TSH Resources expected to perform well in H2

TSH said in an announcement to Bursa Malaysia yesterday that it would continue to focus on oil palm planting programmes in Indonesia and Malaysia

KUALA LUMPUR: TSH Resources is expected to perform well in the second half of 20162 given the stronger crude palm oil (CPO) prices and recovery of fresh fruit bunches (FFB) production in Kalimantan, says PublicInvest Research.

The research house said on Tuesday it continues to rate TSH with an Outperform call and target price of RM2.12.

“Management plans to conserve cash in the coming years to reduce its net gearing level from 0.89 times to 0.70 times. The cash conservation will be done through lowering its capex allocation for new planting activities as it currently owns sizeable and young plantation land. 

“The group’s plantation age profile stands at 7.5 years old. 83% of its planted area is below 15 years old while only 7,221ha or 17% is above 16 years old. Even without any aggressive new plantings over the next three years, we foresee the group will still enjoy young age profile coupled with double-digit production growth,” it said.

PublicInvest Research said TSH group’s FFB production fell 15% on-year in the 1HFY16. For the full-year, management expects the decline to fall below 10% as production is set to recover in the coming months. Kalimantan production has bottomed out while Sumatra and Sabah might still be a drag until April 2017.

The research house also said due to the lag effect from the El Nino phenomenon, the weaker FFB production has led to a higher CPO production cost of RM1,500 a tonne this year. 

“Nevertheless, we think production cost should be softer compared to the 1H, led by the recovery of production and higher palm kernel prices.

“As the company mainly sells its CPO production at spot prices, it should fully capture the current bullish CPO prices. Based on our sensitivity analysis, for every RM100 per tonne increase in CPO price, the group’s pre-tax profit would increase by another RM7mil. 

“Year-to-date, CPO prices average at RM2,535 a tonne. Assuming the current bullish CPO price trend remains for the coming months, we expect to see earnings surprise in 2H. Hence, we believe TSH is likely to achieve our full-year FY16 forecast,” it said.