This article first appeared in The Edge Financial Daily on January 24, 2019
TSH Resources Bhd
(Jan 23, RM1.05)
Upgrade to outperform with a higher target price (TP) of RM1.30: We came away from a meeting with TSH Resources Bhd executive director Frederick Tan positive on the group’s outlook. Financial year 2019 estimate (FY19E) fresh fruit bunch (FFB) growth in Indonesia and Sabah is guided at 12%-13% and 3%-5%, respectively. Crude palm oil (CPO) price is expected to recover to RM2,400 per tonne, driven by biodiesel initiatives. We raise FY19E core net profit (CNP) by 22% after revising FFB growth from +6% to +10%, but maintain FY18E CNP.
Although Indonesian oil palms are expected to take a break after a robust year in FY18, management continues to expect sturdy FFB growth of 12%-13% in FY19 as more than 3,000ha of palms come into maturity. In Sabah, FFB growth is likely to be decent at 3%-5% as the region fully recovers from El Nino. As such, we are raising our conservative FY19E FFB forecast by 5% from 922,000 tonnes (+6% year-on-year [y-o-y]) to 964,000 tonnes (+10% y-o-y).
Despite a potential 5%-10% increase in both labour and fertiliser costs, we believe production costs would remain manageable in FY19. Management said that an increase in minimum wage in Indonesia — from current levels of RM550-RM750/month in Kalimantan and Sumatra — would have a minimal impact on earnings as the majority of estate workers are already receiving RM1,000/month and above. Considering stronger production, we estimate FY19E ex-mill cost of production at RM1,560 per tonne (excluding the effect of amendments to the Malaysian Financial Reporting Standards), a mere 3% increase from around RM1,520 per tonne in FY18.
Management expects CPO price to average RM2,400 per tonne this year, driven by biodiesel initiatives in both Malaysia and Indonesia. This represents a 7% improvement from 2018’s average of RM2,235 per tonne, in line with our current forecast. Coupled with a sturdy FFB growth outlook, we expect TSH Resources’ earnings to come back with a vengeance in FY19.
We raise FY19E CNP by 22% from RM72.8 million to RM88.5 million after revising FFB forecast upwards as noted, while maintaining FY18E CNP.
Upgrade from “market perform” to “outperform” with a higher TP of RM1.30 (previously RM1.05) based on an unchanged forward price-earnings ratio (Fwd PER) of 20.2 times applied to a revised FY19E earnings per share of 6.37 sen (previously 5.24 sen). The Fwd PER reflects -1.5 standard deviation (SD) valuation basis, considering a potential soft patch in 4QFY18 earning. Valuations of other planters under our coverage are pegged at -1SD to -3SD levels. For investors who would like to capitalise on a recovery in CPO prices, we recommend pure upstream planters like TSH Resources given their higher earnings sensitivity to CPO prices. Currently, TSH Resources is the only pure upstream planter under our coverage that is still profitable at a pre-tax profit level. Its calendar year 2019 production outlook (+10%) is also superior to that of its peers’ (+5%). Risks to our call include sharp falls in CPO prices and a precipitous rise in labour/fertiliser/transportation costs. — Kenanga Research, Jan 23