KEY INVESTMENT HIGHLIGHTS

• Temporary blip in 2QFY20 financial performance mainly due to short-lived downturn in CPO price

• Nonetheless, 1HFY20 normalised earnings still came in +25.1%yoy higher to RM24.5m, aided by higher CPO price

• Healthy FFB production and favourable CPO price is expected to further drive earnings momentum in 2HFY20

• Downstream and cocoa business segments to gradually recover on resumption of economic activities

• Maintain BUY with an unchanged TP of RM1.20

2QFY20 results fell into marginal losses. TSH Resources Bhd’s (TSH)’s posted a normalised losses of -RM0.2m in its 2QFY20 financial results after excluding the insurance claims and forex gains of RM13.1m and RM6.7m respectively. We believe the losses was primarily due to the sharp slump of average CPO price in 2QFY20 to RM2,099/metric tonnes (mt) and higher operating expenses (+32.0%yoy) incurred during the onset of the COVID-19 outbreak. However, this was partially offset by higher FFB output in 2QFY20 of approximately 219.1k mt (+9.0%yoy).

Anticipating higher earnings growth in 2HFY20. The group’s 1HFY20 normalised earnings increased by +25.1%yoy to RM24.5m as predominantly driven by higher CPO price of RM2,350 (+23.3%yoy). This was within our and consensus’ expectations, accounting for 35.8% and 39.2% of the full year FY20 earnings respectively. Note that the higher normalised earnings were mainly achieved after excluding unrealised forex loss of about -RM19.5m. Moving forward, we foresee higher earnings momentum to continue with the elevated CPO price and resilient FFB production growth.

Palm products segment remains the main earnings driver. The group’s 1HFY20 revenue increased by +18.9%yoy to RM468.0m. This was mainly attributable to higher CPO price of RM2,350/mt (+23.3%yoy) and higher FFB production (+5.2%yoy). This led to the group’s palm products segment’s profit to jump to RM75.2m in 1HFY20 from RM31.8m in 1HFY19.

Healthy FFB output. The group’s 1HFY20 FFB production grew by +5.2%yoy to 426.8k mt. We anticipate that the group’s FFB production growth will continue to outperform the industry average. This is in view of consistent application of fertilizer and upkeep as well as a relatively young average age profile of its oil palm trees in Indonesia (i.e. 9 years old). This will partially make up for the lagged effects of adverse weather condition which will usually have adverse impact on the FFB yield. We opine that the resiliency in FFB growth also enable the group to be in a more competitive position in terms of higher sales volume.

Performance of the downstream and cocoa segment to recover gradually. In 1HFY20, the operating profit declined by -24.7%yoy to RM14.3m, plagued by lower profit contribution from the bio-integration division as its production was impacted by the disruption in supply of raw material. Nonetheless, we are of the view that the demand for both the downstream and cocoa products will gradually improve given the resumption of business activities on easing of lockdown.

Earnings estimates. We are making no changes to our earnings estimates.

Target Price. We are maintaining our target price of RM1.20 which is derived by pegging its FY20EPS of 6.1sen to target PER of 19.7x. Note that the PER is about the group’s 5-year historical average.

Maintain BUY. We remain sanguine on the group’s earnings outlook moving forward, particularly from its palm division, given the current elevated CPO price 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 remain robust 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 outperform the industry trend in CY20. In addition, we postulate that the group would also stand to benefit from the revival of Indonesia’s higher B40 biodiesel mandate given its strategic land banks in the region. These would translate into positive developments to the group’s earnings momentum in the upcoming quarters. All factors considered, we are maintaining our BUY recommendation on TSH

Source: MIDF Research - 21 Aug 2020