We maintain our NEUTRAL call on TSH Resources (TSH), with MYR2.28 FV. While TSH’s 1HFY13 net earnings were commendable, its valuation remains  on  the  high  side.  The company’s net  gearing  is  still  elevated, but  will  gradually  drop  if  it  slows  its  expansion,  while  its  planted  area continues to deliver strong production growth. TSH remains one of the few planters poised to achieve positive earnings growth this year.   
 
- Results  better  than  expected.  TSH’s  1HFY13  core  earnings  of MYR45m  comfortably  made  up  more  than  half  of  our  FY13  forecast. Despite  the  27%  decline  in  realised  crude  palm  oil  (CPO)  price,  the company still recorded a 24.7% earnings growth in 1H13. This was due to:  i)  a  very  strong  production  growth  of  38.5%  coupled  with  a  higher proportion of trees in prime age, ii) the strong low-crop 1Q earnings due to the sale of inventory built up at end-2012 bolstered 1H earnings.  

- Prime drive. We estimate that 52% of TSH’s mature areas are in prime age  this  year  compared  with  44%  last  year.  This  means  that  all  else being  equal,  profitability  should  improve  as  the  yields  from  the company’s prime  mature  areas  are  expected  to  more  than  mitigate  the low yields from its young mature areas.  

- Net  gearing  and  cash  generation.  TSH’s net gearing remains at an uncomfortably  high  level  of  107%.  That  said,  its  cash  generation  has improved  tremendously  against  last  year  as  it  generated  MYR47.8m  in operating  cash  flow  in  1H13  vs  a  negative  operating  cash  flow  of MYR9.2m in 1H12. We note that the company is still spending heavily on capex,  which  amounted  to  MYR104.2m  in  1H13  -  more  than  double  its operating cash flow.  

- No  changes  to  forecasts  and  recommendation. We  are  keeping  our earnings  forecasts  unchanged.  Our  recommendation  remains  a NEUTRAL. Despite its strong production growth and a higher proportion of  prime  trees, TSH’s valuation is on the high side at 23.2x  and  19.0x forward  earnings.  Our  FV  is  based  on  sum  of  the  parts  valuation  with plantation valued at 16x CY14 earnings. 

Source: RHB