lower y-o-y but 7% higher q-o-q. In line with a recovery from earlier weather impact, TSH’s internal FFB production had rebounded 30% q-o-q and yields were working back to normalisation as internal FFB was up 30% q-o-q (-1% y-o-y), despite external FFB remaining 9% lower q-o-q.

Expect stronger quarters ahead. As the effects of the El Nino ease, we expect more sequential production improvement, which may see compounding effects from the current strength in CPO spots prices. Further on, growth in 2017 will be aided by a larger mature hectarage. Our current CPO price assumption is RM2,600/2,610 for CY16/17F. We maintain our BUY call and RM2.20 TP.

Appendix

Privatising Ekowood. In an announcement, TSH offered to take private the remaining 32.54% interest in listed subsidiary Ekowood International for a consideration of RM21.9m or RM0.40 per share, a >100% premium over the latter’s VWAP up to one-year. This will be funded by issuance of 11.39m new TSH shares at RM1.92 apiece (5- day VWAP), or 0.85% of its current issued shares.

Room to improve. Ekowood, involved in the production and marketing of hardwood flooring, has been consistently lossmaking for up to seven FYs previously (RM3.3m in FY15, RM1.4m for 9M16). The rationale given for the privatisation was to facilitate a review and rationalisation plan, which may involve operational restructuring or injection of capital.

Minimal impact on TSH. The offer price implies a valuation of 0.7x P/BV. While this is above Ekowood’s historical trading range of 0.3-0.4x, we think it is reasonable given its loss-making position and the fact that TSH is trading at 1.8x – implying that TSH will actually see minor BVPS accretion (rather than dilution) despite the premium to Ekowood’s traded share price. While the group will have to incorporate the entire losses from Ekowood (as there is no more MI portion), the impact will ultimately be negligible at <1% to our earnings forecasts. Furthermore, we think this gives the group more flexibility going forward to reposition the unit, including opportunities for value-accretive additions or divestments.

Source: Alliance Research - 1 Dec 2016