TSH’s fundamentals intact despite headwinds, weather

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KUCHING: TSH Resources Bhd’s (TSH) fundamentals are still intact despite facing potential headwinds from export levy implementation and production decline from the incoming El Nino phenomena.

Analysts view that TSH’s young tree age profile is a boon to growth but they still expect shortcomings in performance due to the decline in its crude palm oil (CPO) and palm kernel (PK) production.

During the first quarter of the financial year 2015 (1QFY15), TSH’s revenue declined 28.2 per cent year-on-year (y-o-y) on lower CPO sales volume and weaker average selling price (ASP), the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) said in a report.

It added, the company’s 1QFY15 earnings fell 87.7 per cent y-o-y to only RM6.4 million, the lowest since 1QFY09, attributable to the loss of foreign exchange amounting to RM23 million.

On top of that, MIDF Research pointed out, “In 1QFY15, TSH recorded total fresh fruit bunches (FFB) production of 143,258MT (a decline of 18.9 per cent y-o-y) of which 19 per cent was from Sabah operations and the remaining from Indonesian operations.

“The crop production in 1QFY15 was affected by the hangover of long-term stress from 2014 drought in both Indonesia and East Malaysia.

“This was further exacerbated by the dry weather during early 2015 in East Malaysia. In February and March 2015, Malaysian Meteorological Department reported that the amount of rainfalls recorded in Sabah were below average.”

While the research team expect TSH’s production to start picking up in 2Q, it expect the average CPO price to be lower than the price registered in 1Q.

“Thus, we do not foresee a strong sequential quarter growth in revenue and earnings for the Company in 2QFY15,” it said.

Nevertheless, it believed that the fundamentals of TSH are still intact as for the past five years, TSH has recorded a compounded annual growth rate of 18.08 per cent on its FFB production, from Sabah and Indonesia.

“We are expecting TSH to continue to post double-digit growth for its FFB production as we note that TSH have nearly 70 per cent immature and young trees as at December 2014, of which we believe will be the main driver of its growth moving forward,” it added.

AllianceDBS Research Sdn Bhd (AllianceDBS Research) in a separate note, also pointed out that the soft 1Q15 production figures, as well as the El Nino weather phenomenon may restrict 2015 production growth but TSH’s young tree age profile (69 per cent) bodes well for the long term.

As such, it expected the group’s FFB yields to recover over the next few quarters.

TSH could also face headwinds from the export levy implementation in Indonesia as close to 40 per cent of its CPO production and circa 86 per cent of its planted hectarage are in Indonesia.

However, AllianceDBS Research noted, the Indonesian government has stated that proceeds of the levy would go into a fund to spur biodiesel production, which can boost CPO demand and thus lift prices over the longer run.

In the long run, TSH also has room to grow. The research team said, TSH has a sizeable unplanted landbank of 64,000 ha in Indonesia (68,000 ha total) to support continuous aggressive new planting. Currently, the company has a total planted area or circa 41,000 ha.

AllianceDBS Research maintained its earnings forecast for TSH for now and retained a ‘buy’ recommendation on the stock while MIDF Research retained a ‘neutral’ recommendation.