Following our move to OVERWEIGHT the plantation sector as well as upgrade our 2013 average CPO price assumption to RM3,500 per tonne, we are increasing our FY13 earnings estimates for TSH and now project a 25% y-o-y earnings growth next year. Although FFB production growth will soften more than initially forecast should the anticipated El Nino bring on drought, the organic growth from the company’s young trees will sufficiently buffer it against a hard landing in production. Maintain BUY, with FV of RM3.00.
25% FY13 earnings growth. We recently upgraded TSH’s FY13 estimated earnings to RM157.1m for FY13, up 8.4% from our previous forecast for RM145.0m. This followed an upgrade on our 2013 average CPO price assumption to RM3,500 per tonne, which triggered a round of upward earnings revision across our plantation universe for FY13. Our move to OVERWEIGHT the plantation sector on 9 July 2012 stems from our belief that palm oil price is still at the early stage of a 3-year upcycle, fuelled by the rising possibility of an El Nino occurring in 4QCY12/1QCY13, as well as a potential peak in Indonesia’s production in 2015. Hence we expect TSH’s FY13 earnings to jump 25.4% y-o-y, buoyed by firmer prices and positive FFB production growth.
Cutting FY13 production forecast. In line with our view that the upcoming El Nino will not be a mild one, we are toning down our FY13 FFB production growth forecast to 9.7% from 18.5% previously. As TSH has planted over 21.8k ha of oil palm since 2006, 75.0% of its trees are still below peak production, thus giving it the 4th most favourable tree age profile within our 18-stock plantation universe. This leads us to believe that organic production growth from its young trees will sufficiently mitigate the production losses arising from the anticipated dry weather. TSH’s rising share of production from its Kalimantan operations will also boost CPO production somewhat, as the OERs from that region tends to be a higher ~25% versus Malaysia’s typical 20%-22% due to the less weathered soil.
Looking to buy brownfield Sabah land. On 26 June 2012, TSH proposed to purchase the remaining 80.2% it does not own in Pontian (non-listed) for a price consideration of RM624.8m, of which 50.1% will be funded through borrowings and the remainder through new stock issuance. Although the number of the company’s outstanding shares will go up by 17.6% as a result of the exercise, we believe that the acquisition should be EPS-accretive right off. The acquisition, priced at a 10.9x FY11 PER, should perk up TSH’s FY13 EPS by some 9.8% (please see Figure 1).
Roadblocks ahead. All said, we do not think the path to completing the acquisition would be smooth sailing since there are some 200 shareholders in Pontian. This will make the share accumulation process more difficult than usual and may result in an extension of the current offer closing date of 7 Aug 2012. We also learned from our sources that some of Pontian’s landbank is actually submerged in water given its proximity to the Kinabatangan river. The total landbank that TSH is looking to acquire is thus likely to be higher than our initially estimated 13,200 ha, although the plantable area may come closer to our estimate.
Maintain BUY. Following our sector-wide earnings revision, we value TSH at a FV of RM3.00, based on a 15.0x FY13 PER and a RM0.16 per share value for its 10k ha of rubber areas, on which 2k ha is planted. We have yet to factor in any potential earnings contribution from the proposed Pontian acquisition on account of insufficient details on Pontian’s landbank, tree age profile and historical production. TSH continues to be a BUY as the company has one of the youngest tree age profiles and strongest production growth prospects among the planters we track.
Source: OSK
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