This article first appeared in The Edge Financial Daily on April 10, 2020

TSH Resources Bhd 
(April 9, 67.5 sen) 
Maintain buy with an unchanged target price (TP) of 75 sen. We hosted a conference call with TSH Resources Bhd and came away feeling less worried about the three-week plantation operations suspension in Sabah, as the impact is unlikely to be significant. Fresh fruit bunch (FFB) growth for TSH is driven largely by its Indonesian estates, which are still operating as usual. Valuations remain attractive at current levels.

The Sabah state government is consulting with plantation firms there as to how best to contain the spread of Covid-19 within their estates. Each company is advised to have its own quarantine centres, where designated doctors are deployed to supervise the estates.

TSH’s labourers are being retained because there are no other jobs currently as nearby estates are also shut down too. If the operation suspension is extended, there is a risk of labourers leaving to non-affected areas, particularly as a large portion of wages are tied to productivity.

The three-week movement control order (MCO) impact on Sabah will not be significant, as FFBs remain on oil palm trees, albeit slightly overripe. As harvesting is done every 10 to 18 days, a three-week suspension means one harvesting round is not done. Although overripe fruits give rise to higher free fatty acid content — resulting in marginally lower prices at mills — there is still value to be had, as the fruits can still be sold. Fertiliser application can also catch up after the three-week suspension is over.

As only 10% of the company’s planted areas are affected by the MCO, TSH believes the overall impact to FFB output will not be significant. We note that its joint venture refinery with Wilmar International Ltd is not operating currently. Year to date to February, TSH posted a 5.3% year-on-year rise in output, with Indonesia posting a 9.4% increase. If the MCO is extended, the impact may be more significant, as it means TSH will lose more rounds of harvesting. The company’s original 2020 FFB growth forecast was 8% to 12% (our projection: 8.3%). The management says it is too early to review its guidance at this moment.

TSH believes it will be difficult to lock down Indonesian estates if a breakout occurs as the estates there are vast and widespread. It is likely that at most lockdowns can only happen within city centres, as enforcement at estates will be near impossible. When queried if it will allow workers to go back during the upcoming festive period, TSH said it will wait for government directive on the matter. We make no changes to our forecasts at this juncture. We believe valuations look attractive now, given the recent share price retracement. TSH is trading at -2 standard deviation of its historical price-earnings ratio mean and below the global financial crisis price-to-book value trough. — RHB Research Institute, April 8