During our recent small group virtual meeting with TSH’s management, we gather that (i) FFB output to remain flattish at ~920k tonnes in FY22, before declining to 830-840k in FY23 (following the completion of planted landbank disposal), (ii) CPO production cost of RM2,000/tonne in FY22-23, (iii) TSH will turn into a net cash company by end-1Q23 (from a net gearing of 0.07x as at 30 Sep 2022), (iv) new planting activities to resume from FY24 (with new planting target of 500-1,000 ha p.a.). We tweak our FY22-24 core net profit forecasts by 0.8%/-5.2%/4.8%, to reflect marginal adjustment to our FFB output and production cost assumptions. Post earnings revision, we maintain our HOLD rating on TSH, with a higher TP of RM1.12 (from RM1.07 earlier) based on 15x FY24 core EPS of 7.5 sen.

FY22-23 FFB output guidance. TSH clocked in FFB output of 857.7k tonnes in 11M22 (-0.8%), and management expects total output of ~920k tonnes in FY22 (matching FY21’s FFB output of 919k tonnes). Moving into FY23, management expects FFB output to fall by 9-10% (to 830-840k tonnes), as additional area reaching maturity bracket (300-400 ha) will be more than offset by a decline in planted landban k (following the completion of planted landbank disposal).

Flattish production cost guidance. TSH achieved blended CPO production cost of ~RM2,000/tonne in 9M22 (at ~40% higher than FY21’s CPO production cost), and such production cost will remain for the remaining months of FY22, given higher fertiliser and labour costs. Moving into FY23, management shared that production cost will remain flattish at ~RM2,000/tonne, as it expects lower fertiliser costs will be offset by higher labour costs. We understand that TSH has locked in its 1Q23 fertiliser requirement (which blended price has declined by ~15% from a year ago), as opposed to half yearly procurement usually, as it expects fertiliser prices go trend down further.

Balance sheet to strengthen further. Strong earnings performance (arising from strong palm product prices particularly during 1H22) and landbank disposal in FY22 have resulted in TSH’s net gearing declining to 0.06x as at 30 Sep 2022 (from 0.45x as at 31 Dec 2021). Management shared that TSH’s balance sheet will strengthen further in the near future (net cash by end-1Q23), as it is expecting to receive the remaining ~RM300m proceeds from disposal of the remaining 6,080ha of landbank by end-1Q23.

New planting to resume from FY24. Following the disposal of plantation landbank, TSH will be left with ~30,000 ha of unplanted landbank (of which only 10,000-15,000 ha is plantable). Management shared that it will resume on new planting activities (targeted at 500-1,000 ha p.a. from FY24).

Forecast. We tweak our FY22-24 core net profit forecasts by 0.8%/-5.2%/4.8%, to reflect marginal adjustment to our FFB output and production cost assumptions (in line with management’s guidance). Based on our assumptions, every RM100/mt change in our CPO price assumption will result in TSH’s FY23-24 core net profit changing by 7-8%.

Maintain HOLD, with slightly higher TP of RM1.12. Post earnings revision, we maintain our HOLD rating on TSH, with a higher TP of RM1.12 (from RM1.07 earlier) based on 15x FY24 core EPS of 7.5 sen. At RM1.10, TSH is trading at FY22-24 P/E of 7.5x, 13.9x, and 14.8x, respectively. While we like TSH for its favourable age profile (average age of 11.7 years as of Sep-22) and improving balance sheet, further upside is capped by the absence of earnings growth catalyst.

Source: Hong Leong Investment Bank Research - 16 Jan 2023