This article first appeared in The Edge Financial Daily on October 9, 2018

TSH Resources Bhd
(Oct 8, RM1.10)
Maintain buy with a lower fair value (FV) of RM1.38: We maintain a “buy” on TSH Resources Bhd with a lower FV of RM1.38 per share (versus RM1.48 per share previously), based on a financial year 2019 price-earnings ratio of 22 times.

We are keeping TSH’s earnings forecast for the financial year ending Dec 31, 2018 (FY18). However, we have reduced its FY19 net profit forecast by 6.9% to account for a lower plantation earnings before interest and tax (Ebit) margin of 16% versus 17% previously.

We believe TSH’s plantation Ebit margin in FY19 would be squeezed by higher costs of fertiliser, diesel and wages. Plantation production costs are expected to increase more than 10% in FY19.

We have assumed TSH’s fresh fruit bunch (FFB) production would improve by 15% in FY18 compared with 19.2% in the previous financial year. Indonesia accounts for more than 80% of TSH’s FFB production.

Despite TSH’s robust FFB production growth of 31.8% year-on-year in the first half (1H) of FY18, we think this may not be sustainable in 2HFY18. Hence, we are not revising our FY18 FFB output growth assumption of 15% for TSH.

However, the group’s net profit in 2HFY18 may still be better than that in 1HFY18 as most of the manuring and fertilisation expenses are expected to be completed by the third quarter (3Q) of FY18.

We think industry FFB production in Kalimantan, Indonesia would ease year-on-year (y-o-y) in 3QFY18 or 4QFY18 as oil palm trees take a rest after a robust productivity in 2QFY18.  

TSH’s strong FFB production of 40.4% y-o-y in 2QFY18 was mainly driven by its Central and East Kalimantan units.

An industry player with operations in East Kalimantan said palm production in the province was so high, palm refiners ran out of storage space. This contributed to the downward trend in crude palm oil prices.

We understand the issue would be resolved when FFB production in East Kalimantan eases in September or October 2018.

We estimate TSH’s production cost (ex-mill) to be RM1,800 per tonne in Indonesia in FY19 compared with RM1,750 per tonne in FY18.

Although TSH’s FFB production is envisaged to expand 7% in FY19, we believe this would not generate enough economies of scale to reduce production costs on a per tonne basis. — AmInvestment Bank, Oct 8