INVESTMENT HIGHLIGHTS

• 1HFY19 normalised earnings of RM18.3m (-20.1%yoy) is in line with our expectation

• This was mainly attributable to lower crude palm oil (CPO) price (-17.1%yoy) in 1HFY19

• Anticipating better FFB production and CPO price in 2HFY19 to support the group’s earnings

• Maintain NEUTRAL with an unchanged TP of RM0.89

1HFY19’s core earnings within our expectation. TSH Resources Bhd’s (TSH) 1HFY19 normalised earnings came in lower at RM18.3m which is within our expectations, accounting for 36.5% of full year FY19 earnings. Note that based on historical track record, the second quarter results usually accounted for between 40% and 45% of the full year financial year results. We are of the view that upcoming quarters’ higher FFB production cycle and improvement in CPO price would partially support the group’s earnings momentum.

Earnings impacted by persistently low CPO price. TSH’s average CPO price for 1HFY19 declined by -17.1%yoy to RM1,906/mt. This led to the group’s palm products segment profit to more than halves (- 52.0%yoy) to RM31.8m. Nonetheless, we opine that given the recent recovery of CPO price to slightly above RM2,000/mt would lead to better earnings in 2HFY19.

Expecting better FFB production in 2HFY19. The group’s 1HFY19 FFB production grew marginally by +1.0%yoy to 405,572mt. This is insufficient to overcome the decline in CPO price. However, we are of the view that the higher FFB production cycle in 2HFY19 to be the mitigating factor.

Operating profits at others segment improved. The operating profit from the other segment business increased by +76.0%yoy to RM19.0m as a result of higher profit contribution from cocoa and bio-integration division.

Earnings estimates. We are maintaining our earnings forecasts.

Target Price. We are maintaining our target price of RM0.89 which is derived by pegging its FY20EPS of 4.6sen to target PER of 19.4x which is the group’s 5-year historical average.

Maintain Neutral. We are expecting CPO price gradually recover in 2HFY19. However, we doubt that the recovery in CPO price would be significant. Meanwhile, TSH’s FFB production is expected to trend higher in 2HFY19 driven by its palm oil plantation’s prime age profile where more planted areas are going to be matured and harvested. We are of the view that this will provide the group an advantage in weathering the weak CPO price environment as compared to its peers. All in, we expect TSH’s earnings to be higher as compared to 1HFY19. Nonetheless, on a year-over-year basis, we are still expecting a decline in the group’s annual earnings. Given limited capital upside, we are maintaining our NEUTRAL recommendation on the stock.

Source: MIDF Research - 23 Aug 2019