TSH Resources Bhd
(Aug 26, 89 sen)
Maintain neutral with an unchanged target price (TP) of RM1.05: We maintain “neutral” with a TP of RM1.05, pegged at a financial year 2019 (FY19) price-to-book value of one times. Our TP translates into an upside potential of 17%. We still favour TSH Resources Bhd for its young palm age profile. Despite normalising global crude palm oil (CPO) inventory levels, the industry will enter a peak in the second half of the year (2H), capping any expectations of CPO price appreciation. Risks to our call include: i) weaker palm oil demand in Indonesia; ii) a minimum wage hike in Indonesia; iii) a strengthening of the US dollar against the rupiah, which would have an impact on TSH’s US dollar borrowings.

 
TSH’s second quarter (2Q) of FY19 earnings turned in at RM19.6 million, 34% lower year-on-year (y-o-y) largely due to lower CPO and palm kernel oil (PKO) prices. Earnings were down quarter-on-quarter due to lower fresh fruit bunch production and CPO milled. The lower production was on the back of fewer working days during the Hari Raya season. On this basis, production should recover in 3QFY19. Weakness in global oilseed and vegetable oil prices persisted throughout 2QFY19 and only rebounded to a high of RM2,220 a tonne on the back of a normalised global CPO inventory and feasible biodiesel demand. Despite the weak CPO prices, performances improved for the cocoa division and a joint venture (JV; its palm oil refinery is a 50:50 JV with Wilmar) on strong cocoa prices and lower CPO input cost buffering the poor upstream plantation results. TSH’s six months of FY19 earnings met 35% and 40% of our and the street forecasts respectively, thus meeting expectations. Upstream planters’ full-year earnings are normally split 40:60 between 1H and 2H results.

We maintain our FY19 and FY20 CPO and PKO assumptions at RM2,000 a tonne and RM1,400 a tonne respectively. We believe CPO prices bottomed in 1H19. However, the price upside is capped by an additional three million tonnes of CPO supply expected from Indonesia for calendar year 2019 and the Indonesian government, being wary of supply pressures, has prepared plans to increase its biodiesel blend to B50-B100 by 2021-2022. TSH has about 100,000ha of plantation land bank of which approximately 42,000ha is planted with an average palm age of 9.2 years; 20% of the planted hectarage is immature. — Inter-Pacific Research, Aug 26