Review

• TSH Resources Berhad (TSH)’s 9MFY19 results came in above ours but within consensus’ expectations. The variance was due to higher-thanexpected JV’s contribution. Stripping out forex impact and other exceptional items, core profit plunged 33.0% YoY to RM29.5mn. The lower earnings were mainly owing to lower palm oil prices.

• Palm Product: 9MFY19 revenue decreased by 12.7% YoY to RM511.7mn, mainly attributable to lower average CPO price (-13.6% YoY to RM1,906/tonne). As a result, operating profit decreased by 46.2% YoY to RM57.3mn. FFB production remained flattish at 653.1k tonnes (+0.2% YoY).

• Non-palm commodity: 9MFY19 operating profit increased by 22.5% to RM25.5mn, driven by the higher profit contribution from bio-integration segment.

• There was no dividend declared for the quarter under review.

Impact

• Earnings forecasts are revised upward for FY19 and FY20 by 9% and 65.8% after factoring in higher CPO price assumptions of RM2,400/tonne and RM2,500/tonne for CY20 and CY21, respectively. We also take this opportunity to introduce our FY21 earnings forecast of RM110.0mn.

Outlook

• Management expects better performance for the coming quarter, underpinned by the recent recovery in CPO prices. The higher FFB production growth in FY20 will be supported by: 1) improving age profiles as more oil palm trees will reach the optimum yield; and 2) increase in planted areas, which are ready for harvesting.

• We expect higher CPO prices for CY20 and CY21, underpinned by lower palm oil supply, firmer soybean oil prices and higher biodiesel mandates, which are expected to reduce palm oil stockpiles.

Valuation

• We upgrade TSH’s TP to RM1.38 based on 24x CY20 EPS. With the potential upside of more than 12%, we upgrade TSH to BUY from sell.

• As a pure upstream player, TSH’s earnings are highly sensitive to changes in CPO price. We are positive on the long-term fundamentals of TSH and believe the group has a strong future growth in FFB production, underpinned by favourable tree age profile.

Source: TA Research - 26 Nov 2019