RHB Research said TSH has 90% exposure to Indonesia and it expects FY21 should be a better year due to improved output and higher crude palm oil (CPO) prices. KUALA LUMPUR: RHB Research has a Buy call on plantation company TSH Resources Bhd with RM1.25, which is a 16% upside, while it increased the FY20-21F earnings by 1%-2%, after imputing new fresh fruit bunches (FFB) revisions, capex and in-house forex assumptions. It said on Wednesday the RM1.25 was based on 16 times FY21F P/E for its upstream division, and 0.5 times price-to-book value (P/BV) for its other divisions. “Our TP implies an enterprise value/ha of US$12,000, in line with its peer range of US$10,000 to US$15,000/ha. We believe valuations remain undemanding, as TSH is trading at 17 times P/E (within the small-cap peer range of 11 to 18 times), while FFB growth and earnings prospects remain solid. RHB Research said TSH has 90% exposure to Indonesia and it expects FY21 should be a better year due to improved output and higher crude palm oil (CPO) prices. “We continue to like TSH, as valuations remain attractive – the stock is trading at -one standard deviation from its five-year forward P/E, while prospects for production growth is decent, ” it said. FY20 FFB production increased marginally by 1.4% YoY, while TSH’s Indonesian estates recorded 1% growth YoY. Currently, the weather is favourable for operations, despite the increased rainfall – as a minimal portion of its estates are on low-lying areas, which translates to rarer flooding events. TSH management reiterated its FY21F FFB growth of 7%-11% YoY (inclusive of the land to be sold to Kuala Lumpur Kepong, the land accounted for 26% of FY19 production) on decent weather and larger areas coming into maturity (c. 2,000 ha). RHB Research tweaked its FY20 estimates accordingly, to 1.4% YoY growth (from 0.5% YoY). It also highlighted that TSH’s FFB output is likely to decline by 11%-16% YoY if the land sale to KLK is completed in end-1Q21. On the Movement Control Order 2.0, TSH will be able to operate at 100% labour capacity (vs 50% in the first MCO), so fertilising and maintenance will continue as scheduled. Although the Sabah Government has yet to lift restrictions on the hiring of foreign labour, TSH reassured that its labour situation is manageable and no Covid-19 cases have been reported at current juncture. TSH has contracted the required fertiliser for application this year at a cost similar to FY20’s. As such, management expects unit production cost to stay flat in FY21 at RM1,420/tonne (ex-mill) as the uplift in production yields will offset the anticipated increase in labour cost – in line with its forecast of RM1,440/tonne. RHB Research also said TSH has sold 80%-90% of its production one to two months forward. While it may not enjoy the immediate benefits of an uptrend in CPO prices, the company will be able to hedge its position when prices do take a downturn. “Management believes prices will continue to be elevated, highlighting concerns over the cutback on fertiliser application by the smallholders when prices plunged in 1H20 – which could result in lower-than-expected output, and be supportive of higher CPO prices, ” it said.
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