TSH Resources - Strong Output, Easing Cost Pressure

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+0.26 (25.00%)

TSH’s 9MFY23 results beat our expectation but disappointed the market. Its 3QFY23 earnings jumped 65% QoQ on lower costs and strong FFB output while CPO prices were flattish. We raise our FY23-24F core net profit forecasts by 34% and 13% respectively, nudge our TP up by 30% to RM1.30 (from RM1.00) and upgrade our call to OUTPERFORM from MARKET PERFORM.

Its 9MFY23 core net profit beat our expectation at 86% of our full-year forecast but disappointed the market at only 43% of the full-year consensus estimate. The variance against our forecast came largely from stronger recovery in FFB output, lower cost but also slightly firmer CPO price than we had expected.

Its 3QFY23 CNP rose 65% QoQ to RM28.6m but remained 34% weaker YoY due to exceptionally high CPO prices last year. The QoQ uptick came from seasonally higher FFB output of 258K MT (+16% QoQ, -2% YoY), lifting 9MFY23 output to 679K MT (-3% YoY) which is decent as two of its matured Sabah estates with annual FFB production of 60K MT were sold last March. 3QFY23 CPO price of RM3,371 per MT was firmer than expected while input costs have eased, helping to expand EBIT margins from 19% in 2QFY23 to 23% in 3QFY23.

The one-off items which were excluded from the core net profit comprised unrealised foreign exchange loss of RM11m which was offset by fair value gains of RM6m and net disposal gain of RM25m. Much of the disposal gain came the staggered sales of 13,898 Ha (28% planted) located in NE Kalimantan for RM731m cash in June 2022. RM429m worth of land was transferred during FY22 with a gain of RM311m. In Jan 2023, a much smaller parcel (575 Ha) was transferred resulting in a RM27.6m gross disposal gain. The remaining land sales (with expected RM120m-RM140m in divestment gain) are expected to be concluded before mid-2024.

Core earnings should recover next year on relatively flat CPO prices over 2024-25 while production costs should ease. Global edible oil demand looks set to grow by 3%-4% YoY over 2024-25 but supply is looking tight for 2024, possibly to mid-2025. Thus far, El Nino is confirmed. Sumatera and Kalimantan, where most of TSH’s estates are located, have experienced less rainfall, which potentially may lead to slower fruit formation and delay in harvesting but not so dry as to trigger flowers to abort. CPO prices of RM3,600-RM3,700 per MT is expected for TSH over FY24-25, lower than our sector average of RM3,800 per MT due to higher levies and duties in Indonesia. Input costs such as fertiliser and fuel rose substantially in the first half of last year but have since eased by 30%-40% YoY. Overall, production cost should plateau in FY24-25.

Long-term expansion. Prior to FY22, high borrowings prevented aggressive planting of 10k-20k Ha the group already owns. Strong FY22 operating cash flows (thanks to high CPO price) and sales proceeds from sales of NE Kalimantan land (RM429m) and two Sabah estates (RM258m) helped pared net debt from RM816m at the start of FY22 to RM88m (4% net gearing) as of 31 Sept 2023. New planting should start by early to mid-2024.

Forecasts and TP. We raise our FY23-24F net profit forecasts by 34% and 13%, respectively. Likewise, we nudge up our TP by 30%, from RM1.00 to RM1.30 based on P/NTA of 0.8x instead of 0.7x previously to reflect the latest 6-month sector PBV for the smaller to mid-sized plantation players. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3). Upgrade to OUTPERFORM from MARKET PERFORM as value has emerged.

Risks to our call include: (i) Western hostility towards palm oil on sustainability and bio-diversity issues, (ii) impact of weather and labour shortages on production, (iii) weak CPO and palm kernel prices, and (iv) cost inflation particularly fertilizers.

Source: Kenanga Research - 24 Nov 2023

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