INVESTMENT HIGHLIGHTS

• FY18 normalised earnings declined by -24.3%yoy, which is below our expectation but in line with consensus

• This is mainly attributable to the company’s lower CPO price and higher depreciation and amortisation charges

• Growth in FFB production is supported by better age profile

• Earnings for FY19 revised upwards in anticipation of high FFB production and gradual recovery in CPO price

• Maintain Neutral with a revised TP of RM1.05

Weaker FY18 core earnings. TSH Resources (TSH) FY18 normalised earnings dropped by -24.3%yoy to RM54.9m. This translated to 84.3% and 97.9% of ours and consensus full year earnings estimates respectively. The financial performance came in below our expectations, mainly due to the poor results in 4Q18 whereby the company experienced both decline in FFB production (-18%yoy) and lower CPO price (-12.6%) as well as higher Depreciation and amortisation charges (+39.2%yoy) on new planted areas coming into production.

Better-than-expected FFB production. On a yearly basis, the group’s FFB production improved to 857,802mt (+21.0%yoy). This was primarily due to its good age profile of planted areas in Indonesia. We opine the young age profile in Indonesia will underpin FFB production growth as more planted areas are expected to come into maturity. Although FY18 FFB production showed continued improvement, it was insufficient to accommodate the impact of lower CPO price. Average CPO price plunged -22.7%yoy to RM2,086/mt in FY18, impacting at a larger scale to both its revenue (-15.6%yoy) and bottom line (-24.3%yoy).

Earnings estimate revised downwards. FY19’s forecasted core earnings revised downwards by -7.4% to RM51.0m. We have lowered our assumption on the growth rate for both FFB production and ASP of CPO for the year.

Target Price. We roll forward our valuation base year to FY20 and derive a revised target price of RM1.05 (previously RM0.89). This is achieved by pegging its FY20EPS to a PE of 22.3x.

Maintain NEUTRAL. With signs of recovery in CPO price in FY19, we opine the higher growth rate of the company’s FFB production will reap the benefits as global production cycle seems to have peaked while demand remains unabated.

Source: MIDF Research - 28 Feb 2019