• Maintain NEUTRAL, lower MYR1.10 TP (from MYR1.40), 4% downside. TSH Resources’ 1H24 core profit came in above Street’s estimates. While we expect FY24 earnings to strengthen YoY as production improves and unit costs moderate, valuation remains high, with the stock trading at 13.3x FY25F P/E, at the high end of its peers’ range of 6-13x.

• 1H24 core profit above Street’s estimates, at 61% of full-year forecasts. 2Q24 core profit jumped +78% QoQ and +134% YoY to MYR38.4m, thanks to improved FFB production (+4% QoQ, -8% YoY), CPO ASPs (+3% QoQ, +6% YoY) and lower estimated production costs (-8% QoQ, -0.2% YoY). This, along with better contribution from its refining JV (+6x QoQ, +76% YoY), resulted in 1H24 core profit growing over 200% YoY.

• 2Q24 FFB output fell 7.7% YoY due to a decline in Indonesia (-9.4% YoY), bringing 1H24 growth to -5% YoY. As the impact of El Nino still lingers, particularly in Kalimantan, FFB production slipped further to -10% YoY in YTD-July. Regardless, management kept its FFB growth target of flattish growth for FY24, as production will start to pick up at the end of 3Q24 and into 4Q. However, we prefer to remain conservative and expect production to decline 5% in FY24, but recover by +5% in FY25-26F.

• 1H24 estimated cost of production rose 10.2% YoY, as a result of the drop in FFB production, despite TSH not fulfilling its normal fertiliser application in 1H24 due to rainfall in Sumatra. TSH has secured FY24 fertiliser requirements at prices that are 5-10% lower YoY and is expecting manuring activities to catch up in 2H24. As output picks up, we expect cost to somewhat moderate to reflect a 5-6% increase YoY for FY24-26F.

• Refining JV saw strong profits this quarter (+76.4% YoY), bringing 1H24 JV earnings to MYR6.8m (1H23: MYR1.4m loss), likely on the back of improved CPO prices. We expect these contributions to remain strong going forward.

• Aborted the disposal of 5,398ha of plantation land in North East Kalimantan, Indonesia. In Apr 2022, TSH entered into an agreement to sell 13,898ha of mostly unplanted oil palm plantations to reduce its debt level (2021 net gearing: 0.55x). The first part of the disposal involving 8,500 ha was completed for MYR441m in Aug 2022. We are positive on the cancellation of the disposal as over 60% of the undisposed land consists of planted prime age trees which produce optimal yields vs the disposed area of 8,500ha which was mainly unplanted. Note that TSH managed to pare down its net gearing to just 0.04x as at 1H24.

• Our new TP is based on 14x FY25F P/E (in line with its historical averages), and includes an 8% ESG discount. TSH is trading at 13.3x FY25F P/E, at the high end of its peers’ range of 6-13x.

Source: RHB Research - 23 Aug 2024