Stripping out i) realized loss on commodity futures contracts (RM26.5m), ii) gain on disposal of an estate and a palm oil mill of RM53.2m, iii) gain from fair value adjustment of FFB (RM8.9m) and iv) net FX gain of RM58.4m, TSH saw its 1QFY22 core earnings jumping 79% YoY to RM54m. The strong set of results were in line with our and the consensus expectations, making up 26% and 29%, respectively. No dividend was declared for the quarter. Maintain Neutral call with an unchanged TP of RM1.48 based on 15x FY23 EPS.

• 1QFY22 revenue (QoQ: +3%, YoY: +38%). The increase in sales to RM337m was mainly boosted by stronger plantation sales. Plantation revenue surged 42% YoY to RM313m, driven by stronger CPO prices despite a steep decline in FFB production. 1QFY22 average CPO prices advanced from RM3,007/mt to RM4,779/mt while average PK prices surged from RM2,112/mt to RM3,950/mt. FFB production fell 13% YoY to 197,947mt, dragged by weaker production in Indonesia (-14%), while Sabah production remained at 17,095 mt. Non-core sales rose 5% YoY to RM25.1m.

• 1QFY22 earnings soared to RM54m. The 1QFY22 earnings would have been even better if not because of the additional hefty Indonesian export levy and duty on CPO amounting to RM45m, which is almost equivalent to the group’s earnings. The Group recorded core earnings of RM54m, up 79% YoY. Plantation EBIT margin jumped from 27.8% to 41.4%. On the other hand, other businesses saw a fourth consecutive quarterly loss of RM4.3m, as the sale of electricity generated by the bio-mass power plant was discontinued since 3QFY21 following the expiry of the power purchase agreement. A new power purchase agreement has been executed and the supply of electricity by the bio-mass plant recommenced in March 2022. Meanwhile, earnings contribution from its 21.9%-owned Innoprise Plantations jumped from RM1.9m RM 6.3m.

• Outlook. Despite seeing a 14% decline in FFB production for Jan-Apr, TSH is expected to maintain its growth target of 7%-11% for FY22. On worker shortage issue, in our view, TSH is least affected amongst the plantation companies given than more than 90% of their plantation landbank is located in Indonesia. However, they are subject to the hefty Indonesian CPO export levy and duty amounting to USD575/mt. On top of it, they are now required to sell a portion their CPO products at a steep discounted price under the domestic market obligation in a bid to cool down cooking oil prices. Meanwhile, we understand that the Group has a 2-month CPO forward selling policy in place. Based on our sensitivity analysis, every RM100/mt change in CPO price would translate to 7-10% increase in the Group’s bottomline. Lastly, the allocated capex for FY22 is about RM50m-60m, mainly catered for the maintenance of immature area and replanting activities.

Source: PublicInvest Research - 25 May 2022