TSH 9M results within estimates

TheEdge Wed, Nov 27, 2019 10:26am - 4 years View Original


TSH Resources Bhd
(Nov 26, RM1.13)
Downgrade to sell with a higher fair value (FV) of RM1.06:
We downgrade TSH Resources Bhd to “sell” from “hold” with a higher FV of RM1.06 versus 88 sen previously. We believe the recent rise in TSH’s share price has already priced in improvements in crude palm oil (CPO) prices.

Our FV implies a forecast financial year ending Dec 31, 2020 (FY20F) price-earnings ratio of 25 times versus 22 times previously. We raise our FY20F net profit for TSH by 6% to account for a higher average CPO price assumption of RM2,200 per tonne versus RM2,100 per tonne previously.

TSH’s cumulative nine months of FY19 (9MFY19) results were within consensus estimates and that of our’s. Included in TSH’s reported net profit for 9MFY19 was an insurance claim of RM41.6 million, partly offset by write-offs and impairment of fixed assets and inventories amounting to RM27.4 million. In TSH’s reported net profit for the third quarter of FY19 (3QFY19), the insurance claim was RM15.3 million, while the impairment loss on inventories was RM6.4 million.

The group’s gross profit slid by 22.1% year-on-year (y-o-y) to RM183.7 million for 9MFY19 due to rising production costs and weak CPO prices. The average CPO price fell by 13.6% to RM1,906 per tonne in 9MFY19 from RM2,205 per tonne in 9MFY18.

TSH’s fresh fruit bunch (FFB) production growth was unexciting at 0.2% y-o-y in 9MFY19. TSH’s FFB production in Indonesia improved by a small 1.7% y-o-y in 9MFY19, while in Malaysia, FFB output slipped by 10.7%. Indonesia accounted for 89.1% of TSH’s FFB production in 9MFY19, while Malaysia made up the balance 10.9%.

We attribute the small y-o-y increase in TSH’s FFB production in 9MFY19 to tree stress after bumper harvests in the past two years. TSH’s FFB output grew by a blistering 19.2% in FY17 and 20.8% in FY18.

There were three factors that cushioned the fall in TSH’s palm earnings for 9MFY19. First, insurance claims for a fire at Ekowood’s plant in Gopeng, Perak. Second, a rise in the share of profit from the TSH/Wilmar refinery to RM18.5 million for 9MFY19 from RM3 million for 9MFY18. Third, a 22.5% y-o-y increase in earnings before interest and taxes (Ebit) from its “others” unit (mainly cocoa activities) for 9MFY19.

On a quarterly basis, TSH’s gross profit improved by 10.4% to RM64.2 million for 3QFY19, driven by higher CPO production. The average CPO price was RM1,905 per tonne in 3QFY19 against RM1,901 per tonne in 2QFY19. FFB production expanded by 23.2% quarter-on-quarter (q-o-q) in 3QFY19.

Ebit of the “others” division slid by 29.8% q-o-q to RM6.5 million for 3QFY19. The Ebit margin dropped to 21.7% for 3QFY19 from 31.7% for 2QFY19. — AmInvestment Bank, Nov 26

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