New plantings set to help TSH Resources grow

  • Analyst Reports
  • Friday, 11 Sep 2020

TA has maintained its “buy” recommendation on TSH with an unchanged target price of RM1.31.

PETALING JAYA: Continuous planting efforts and the recent disposal of two subsidiaries will put TSH Resources Bhd in good stead for strong growth.

Analysts remain bullish on the long-term outlook for TSH despite a year-to-date share price depreciation of about 36%, given its upstream undertaking, expected rise in fresh fruit bunch (FFB) yield and decline in production costs, as more young oil palm trees mature and reach peak productions.

“TSH has been concentrating on upstream productions (FFB and CPO), which traditionally fetch higher margins than the downstream productions.

“In order to grow its upstream business further, we believe that TSH would have to improve its cash position by disposing some of its non-strategic assets and unlock value via monetisation and opportunistic divestments.

“We believe the recent proposal to dispose of two Indonesian subsidiaries to Kuala Lumpur Kepong Bhd will help to strengthen the group’s cash position to develop its remaining unplanted plantation land, ” TA Research said in a report.

TA has maintained its “buy” recommendation on TSH with an unchanged target price of RM1.31.

TSH had an aggressive new planting programme in financial year 2014 (FY14) and FY15, which reached 2,800ha each year. Subsequently, the company slowed down new planting in FY16 to FY19 to a few hundred hectares each yer, to conserve cash and reduce its net gearing level.

As at end-2019, it had 57,400ha of unplanted and 42,100ha of planted land bank.

The recent disposal will reduce the group’s total planted and unplanted land bank to 42,000ha and 32,100ha respectively.

The land in Indonesia alone accounted for 85% of its total planted area.

“We believe the unplanted land bank of 32,100ha would provide some room for the group to expand its plantation footprint and be the engine of growth for future earnings.

“The expected disposal proceeds of around RM518mil will provide greater capacity for the group to accelerate the development of its remaining unplanted land in Indonesia.

“Based on our estimate, it can help the group to fund around 23,000ha-25,000ha of land, assuming the new planting cost to be around RM20,000-RM22,000 per ha.

“However, the new planting area could be lower since the group intends to pare down its existing borrowings to improve its gearing level, which stood at 0.83 times in FY19, ” said TA.

TSH’s aggressive planting in the past had enabled it to generally enjoy double-digit FFB production growth in the past 12 years, except for selected years.

Its oil palm age profile has improved significantly compared to five years ago.

While the company’s management is expecting a flattish FFB production growth this year, growth is expected to be in the range of 7% to 11% for FY21 and FY22.

More importantly, said TA, its CPO production cost (ex-mill) of around RM1,400 per tonne reflects the efficiency of the business.

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