TSH Resources (TSH)’s 1QFY13 earnings of MYR21.0m (+7.0% y-o-y) were buoyed by a 43.5% y-o-y surge in FFB production even as CPO prices sank 27.3% y-o-y. While its production growth prospects are strong,  the company’s  high 1.1x net gearing is likely to slow its expansion in the near term. Downgrade to NEUTRAL, with lower Fair value of MYR2.28.

-  In line.  TSH’s 1QFY13 revenue jumped to MYR280.1m (+23.2% y-o-y, +29.2% q-o-q) despite a 27.3% y-o-y dive in realized crude palm oil (CPO) prices as CPO output surged 35.4% and earlier stockpiles were sold. Consequently, its core earnings came in at MYR21.0m (+7.0% y-o-y, -32.0% q-o-q) as strong fresh fruit bunches (FFB) output growth as well as lower tax and minority charges bolstered y-o-y profitability. Meanwhile, seasonally softer production dampened q-o-q growth. TSH’s earnings were in line with our forecasts but fell short of consensus estimates, at 25.5% and 22.1% of the FY13 estimates respectively. 

-  Youth power.  TSH’s 1QFY13 FFB production rose 43.5% y-o-y, driven by a 48.3% y-o-y production growth in its Indonesian unit. Surprisingly, its output from fully-matured Sabah estates surged 35.9% y-o-y as production in the state started to recover. Our model currently incorporates a 25.4% increase in production this year on expectations that its Sabah operation’s strong FFB growth is not sustainable.

- Net gearing inches above 1.0x.  TSH’s net gearing rose to 1.08x in 1QFY13, up from 1.04x at end-FY12.  We believe the company’s high leverage and the current weak price environment will slow down new planting efforts as the group focuses on cultivating existing young areas.  

- Downgrade to NEUTRAL. Following the recent revisions to our 2013 and 2014 CPO price assumptions to MYR2,400 and MYR2,600 respectively, we have cut our earnings forecasts by 22% to MYR82.3m for FY13 and  –ve 27% to MYR100.5m for FY14. TSH still boasts of having one of the highest growth among the planters we cover but its high gearing will curb its expansion pace. We value the stock at 16.0x FY14 plantation earnings and 0.9x BV for its wood and cocoa units, to derive a FV of MYR2.28.

Source: RHB