TSH: Challenging times ahead

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PROSPECTS for the various businesses of TSH Resources (RM1.34) are mixed for the current year and we expect the overall outlook to remain challenging.Plantation outlook still uncertainPalm & bio-integration will remain the company's biggest earnings generator. The business accounted for about four-fifths of total earnings before interest and taxes (EBIT) in 2008.To be sure, sentiment for the plantation sector has improved since fourth quarter 2008 (4Q08). But the outlook going forward is still somewhat uncertain.Crude palm oil (CPO) prices have rebounded smartly from the lows in October 2008 - with prices averaging above RM1,850 per tonne in the first two months of this year. Currently, prices are hovering around RM1,900-RM2,000 per tonne, thanks, in part, to the recent strengthening of the US dollar.  Malaysia's CPO stockpile fell in February for the third consecutive month - to 1.56 million tonnes - since hitting a high of 2.27 million tonnes in November 2008. This could be attributed to lower production, due to heavy rainfall, as well as some re-stocking activities following the lull in 4Q08. Nonetheless, industry observers remain cautious on the outlook for the rest of the year. Demand growth for vegetable oil, whilst relatively resilient, will likely be tempered by the deepening global economic downturn.Growth in demand for alternative biofuel is also likely to be muted, given the prevailing low prices of crude oil and increasingly stringent regulations on the use of food crops as feedstock to produce biofuel. Crude oil prices have fallen well off last year's record levels and are currently trading around US$40-US$45 (RM148-RM166) per barrel. Without the biofuel demand impetus, it seems unlikely that we will witness the return of high CPO prices any time soon.Hence, despite our estimated 10% growth in fresh fruit bunch (FFB) output, lower CPO prices are expected to result in TSH's palm & bio-integration sales falling by an estimated 21% in 2009. We assumed CPO to average at roughly RM1,800 per tonne, down sharply from the RM2,730 per tonne last year. EBIT decline is estimated at a sharper 47% year-on-year (y-o-y), primarily because costs are still relatively high.Ekowood to stay in the red on housing slumpOutlook for the timber and wood products arm is more downbeat at this point. The business, housed primarily under subsidiary Ekowood, reported 25% sales drop in 2008. Sales in Europe, its biggest market, the US and south-west Pacific all slumped - demand for the company's engineered solid hardwood flooring was deeply affected by the housing market's collapse, which triggered the global recession.Deteriorating operating conditions in second half 2008 (2H08) and losses in 4Q08 pared EBIT for the division to just about RM3.9 million in 2008, well below the operating profit of RM21 million in the previous year. With the housing market still in decline, we doubt Ekowood would turn around in the foreseeable future. Demand may see some mild recovery in 2H09 but we expect the business to remain loss-making in 2009.Cocoa processing and palm oil refinery likely resilientOn the other hand, cocoa processing registered strong 30% growth in EBIT to RM22.1 million in 2008 - and accounted for 15% and 17% of TSH's turnover and EBIT, respectively. The pace of growth is expected to be significantly lower this year, due in part to lower commodity prices. But the cocoa processing business should be relatively resilient - as is the palm oil refinery under associate TSH-Wilmar. The latter's quarterly earnings can sometimes be volatile due to trading gains/losses but its underlying business should hold up fairly well in the slowdown. In all, we estimate TSH's net profit will contract to RM39.6 million in 2009, or down some 41% from last year's level. Its shares appear fairly valued at 13.9 times our estimated earnings for the year. We also assume lower dividends of about 3 sen per share in 2009. That will give shareholders net yield of 2.2% at the current share price. Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.