TSH Resources - Production to resume growth in FY13F Buy

- Maintain BUY on TSH Resources Bhd, with a lower fair value of RM2.70/share. In spite of weak results in FY12F, we expect an earnings recovery in FY13F underpinned by a rebound in CPO production and stabilisation of production costs.

- TSH’s 3QFY12 results were below expectations due to weak production in Indonesia. Hence, EBIT of the palm and bio-integration only rose 4.1% QoQ to RM35.5mil in 3QFY12.  

- We reckon that the group’s FFB production rose 12% QoQ in 3QFY12 led mainly by the oil palm estates in Malaysia. We estimate that the plantation division in Malaysia recorded a 17% QoQ expansion in FFB production in 3QFY12. 

- However, FFB output of the estates in Indonesia inched up only 1.4% QoQ in 3QFY12. We believe that the oil palm trees in Indonesia are still suffering from tree stress after a robust production growth of more than 50% in FY11.

- TSH’s revenue shrank 6.6% QoQ to RM260.5mil in 3QFY12 due to lower CPO prices. However, net profit improved 11.8% QoQ in 3QFY12 on the back of an increase in other operating income. This comprised mainly gains in forward contracts.

- Comparing 9MFY12 against 9MFY11, revenue fell 10.4% YoY to RM766.8mil. However, net profit slid by a sharper 51.2% due to higher production costs and a decline in earnings of the Wilmar-TSH refinery.

- We estimate the production costs of the plantation division in Indonesia at RM1,300/tonne and in Malaysia at RM900/tonne currently. 

- Share of earnings in the Wilmar-TSH refinery declined from RM15.3mil in 9MFY11 to RM7.9mil in 9MFY12 due to competition from the refineries in Indonesia.  

- Wood products and cocoa manufacturing divisions broke even in 3QFY12. The two divisions recorded losses of less than RM1mil in total in 9MFY12 on the back of declining turnover.

- We believe that the smaller-than-expected losses of the two divisions can be attributed to restructuring efforts to minimise operating expenses.  

Source: AmeSecurities