Insider Asia Written by Insider Asia Friday, 24 February 2012 11:20
TSH Resources Bhd chalked up a record high profit for FY11 ended December. Net profit surged 43% to RM120.5 million on the back of a sharp jump in fresh fruit bunch (FFB) production and higher average crude palm oil (CPO) prices.
Based on the company’s planting up programme in the past few years, we expect continued double-digit FFB output growth, which would support earnings expansion for the foreseeable future. Although its shares have performed well last year — gaining 38% — valuations remain at the lower end of the sector’s average. The stock is trading at roughly 13.4 times our estimated earnings for 2012 and 11.1 times for 2013 at the current price of RM2.15. We are therefore sanguine on TSH’s prospects.
A first and final net dividend of 3.5 sen per share has been proposed, translating into a modest yield of 1.6% at the prevailing price. The entitlement date is yet to be fixed.
An emerging plantation player
We believe TSH is a solid plantation stock choice for investors with a longer-term horizon. The company is a relative newcomer to the industry. Although its first 4,750ha of oil palm plantations in Sabah was acquired back in the late 1980s, the major expansion drive only started in 2006. Since then, the company’s landbank has grown to nearly 99,400ha. All of the new acquisitions were in Indonesia. Only 30% of these have been planted to date so the full potential is in the future.
Based on the company’s planting up programme in the past few years, we expect continued double-digit FFB output growth, which would support earnings expansion for the foreseeable future. Although its shares have performed well last year — gaining 38% — valuations remain at the lower end of the sector’s average. The stock is trading at roughly 13.4 times our estimated earnings for 2012 and 11.1 times for 2013 at the current price of RM2.15. We are therefore sanguine on TSH’s prospects.
A first and final net dividend of 3.5 sen per share has been proposed, translating into a modest yield of 1.6% at the prevailing price. The entitlement date is yet to be fixed.
An emerging plantation player
We believe TSH is a solid plantation stock choice for investors with a longer-term horizon. The company is a relative newcomer to the industry. Although its first 4,750ha of oil palm plantations in Sabah was acquired back in the late 1980s, the major expansion drive only started in 2006. Since then, the company’s landbank has grown to nearly 99,400ha. All of the new acquisitions were in Indonesia. Only 30% of these have been planted to date so the full potential is in the future.
Accordingly, earnings before interest and tax (Ebit) from the plantation business increased to RM191.7 million, up 56.1% year-on-year, on the back of stronger production and higher average CPO prices.
With more areas coming into maturity, FFB output is forecast to increase by a further 18% in the current year before ticking higher again by some 28% to over 600,000 tonnes in 2013. TSH has a relatively high 46% of oil palm trees that are below the age of three while another 29% are in the steep rising yield ages of four to seven years.
We estimate net profit growth at a more modest 8% to roughly RM130 million in 2012, where the strong output growth is expected to more than offset lower CPO selling prices. Earnings are forecast to enjoy a stronger boost in 2013 — to about RM158 million — on the back of higher FFB production growth and expectations for stable CPO prices.
We assume average CPO prices at RM3,000 per tonne for the two years compared with the average of RM3,127 per tonne in 2011. CPO prices averaged at RM3,183 per tonne in January, while the benchmark futures contracts on Bursa Malaysia Derivatives are currently hovering around RM3,250 per tonne.
Valuations are still attractive relative to growth prospects
Based on our forecast, the stock is trading at around 13.5 times earnings for 2012 and 11.1 times for 2013. This compares well against the industry’s average valuations.
Large plantation stocks such as IOI Corp Bhd, Kuala Lumpur Kepong Bhd and to a lesser extent, Genting Plantations Bhd, are trading at price-earnings ratios (PER) nearer the high teens, their premiums justified by factors such as larger sizes, liquidity and track record. TSH’s valuations also compare well against mid- and smaller-sized plantation stocks like IJM Plantations Bhd, which is trading at PER around the mid-teens.
In addition, both IJM Plantations and Genting Plantations’ big growth in FFB output is expected in 2014/15. By comparison, TSH’s is more immediate, albeit from a smaller base.
Improving cash to support future expansions
Gearing was relatively high — at 79% as at end-2011 — due to the company’s recent expansion and the gestation period for oil palm. This should, however, gradually improve with the rising FFB output.
Indeed, rising cash flow from the business will support a more aggressive planting programme over the next few years. We estimate TSH will raise new planting up to some 4,000ha to 5,000ha annually, up from roughly 2,000ha to 4,000ha per year in the past three years.
A second palm oil mill in Kalimantan is slated to come onstream in 1H12, in lock step with the company’s rising FFB output. Currently, TSH operates five mills, three of which are located in Sabah where it processes FFB from its own estates and that purchased from third parties.
TSH is firmly focused on the oil palm plantation business. Aside from oil palm plantations, TSH has a 50% stake in a downstream refinery project, under a joint venture with Wilmar International. The refinery has a capacity of about 750,000 tonnes and contributed to the bulk of TSH’s associate pre-tax earnings of RM21.3 million in 2011.
Its other businesses of wood products and cocoa processing are expected to play only a marginal role. The former was loss-making in 2011, with sales affected by the sluggish demand in Europe. The cocoa processing business reported Ebit of just about RM2.1 million last year, hurt by lower demand and prices for cocoa butter.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article appeared in The Edge Financial Daily, February 24, 2012.
