This article first appeared in The Edge Financial Daily on May 10, 2019
TSH Resources Bhd
(May 9, RM1.01)
Maintain neutral with a higher target price (TP) of RM1.01: Following a dismal performance last year, we see earnings recovery for TSH Resources Bhd in financial year 2019 (FY19), led by (1) continuous double-digit fresh fruit bunch (FFB) production growth, (2) stronger electricity sales from the biomass and biogas plants, (3) steady effective tax rate, and (4) solid cocoa butter business. Nevertheless, we lower our FY19 earnings forecasts by 13% for the plantation segment as we see significant increase in cost pressures this year. Our FY20-21 earnings forecast remains unchanged. However, our TP is revised up slightly from 98 sen to RM1.01, after rolling over our valuations to FY20 with an unchanged price earnings (PE) multiple of 20 times. The company’s first quarter FY19 (1QFY19) results are expected to be released on May 27, 2019.
The company has a total planted area of 42,077ha with 85% in Indonesia. The plantation age profile remains young, averaging 9.2 years, which has contributed to the company’s FFB production growth of 18-21% per annum for the last two years. Banking on this young age profile, the company registered one of the highest FFB yields in the industry, at 25.3 tonnes per hectare.
The company’s bio-integration business consists of its operations of biomass and biogas power plants in Sabah. It owns and operates a 14 mega-watt hour (MWh) biomass power plant and a 3MWh biogas power plant in Sabah. Other than for its internal consumption, the power generated is sold to Sabah Electricity Sdn Bhd. Due to some disruptions, it did not run at full capacity last year. This power-generation segment is expected to contribute at least 18% to our annual earnings forecasts.
The group operates a cocoa-processing plant in Klang, Selangor and mainly exports to the US, European Union and Asia. Driven by higher sales volume of cocoa products coupled with better cocoa product prices, the group registered a sales growth of 7% year-on-year (y-o-y) to RM136.9 million, while cocoa earnings jumped threefold to RM31.6 million, making up the bulk of group earnings for FY18. We expect to see another solid performance this year.
We expect to see another double-digit FFB production growth this year, albeit at a slower rate of 10-15%. Crude palm oil (CPO) cost of production is also expected to inch up by 5% to about RM1,700 per tonne on the back of higher fertiliser cost (+8% y-o-y) and an increased minimum wage policy in Sabah (+19.5% y-o-y) and Indonesia. — PublicInvest Research, May 9