TSH Resources Bhd
(Nov 19, RM2.27)
Maintain market “perform” with a target price (TP) under review: TSH Resources (TSH)’s nine months of financial year 2014 (9MFY14) core net profit of RM110 million is within market expectations as it makes up 78% of the street’s FY14 earnings estimate of RM140 million. However, it is only at 65% of our estimate of RM169 million, which is disappointing.

The key variance is the lower-than-expected crude palm oil (CPO) prices in the third quarter of FY14 (3QFY14) at only RM2,170 per tonne (against our estimate of RM2,500 per tonne). This could be caused by a significant decline in soybean oil prices to average US$0.32 cents (RM1.08) a bushel (vs our assumptions of US$0.35 cents per bushel. Note that the soybean oil prices have been affected by bumper soybean crops coming from the United States.

Dividends, none as expected. Year-on-year, 9MFY14 core net profit increased 26% to RM109.5 million as the CPO price improved 9% to RM2,390 per tonne while fresh fruit bunch (FFB) volume was up by 27% to 483,048 per tonne. This is close to our assumption of 25% FFB growth in FY14 estimated earnings.

Despite the good 9MFY14 earnings growth, we believe that current low CPO prices are likely to pull down the earnings growth to only 10% (from 18% previously) for whole of FY14. We are concerned about the recent CPO price trends due to global trend of strengthening US dollar and low crude oil prices. Hence, we are looking to revise the CPO price down soon, which will drag on FY15 estimate earnings.

We have reduced our FY14 core net profit by 7% to RM157 million after reducing our CPO prices assumption to RM2,400 per tonne. Our FY15 estimated earnings are under review at this juncture pending our new CPO price estimate. Our last estimate for FY15 CPO prices is RM2,500 per tonne and we are likely to reduce it.

Maintain market “perform”. Due to TSH’s high FFB growth with three-year compound annual growh rate of 19%, we are likely to keep the recommendation on this stock as market “perform”. However, there is a downside bias to our TP due to the potential earnings trimming for FY15 estimates. We may also look to review our valuation metrics as well. — Kenanga Research, Nov 19

This article first appeared in The Edge Financial Daily, on November 20, 2014.