KEY INVESTMENT HIGHLIGHTS

• 1QFY20 normalised earnings rose by +158.6%yoy to RM24.8m after excluding forex losses of -RM26.5m

• The higher earnings was mainly attributable to higher CPO price of RM2,599/mt (+36.0%yoy)

• The group’s resilient FFB yield has bucked the industry trend thus far due to its discipline in fertiliser application

• Expecting tepid performance from its downstream and cocoa business segments

• Upgrade to BUY with a revised TP of RM1.20

Above expectation. TSH Resources Bhd’s (TSH)’s 1QFY20 rose by +158.6%yoy to RM24.8m, primarily attributable to the higher CPO price and resilient FFB production. This was above our and consensus’ expectations, accounting for 34.7% and 36.9% of the full year FY20 earnings respectively. Note, the higher normalised earnings were mainly achieved after excluding unrealised forex loss of about -RM26.5m.

Palm products segment remains the main driver. The group’s 1QFY20 revenue increased by +24.0%yoy to RM257.4m. This was mainly attributable to higher CPO price of RM2,599/mt (+63.0%yoy) and higher FFB production (+1.6%yoy). This led to the group’s palm products segment’s profit to jump to RM55.8m in 1QFY20 from RM17.5m in 1QFY19.

Expecting resilient FFB production in FY20. The group’s 1QFY20 FFB production grew by +1.6%yoy to 207,727mt. We anticipate that the group’s FFB production growth will outperformed the industry average. This is in view of consistent application of fertilizer and upkeep, thus contributing to better earnings ahead. This will partially make up for the lagged effects of adverse weather condition which will usually have adverse impact on the FFB yield. Based on preliminary finding, we gather that FFB production for the month of April 2020 remain elevated at 12.5%yoy, which was mainly supported by its Indonesian estate.

Performance of the downstream and cocoa segment to remain tepid. In 1QFY20, the operating profit declined by -30.6% to RM6.8m, plagued by lower profit contribution from the bio-integration division as its production was impacted by the disruption in supply of raw material.. Moving forward, we are of the view that the others segment including the downstream and cocoa businesses to be performing at a moderated pace given the Covid-19 pandemic leading to possible lower demand.

Earnings estimates. We are inputting higher FFB production and revising lower CPO price assumption. As a result, our FY20/21/22 earnings estimates have revised slightly downward to to RM68.5m, RM84.6m, and RM107.0m respectively. Note that we are factoring FY20/21/22 CPO price assumption of RM2,300/mt, RM2,450/mt, and RM2,550/mt respectively.

Target Price. We are rolling forward our valuation base year to FY21 and derive a new target price of RM1.20

(previously RM1.27) which is derived by pegging its FY20EPS of 6.1sen to target PER of 19.7x (previously 24.5x). Note that the lower PER is -1SD below of the group’s 2-year historical average and it is taking into account the weakening economic conditions brought by the Covid-19 pandemic.

Upgrade to BUY. We remain buoyant on the group’s earnings outlook moving forward, particularly from its palm division, given that CPO price is currently trading healthily above the RM2,000/mt level. Note that the palm products segment accounts for approximately 86% of the group’s total revenue. The group’s FFB production is also expected to grow steadily as it continues to maintain its commitment in diligently carrying out the fertiliser application, which will inadvertently lead to a better FFB yield. This is in contrast to the general industry expectancy of a contraction in FFB production. Note that we are foreseeing the group’s FFB yield to be outperforming the industry trend in CY20. These would translate into positive developments to the group’s earnings momentum in the upcoming quarters. All factors considered, we are upgrading our recommendation on TSH to BUY from previously NEUTRAL.

Source: MIDF Research - 22 May 2020