TSH in consolidation mode

TheEdge Mon, Jun 03, 2019 08:37am - 4 years View Original


KUALA LUMPUR: TSH Resources Bhd, among the many plantation companies that have seen its earnings hit by low palm oil prices lately, plans to consolidate its core business to prepare itself for a sector recovery it sees approaching.

In an interview with The Edge Financial Daily, its group managing director, Datuk Tan Aik Sim (pic), said for financial year ending Dec 31, 2019 (FY19) TSH will focus on improving its core business operations and carry out minimal replanting on some 200 to 300 hectares (ha) of its plantation.

“This year, our focus is only on consolidation. Our core business is oil palm [cultivation] and we believe the prospects are still quite good in the longer term, so we’re continuing with that.

“It (the plantation industry) is cyclical and takes time to improve. Maybe this year won’t be as good as we want it to be — hopefully next year is a better one — but there are positive signs,” Aik Sim, who is in his tenth year as group managing director, added.

High inventory levels have been pressuring crude palm oil (CPO) prices, besides negative news flow vis-à-vis the planned palm oil biodiesel ban in Europe and rising trade war tension.

Compared with the RM2,500-a-tonne level a year ago, the prices have since slumped, with the benchmark palm oil contract for August delivery settling at RM2,084 per tonne last week.

According to Aik Sim, for the second half of the year, CPO prices would likely average RM2,300, as market talks suggest. For TSH, every RM100 rise in CPO price per tonne could likely generate RM15 million to RM20 million in additional annual earnings.

In the past year, the group’s core palm products segment saw a squeeze in profit as a result of lower average CPO price. The segment registered a 42% profit fall to RM123.9 million in FY18, from RM213.4 million a year ago.

The impact of that on the group’s earnings was mitigated by its other segments — bio-integration, wood products and cocoa products. The segments’ profit jumped fourfold from RM7.9 million to RM31.6 million in FY18.

However, the 55-year-old said the group currently has no plans to further expand its cocoa business — which saw higher sales volume while benefitting from better cocoa product prices — to cushion the impact of its weak plantation earnings.

Cocoa was TSH’s initial business when it was founded in 1979 by Tan Soon Hong, Aik Sim’s father. The group currently operates a cocoa processing plant in Klang, Selangor, which produces cocoa products which are mainly exported to the US, Europe, and Asia.

“We’ll keep it (non-core business) as it is. It balances out nicely in the group. The [palm oil] industry is seeing more supply than demand now because a lot has been planted in the past 10 years. Those trees are coming into maturity and producing a lot of fruits. But for the past three or four years, new plantings in Indonesia have slowed down by half.

“So, going forward, in the next few years, there will be less incremental supply, balancing things out quite nicely,” he said, adding that TSH should be able to remain at its current levels of profitability.

In the first quarter of FY19 (1QFY19) that ended March 31, the group reported a 24% decline in net profit to RM13.54 million, from RM17.83 million a year earlier, no thanks to the lower average CPO and palm kernel selling prices.

Revenue for the quarter fell 8% to RM207.59 million from RM226.14 million previously.

During the quarter, the group said average CPO and palm kernel prices retreated to RM1,911 and RM1,214 per tonne, respectively, from RM2,316 and RM2,043 per tonne in the corresponding 1QFY18.

 

Banking on increased biodiesel  mandates and RSPO certificates

Aik Sim said when prices are better and as production improves with its oil palm trees approaching maturity and higher yielding ages in the next few years, the group will be able to pare down its borrowings.

TSH’s net gearing stood at over 0.8 times, which Aik Sim acknowledged is “quite high”.

The group is also banking on the increased biodiesel mandates in Malaysia and Indonesia to bump up demand for palm oil, he said.

Meanwhile, TSH will continue with its ongoing sustainability efforts by securing certification for at least two to three more of its plantations in Indonesia from Roundtable on Sustainable Palm Oil (RSPO).

Currently, about one-third of TSH’s total plantation areas are RSPO-certified, said Aik Sim.

TSH is principally engaged in oil palm cultivation and the processing of fresh fruit bunches into CPO and palm kernel.

As at Dec 31, 2018, its plantation land bank stood at 99,523ha, spread out across Sabah, Kalimantan, and Sumatra, of which 42,077ha are planted. It also operates seven palm oil mills — three in Sabah and two each in Kalimantan and Sumatra.

The age profile of the group’s oil palm trees is spread out, with a weighted average age of 9.2 years, which can be considered relatively young. Among the group’s other businesses are the operation of biomass and biogas power plants in Sabah, where it is also involved in industrial tree plantation at the Forest Management Unit in Ulu Tungud, Sandakan; the manufacturing and marketing of engineered hardwood flooring; and, the processing and marketing of cocoa products.

Lightly traded with just 29,300 shares done, TSH finished unchanged at 93 sen last Friday, for a market capitalisation of RM1.29 billion.

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