TSH Resources - Boost in refining profits BUY

- Maintain BUY on TSH Resources Bhd, with an unchanged fair value of RM2.40/share. Our fair value is based on an FY13F PE of 18x.

- TSH’s FY12 results exceeded our expectations and consensus estimates due to a strong 4QFY12. The group recorded a net profit of RM30.6mil in 4QFY12, which was 87.3% higher than 3QFY12’s RM16.3mil.

- Robust palm oil production helped compensate for weaker CPO prices in 4QFY12. Higher share of profits in the jointly-controlled entity, i.e. TSH-Wilmar refinery, also provided TSH’s profitability with a boost.

- Share of profits in the jointly-controlled entity rose from RM0.3mil in 3QFY12 to RM10.8mil in 4QFY12. We believe that the improvement in refining margins was due to a decline in the cost of feedstock. We reckon that demand had also improved in 4QFY12 as selling prices fell.

- TSH’s FFB production was 36.8% QoQ higher in 4QFY12. Average CPO price realised was RM2,107/tonne in 4QFY12, 21.8% lower than the price of RM2,693/tonne achieved in 3QFY12.

- Like the other plantation companies, the group’s FFB production peaked in November and December 2012 instead of 3QFY12.

- For FY12, the group’s FFB output growth was 6.3% against 35.6% in FY11. Indonesia is estimated to account for 72% of TSH’s FFB production in FY12.

- TSH’s CPO inventory increased to 19,570 tonnes as at endFY12 from 5,921 tonnes as at end-FY11.

- We believe that the increase in inventory was due to the higher output in 4QFY12. In any case, the holding back of inventory would enable the group to sell CPO at prices which are higher now compared to last year’s.

- EBIT of the wood-based division shrank from RM5.2mil in FY11 to RM1.7mil in FY12 while the cocoa division swung from a small profit of RM2.1mil in FY11 to a loss of RM1.6mil in FY12.

- Net gearing increased from 79.2% as at end-FY11 to 104% as at end-FY12 as the group borrowed to acquire 20% of Pontian United Plantations Bhd.

Source: AmeSecurities