This article first appeared in The Edge Financial Daily on November 24, 2017

TSH Resources Bhd
(Nov 23, RM1.64)
Maintain neutral with an unchanged target price of RM1.87: TSH Resources Bhd posted a core profit of RM80.1 million for the nine months ended Sept 30, 2017 (9MFY17), making up 65.5% and 65.7% of our and consensus expectations respectively after stripping out the net foreign exchange gain amounting to RM12.2 million and other exceptional items.

Despite weaker-than-expected results for the first nine months, we keep our numbers unchanged as we expect stronger results in the final quarter, led by an increase in both crude palm oil (CPO) prices and fresh fruit bunch (FFB) production.

 TSH’s stronger third-quarter (3QFY17) revenue (quarter-on-quarter [q-o-q]: -0.5%, year-on-year [y-o-y]: +20.5%) was mainly driven by plantation (+20.1%) and other segments (more than 100%).

Average CPO prices rose from RM2,453 per tonne to RM2,576 per tonne, while FFB production jumped 40.3% y-o-y to 212,342 tonnes, led by a strong production recovery in Indonesia (+53%), despite weaker FFB production from Sabah (-16.8%).

The weaker production in Sabah was likely due to the effect of a second wave of El Nino, which has affected some estates in Sabah.

Other segments registered encouraging sales, bolstered by higher wood product sales under the brand name of Ekowood.

Excluding the net unrealised foreign exchange gains of RM1.1 million, the group registered a core net profit of RM29.6 million, up 56.6% y-o-y.

Plantation operating earnings jumped 84.2% to RM59.5 million while other segments dipped 38.6% y-o-y to RM3.5 million on the back of weaker electricity and steam sales by the bio-integration segment.

Earnings contribution from the jointly owned refining palm kernel crushing business, which is in collaboration with Singapore-listed Wilmar International Ltd, fell 41.7% y-o-y to RM1.1 million.

Meanwhile, earnings contribution from its 21%-owned associate, Innoprise Plantations Bhd, saw a decline of 11.9% y-o-y to RM2.6 million, dragged down by weaker CPO sales volume as delivery was affected by exceptionally wet weather, which also had a negative impact on the oil extraction rate.

Due to the small new planting activities coupled with improving operating cash flows, the company’s net gearing position has improved from 0.84 times to 0.77 times.

The strengthening of the currency has also helped to ease its US dollar-denominated borrowing. On plantations, we think the Indonesian FFB production has peaked last month, while Sabah’s production remains steady in November.

Despite recent sharp correction in CPO prices, the company managed to lock in 30% of its remaining sales at around RM2,700 per tonne. — PublicInvest Research, Nov 23