KUALA LUMPUR (Feb 15): Hong Leong Investment Bank (HLIB) Research has maintained its "buy" rating on TSH Resources Bhd at RM1.07 and cut its sum-of-parts derived target price (TP) to RM1.35 (from RM1.38) on updated valuation parameter of its 21.9%-owned listed associate, Innoprise Plantations.
In a note today, the research house said excluding land sale (which has yet to be concluded and still undergoing due diligence process), it expects TSH’s fresh fruit bunches (FFB) output growth trajectory to improve from FY21 onwards (7-11% based on management’s guidance, with an estimated circa 2,000 ha of land bank to be graduated into mature bracket in FY21), underpinned by young age profile at its Indonesia operations.
The research house highlighted that back in August 2020, TSH entered into conditional sale and purchase agreements to dispose of 22,975 ha of plantation land (of which 10,816 ha has already been planted with oil palm) for about RM517 million, and the disposal is still undergoing due diligence process.
According to HLIB’s Chye Wen Fei, the disposal, once completed, will result in TSH’s total planted area and FFB output reducing by around 25% and 20% respectively.
In terms of financial impact, earnings loss from the disposal will be partly mitigated by finance cost savings, while reducing TSH’s net gearing status to 0.48 times from 0.78 times (as at Sept 30, 2020).
Chye said HLIB has lowered its FY20 core net profit forecast for TSH by 2.8% mainly to reflect the actual FFB output registered.
Notably, TSH clocked in FFB output growth of 1.4% in FY20, as replanting activities in Malaysia operations (-0.7%) and lagged impact from drought were more than mitigated by an increase in harvesting area in Indonesia (which has in turn resulted in FFB output in Indonesia operations increasing by 2.3%).
On the other hand, Chye also noted that the weak demand sentiment for cocoa products (due to Covid-19, which has hampered demand for cocoa butter, which in turn is widely used in chocolates and skincare products) will likely be protracted into the next few months, as demand for chocolates remains slow (evident by high cocoa bean inventory in Ivory Coast, the world’s leading cocoa-producing nation).
Nonetheless, the research house said TSH remains as one of its preferred pick within the sector, supported by its high earnings sensitivity to crude palm oil price swing (with earnings sensitivity of RM10 million profit before tax per annum for every RM100/mt change in crude palm […]