TSH Resources (TSH MK, BUY, FV RM2.58, Last Close: RM2.12)

The depreciating rupiah and  hedging  losses hit  TSH’s  1Q financials, without which its earnings would have been higher y-o-y. PBT was lower by 32% q-o-q on seasonally weaker production while FFB production grew at a healthy 14.5% y-oy, buoyed by  strong performance from its Indonesian estates.  Although the 1QFY11 profit represents just 14% of our full-year forecast, TSH’s  1Q earnings have historically made up less than 15% of its full-year earnings. We maintain our plantation forecast but cut our forecast for the wood and cocoa segment to nil following their dismal performance. Maintain BUY with  a slightly lower FV of RM2.58.

Largely within forecast. TSH registered a 1QFY12 revenue of RM227.4m (-10.0% y-oy on poor sales from the wood and cocoa segments, -22.4% q-o-q as production entered a seasonal downcycle) while headline earnings sank 37.2% y-o-y. However, stripping out the unrealized forex and commodity futures gains and losses, the company’s 1QFY12 earnings would have risen y-o-y to RM17.6m (+13.9% y-o-y,  -47.9% q-o-q). Core PBT declined 32.0% q-o-q as production slowed amid a seasonal production downcycle but the higher taxes and minority interest charges exaggerated its q-o-q core earnings decline to nearly 50%. The quarterly earnings made up just 13.7% and 13.1% of our and consensus estimates respectively.  In the previous two financial years, 1Q earnings made up around 13% of full year earnings.

Commendable FFB production growth. TSH’s FFB production grew 14.5% y-o-y, fuelled by a 23.1% growth in its Indonesian production. This is a far cry from TSH’s solid 43.2%  FFB production growth in 2011, but  is  still impressive  compared with  the generally lackluster 1Q production growth experienced by most planters. We are maintaining our 18.2% full year FFB production growth forecast  in view of the strong growth from its young Indonesian trees and our expectations for a production recovery come June as the early-2010 drought effects subside. On the other hand, the company’s fully mature Sabah trees should experience some production decline.

Weaker rupiah  inflicts pain. TSH, whose borrowings for expansion in Indonesia are denominated in USD, incurred forex losses amounting to RM1.7m in 1QFY12 as the IDR depreciated against the greenback. In contrast,  its 1QFY11 earnings were boosted by forex gains in excess of RM4.0m as the IDR outperformed the dollar. The company also saw unrealized commodity futures losses of RM1.6m after selling forward about 20% of its CPO at approximately RM3,000 per tonne.  Excluding  the forex and derivatives impact, the company’s  1QFY12 earnings actually  came in better than that in  1QFY11.The loss on forward sale has no bearing on our forecast, which factored in average CPO price of RM3,000 per tonne.

Source: OSK