TSH to slash cost per tonne further

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TSH Resources Bhd is targeting to slash its cost of production for crude palm oil (CPO) by more than 15% over the next five years.

The upstream planter already has one of the lowest costs in the industry, if not the lowest, producing CPO at just RM830 per tonne when the average cost in Malaysia ranges from RM1,200 to RM1,500 per tonne at present.

To trim its costs, TSH is banking on higher fresh fruit bunch (FFB) yields and higher-yielding fruit from a tissue culture called Wakuba ramet that took the company RM40 million and over 10 years to develop.

“Bringing down the cost of production could take maybe five years. With Wakuba, I think we can bring it down to about RM700 per tonne,” group chairman Datuk Kelvin Tan said at a recent briefing.

The targeted cost per tonne of RM700 would translate into a gross margin of 68% at the current CPO price of more than  RM2,200 per tonne.

To this end, TSH is also increasing its targeted FFB yield by 16% to 35 tonnes per hectare over the next five years.

“On average, for the past three years — from 2011 to 2013 — in terms of FFB yield, we have been producing 30 tonnes per hectare … we have a potential target of bringing it to 35 tonnes per hectare,” Tan remarked.

Last year, the national average based on data from the Malaysian Palm Oil Board was 19 tonnes per hectare.

“This [target] is potentially achievable because our plantations are still very young. Some 82% of our plantations are young trees,” said Tan, adding that the young palms will steadily yield more oil as they mature.

TSH also has a carefully planned planting schedule to keep its production growth stable. Each year, it plants between 4,000ha and 5,000ha, which takes about five years to start bearing fruit.

In terms of production, Tan said, this translates into double-digit growth each year, which then has the same effect on profit.

Last Tuesday, the company released its results for the third quarter ended Sept 30, 2014 (3QFY2014), which showed growth of 27% in the nine-month FFB production period to 483,048 tonnes. CPO production rose 17.6% to 263,607 tonnes in tandem with the higher production capacity of the company’s mills.

In the quarter, FFB production grew 26% year on year to 163,646 tonnes as more plantations reached maturity.

The higher FFB collection was reflected in the double-digit growth in TSH’s core net profit — up 16.3% to RM40.1 million.

“Despite the lower average CPO price of RM2,170 compared with RM2,239 in 3QFY2013, the segment’s operating profit surged 18% mainly as a result of higher FFB production and ongoing initiatives to improve unit production cost and operational efficiencies,” TSH said in a filing with Bursa Malaysial.

Tan added that it had achieved an oil extraction rate of 23% in its Indonesian plantations and 21% in its Sabah estates.

In 3QFY2014, the group reported a 71% drop in net profit to RM24.28 million from RM83.27 million in the previous corresponding period. However, 3QFY2013 had a high base as it included a RM85.3 million gain from the disposal of Pontian United Plantations Bhd. Revenue in 3QFY2014 rose to RM246.95 million from RM220.48 million previously.

In the cumulative nine-month period (9MFY2014), despite the fact that CPO prices were trending downwards, TSH’s palm and bio-integration business saw its profit grow 21% to RM172.7 million. Overall, the group’s 9MFY2014 net profit came in flat at RM122.2 million compared with RM123.02 million in 9MFY2013, which saw a RM85.3 million gain from the disposal of Pontian offset a RM51.6 million foreign exchange loss.

Moving forward, the group is still looking for land in Sabah and Indonesia, but is not yet planning to venture beyond the region to Africa or Papua New Guinea like other companies hunting for land.

According to Tan, TSH is aiming for greenfield sites where the cost is cheaper and the land can be developed according to its own planting standard.

“For the next 5 to 10 years, we have enough land to plant,” said Tan, adding that it is preferable to operate in Indonesia and Malaysia where TSH already knows the operating environment.

At present, the company’s landbank stands at more than 115,000ha — 98,000ha in Indonesia and 19,000ha in Sabah. This inculdes unplanted land of 65,000ha in Indonesia and 1,000ha to 2,000ha in Sabah.

In July this year, TSH had proposed to acquire Icon Field Ventures Sdn Bhd, which has 9,000ha in Kalimantan Tengah, for RM24.5 million. The company  expects to complete the purchase by mid-2015.

Keeping its unit cost low and ensuring fast growth in FFB production is crucial to TSH amid a low CPO price environment. As at end-September 2014, the group had RM55.76 million in cash against long-term borrowings of RM472.68 million and current borrowings of RM455.95 million. Its shareholders’ funds totalled RM1.14 billion while net assets per share stood at RM1.27.

The stock, which has gained some 13% year to date, closed at RM2.25 last Thursday to give the company a market capitalisation of RM3.05 billion.

This article first appeared in The Edge Malaysia Weekly, on November 24 - 30, 2014.