Investment Highlights

• We maintain HOLD on TSH Resources with an unchanged fair value of RM1.20/share based on FY22F PE of 18.0x. We ascribe a three-star ESG rating to TSH. We have tweaked TSH’s FY21E net profit upwards by 2.0% to account for a higher FFB output growth of 9.0% vs. 6.0% previously.

• We believe that TSH would not be significantly affected by Malaysia’s prosperity tax in FY22F as most of the palm earnings are from Indonesia. We estimate that almost 80% of the palm division’s FY20 EBIT of RM145mil were from Indonesia. In addition, we forecast TSH’s FY22F net profit to be less than RM100mil.

• TSH is expected to complete the RM248.0mil proposed disposal of its 2,933ha of oil palm estates and palm oil mill in Kinabatangan, Sabah to Sharikat Keratong Sdn Bhd in 1QFY22. This is estimated to reduce TSH’s net gearing to 55% from 78.9% (as at end-FY20) but also result in a loss of FFB of 5%. We have not accounted for the proposed disposal in TSH’s FY22F earnings forecast yet.

• We believe that TSH’s FFB production in 2HFY21 would be lower YoY after a bumper harvest in 1HFY21. TSH’s oil palm trees in Indonesia were productive in 1HFY21 as reflected in the 16.7% YoY increase in FFB production. Recall that in August 2021, a few SGX-listed Indonesia planters had said that their FFB production in 2H2021 would be the same as 1H2021. For the group as a whole, we have assumed an FFB output growth of 9.0% in FY21E (FY20: 1.4%) on the back of an increase in mature areas of 2,300ha in Indonesia and higher FFB yield of 23.5 tonnes/ha (FY20: 22.8 tonnes/ha).

• Indonesia is envisaged to drive TSH’s FFB production in FY21E. Indonesia is estimated to account for more than 90% of TSH’s FFB production. In Malaysia, TSH’s FFB may decline by 10% in FY21E due to the shortage of foreign labour and wet weather in 1QFY21. TSH plans to focus on replanting of ageing oil palm trees mainly in Sumatra in FY21E and FY22F. The size of the replanting is estimated to be 500ha to 900ha per year. New plantings are envisaged to be minimal in FY21E and FY22F as TSH continues to keep a lid on its net gearing ratio. TSH has plantable reserves of 34,000ha to 35,000ha in Indonesia.

• Cocoa earnings are anticipated to be unexciting in FY21E and early FY22F as demand for chocolates and cosmetics is still weak. We believe that cocoa earnings would start recovering from 2HFY22 onwards as cross-border travelling accelerates. We forecast a small pre-tax profit of RM2.0mil for the “Others” division (cocoa, wood flooring and biomass) in FY22F vs. zero in FY21E.

Source: AmInvest Research - 2 Nov 2021