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

TSH Resources Bhd
(Jan 9, RM1.49)
Maintain outperform with an unchanged target price (TP) of RM1.90:
We walked away from a meeting with TSH Resources Bhd’s management, reassured of TSH and the plantation sector’s prospects, expecting earnings for the company’s financial year ending Dec 31, 2020 (FY20) to return with a vengeance (+116% year-on-year [y-o-y]) on: i) a higher FY20 crude palm oil (CPO) price of RM2,700 per tonne (+27% y-o-y); ii) sturdy fresh fruit bunch (FFB) growth (the management: 8% to 12%; ours: 4.5%) as about 4,000ha of palms come into maturity; and iii) production cost under control at about RM1,600 per tonne. The consensus implied fourth quarter of FY19 (4QFY19) earnings (-58% quarter-on-quarter [q-o-q]) appears too conservative (versus our +30% q-o-q). We make no change to our above-consensus earnings estimates. We reiterate “outperform” with a TP of RM1.90 (+1 standard deviation level).

Current CPO prices should be supported by weak production in FY20 (arising from dry weather impact, lower fertiliser application and replanting activities) while demand remains robust. In addition, it appears that the management is also comfortable with our CPO forecast of RM2,700 per tonne.

Meanwhile, having locked in fertiliser requirements for FY20 (6% to 7% higher than for FY19), the management appears confident to keep FY20 cost under control at about RM1,600 per tonne, in line with our FY20 production cost estimate of RM1,560 per tonne. Alongside an improved CPO price outlook, we expect TSH’s earnings to return with a vengeance in FY20.

Its 4QFY19 earnings are likely to surprise the consensus. With a higher CPO price (+23% q-o-q) and only a slight sequential dip in 4QFY19 FFB output (our expectation for 4QFY19 FFB output: about 240,000 tonnes), we expect TSH’s 4QFY19 earnings to improve significantly to register around RM15 million (+30% q-o-q). For 9MFY19, TSH already registered a core net profit of RM34.2 million (87% of the consensus).

We underscore that our FY19-FY20 earnings estimates are 26%-48% higher than the consensus.

Risks to our call include sharp fall in CPO prices and a precipitous rise in labour/fertiliser/transportation costs. — Kenanga Research, Jan 9

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