TSH Resources - Resuming double-digit production growth in FY13F

- Maintain BUY on TSH Resources with an unchanged fair value of RM2.75/share.

- Like the other plantation companies, TSH is expected to be affected by lower palm oil production and price in FY12F, leading to a 19% fall in net profit.  

- However, we envisage an earnings recovery in FY13F, underpinned by an improvement in palm oil production. We forecast FFB production to expand 16% in FY13F after a 9% increase estimated for FY12F. 

- FFB yield is anticipated to rise in FY13F after being affected by tree stress in FY12F. We forecast an FFB yield of 20 tonnes/ha in FY13F versus 19 tonnes/ha in FY12F. 

- FFB production is also expected to improve on the back of oil palm trees in Indonesia entering maturity. Mature areas are forecast to increase by 2,000ha or 9% in FY13F. 

- As at end-FY11, about 56% of oil palm trees in Indonesia were one to three years’ old while another 30% of the trees were between four and six years old.

- We have imputed contributions from the acquisition of 20.2% of Pontian United Plantations Sdn Bhd in TSH’s FY13F earnings forecast. We envisage earnings enhancements of 1% to 2%.

- We understand that TSH would not have to incur additional capex in respect of Pontian’s oil palm estates.  

- Any share of the replanting cost would only be incurred in seven years’ time. According to news reports, half of Pontian’s oil palm trees are more than 15 years old. 

- Pontian has about 16,188ha of planted land and a palm oil mill with a capacity of 90 tonnes/hour.  

- Production costs per tonne are expected to remain stable in FY13F due to flat fertiliser costs and a recovery in palm oil production. Currently, the group’s production cost is RM1,300/tonne in Indonesia and RM900/tonne in Sabah.

- We understand from industry players that the implementation of the minimum wage in Malaysia is not envisaged to have a major impact. 

- This is because harvesters are already earning more than RM1,000/month after taking into account incentive payments. The minimum wage of RM800/month is supposed to take effect from 1 January 2013 onwards.

Source: AmeSecurities