KEY INVESTMENT HIGHLIGHTS

• 3QFY20 normalised earnings jumped +41.1%yoy to RM24.8m on higher CPO price of RM2,404/mt (25.2%yoy)
• 9MFY20 results rose to RM54.1m (+111.2%yoy), aided by higher CPO price of RM2,377/mt (+23.4%yoy)
• Moving forward, healthy FFB production and favourable CPO price is expected to further drive earnings momentum
• Disposal of Kalimantan estates aims to pare down borrowings and thus lowering the finance cost
• Maintain BUY with an unchanged TP of RM1.34

Strong rebound in 3QFY20. TSH Resources Bhd’s (TSH) 3QFY20 turned to the black with a normalised profit of RM24.8m (+40.7%yoy). This was predominantly driven by higher CPO price of RM2,404/mt (+25.2%yoy) during the quarter under review which led to higher normalised PATAMI margin of +12.8% (+5.5ppts yoy). This was achieved in spite of the lower 3QFY20 FFB output of approximately 177.5k mt (-6.1%yoy) due to the lagged impact of the drought in Indonesia in 3Q2019. Nonetheless, FFB production is expected to normalise in 4QFY20 on improving yield.

Elevated CPO price to drive earnings growth. The group’s 9MFY20 normalised earnings increased by +59.4%yoy to RM40.9m as predominantly driven by higher CPO price of RM2,377 (+23.4%yoy). This was within our and consensus’ expectations, accounting for 57.5% and 59.9% of the full year FY20 earnings respectively. Note that the higher normalised earnings were derived after excluding insurance claims of RM13.3m. Moving forward, we foresee a much stronger earnings momentum in coming quarter, premised on both the elevated CPO price of above RM3,000/mt and expectancy of a resilient FFB production growth in 4QFY20.

Palm products segment remains the main earnings driver. The group’s 9MFY20 revenue increased by +12.0%yoy to RM586.4m. This was primarily attributable to higher CPO price of RM2,377/mt (+23.4%yoy) and higher FFB production of 504.5m mt (+0.6%yoy). This led to the group’s palm products segment’s profit to jump by +85.7%yoy to RM91.0m in 9MFY20.

Healthy FFB output. 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.

Revenue of the others segment displayed resiliency. In 9MFY20, the revenue of the other segment (i.e. wood division, downstream and cocoa businesses) improved by +8.1%yoy to RM92.8m, mainly contributed from the Wood division. Nonetheless, the operating profit declined by -43.5%yoy to RM14.4m, 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 RM1.34 which is derived by pegging its FY21EPS of 6.8sen 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 premised on 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 and young age profile of its Indonesian oil palm estates, 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, with approximately 7- 10% FFB production growth in the following year. In addition, we postulate that the group’s disposal of its Kalimantan estates and utilising the sizeable cash proceeds to significantly pare down its huge borrowings potentially by half in the next two years, to bode well with its earnings momentum moving forward. This will also strengthen the group’s financial standing as gearing is anticipated improve significantly to slightly below 0.5x from current 0.89x upon the completion of the whole exercise, giving much headroom for the group to manoeuvre with its learner balance sheet. These would translate into positive developments to the group’s earnings growth in the upcoming quarter and into FY21. All factors considered, we are maintaining our BUY recommendation on TSH.

Source: MIDF Research - 19 Nov 2020