Friday 13 April 2012

TSH Resources (TSH MK, BUY, FV RM2.65, Last Close: RM2.53)


TSH Resources (TSH) joined us in hitting the road in Singapore recently to meet 9 institutional funds. FFB production growth was spectacular last year, surging by more than 40% y-o-y, with its young Indonesian estates being the key growth  driver. Management is looking to quicken the pace of new planting over the next few years and also  shed light on  why the  company  is further expanding in Kalimantan. TSH continues to have one of the best tree age profiles, with 75.0% of its trees below peak. Maintain BUY, with FV of RM2.65.

Planted area reaches 30,521 ha. TSH planted on 2,584 ha in 2011, which was slower than  the aggressive 3.1k to 5.2k ha  it covered  annually  between 2006  and  2009. Planting has been slow over the past two years as the company  endeavoured to keep its net gearing (calculated  based on total equity instead of shareholders’ equity) below the  0.8x needed to maintain its AA- credit rating  from  MARC. A drop to an A rating would see the company’s borrowing cost rise by as much as 1 ppt from the current 4+%. With this ratio now having trended lower to 0.71x, the company is looking to plant 4k ha of palms and 1k ha of rubber annually,  which  translate  into a 10%-13%  growth  in  oil palm planted areas over the next 3 years. The company will continue to enlarge its 94,003 ha landbank in Indonesia, of which  only  27.8% is planted, before good Kalimantan land becomes scarce and expensive.

Age profile primed for growth spurt. With over 21.8k ha planted since 2006, 75.0% of TSH’s trees are below peak production age, making it the 5th most favourable tree age profile within  our 18-stock plantation universe. Of  the  total area planted, 47.5%  has immature  trees  - the highest within our Malaysian plantation coverage. Indonesia represented only 42.2% of the company’s planted area at the turn of the millennium but this  has risen to 85.5%. The archipelago  nation  was the driver last year, with FFB production surging 59.4% compared to an overall FFB production growth of 43.2%.

Becoming less  Malaysian. Indonesia will continue to be TSH’s key growth  engine given its young tree profile (87.7%  of  trees below peak) while Sabah should see declining production (0.5% of trees below peak). Management forecasts the firm’s FFB production will grow by 21.4% in 2012 while we expect a weaker but still commendable growth of 18.2%. We gather from management that as the heavy rainfall during the first two months of the year had affected harvesting, 1Q production should thus be relatively weak, although it may bounce back in 2Q.

Source: OSK188

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