TSH’s 1HFY12 earnings of RM36.1m weakened by 26% y-o-y as rising production from its Indonesian estates were unable to fully compensate for the steep shortfall in Sabah output. Contribution from its refinery JV with Wilmar also softened given the tough environment for Malaysian refiners. Nonetheless, we see production picking up y-o-y in 2H2012, as production in Peninsular Malaysia and Sarawak showed some recovery in July. Maintain BUY with reduced FV of RM2.88.
Weaker as expected. TSH’s 2QFY12 earnings shrank y-o-y on weaker production and softer prices, with revenue and core earnings coming in at RM279.0m (-15.4% y-o-y, +22.7% q-o-q) and RM18.4m (-44.5% y-o-y, +4.8% q-o-q) respectively, bringing its YTD earnings to RM36.1m (-26.0% y-o-y). The y-o-y decline was compounded by the high base arising from an exceptionally strong 2QFY11, during which earnings soared 328.6% y-o-y and 106.5% q-o-q). The six-month earnings represented just 28.8% and 27.9% of our and consensus full year forecasts.
Pretty much a pure planter. TSH’s plantation division has been and will continue to dominate group earnings. Its wood products division suffered a RM0.5m loss in 1HFY12 amid poor overseas demand while its cocoa segment eked out a mere RM0.01m gain. The wood division is now being downsized.
Sabah output tanks. Following an unexpected 20.1% jump in its Sabah palm fresh fruit bunches (FFB) production last year, the 1HFY12 production from the state declined by 23.3% y-o-y. The fall was even sharper than our forecast for a 9.4% contraction. As TSH’s Sabah trees are fully mature, with little or non-existent growth potential, the steep decline may have stemmed from: i) a reversion to more normalized production levels, and ii) a poor harvest across the state in general. MPOB data show that Sabah’s 7M2012 CPO production fell 14.5% y-o-y, sharper than the nation’s 8.1% drop. TSH’s 2QFY12 Sabah FFB production plunged 38.3% y-o-y.
Indonesia attempts to fill the gap. FFB production at TSH’s Kalimantan-based Indonesian operations rose 7.3%, bolstered by organic growth from its young trees. The increase, however, was still way short of our initial projection for a 33.7% increase. The company’s Indonesian production grew 59.4% last year.
Acquisition encounters hurdles. Separately, the deadline for offer acceptance in relation to TSH’s bid to acquire Pontian has been extended again, this time to 10 Sept, after being postponed to 22 Aug from 7 Aug previously. The acceptance level to date stands at a low 1.1% of Pontian’s shares outstanding (or 1.4% of the shares that TSH and the joint offerors do not hold). We believe the half-cash, half-stock offer - priced at a 10.9x FY11 PER - may have been delayed due to: i) the pricing of the offer, and ii) the sheer number of shareholders in Pontian - at 197 shareholders - which by itself will prolong the acceptance process. We had previously estimated for TSH’s FY13 EPS to increase by 9.8% should the offer be accepted as it is. That said, we have yet to incorporate any contributions from the proposed acquisition, pending confirmation of the RM624.8m purchase.
Maintain BUY. We are trimming our FY12 production growth forecast to 8.1% (Sabah: -18.4%, Indonesia: +22.5%) from 18.2% previously, as well as reduced TSH’s associate contribution amid a challenging operating environment for its JV refinery with Wilmar in Sabah. Our FY12 and FY13 earnings forecasts are correspondingly cut by 19.2% and 5.5% respectively. Our FV is now lower at RM2.88, based on a 15.0x FY13 PER and a RM0.15 per share value for its non-producing rubber estates.
Source: OSK
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