Thanks to rising demand and high selling prices for crude palm oil (CPO), the company’s earnings are likely to remain relatively robust in the near to medium term. We estimate net profit will grow at an average compounded rate of about 17% annually in 2008-2010. By comparison, the shares are currently priced at forward P/E only 8.9 times, suggesting room for further capital gains.
Solid 1Q08 earnings results
TSH’s financial results for 1QFYDec2008 reflects the upbeat outlook for the plantation business while contributions from its two other core businesses - timber and wood products as well as cocoa processing - were steady.
Turnover was up by 68.3% year-on-year (y-o-y) to RM284.1 million on the back of sharply higher contributions from the plantation arm while operating profit grew 46.5% y-o-y to RM40.8 million in 1Q08.
Plantation was the biggest contributor - sales more than doubled y-o-y while operating profit was up by some 83% over the same period. Sales and operating profit accounted for 73% and 78% of TSH’s total turnover and earnings, respectively.
The strong performance can be attributed to both higher CPO prices as well as higher throughput. Selling prices averaged at around RM3,100 per tonne in 1Q08, well above the RM1,900 per tonne average in the previous corresponding quarter. Meanwhile, the company processed about 30% more fresh fruit bunches (FFB) y-o-y - about 264,000 tonnes compared to 204,000 tonnes in 1Q07.
Contribution from its 50%-owned associate company, palm oil refinery TSH-Wilmar, also rose sharply to RM9.4 million from RM3.6 million in 1Q07. In all, net profit improved by 79.6% y-o-y to RM30.8 million in 1Q08.
FFB increases to underpin growth
We expect the company will continue to fare well in the near to medium term. Plantation will remain the primary earnings driver for the company, underpinned by strong growth in FFB production.
TSH has land bank totalling 67,841ha, of which about 29% is currently planted. It has a very young palm oil age profile - only about one-third is in the prime production ages of 7-15 years. About 62% of the palm oil trees will mature within the next three years.
Right now, the bulk of FFB processed are purchased from external parties. TSH owns four palm oil mills with a total processing capacity of 1.5 million tonnes a year. But as its own plantations mature, yields and profitability should gradually improve.
We estimate FFB output from the company’s plantations will grow at a compounded rate of about 27% annually in 2008-2011. Two new mills are on the drawing board, slated for completion in 2009-2010, to cater to rising FFB output from its newly matured landbank.
At the same time, TSH will continue to plant up in its remaining landbank, primarily in Indonesia - an estimated 2,000-2,500ha by end-2008 and beyond this, up to 10,000ha annually. If all goes to plan, its entire landbank will be fully planted by 2013.
Current CPO prices appear sustainable
CPO prices have held up fairly well in the past two months, after falling off their peak in early March. Prices averaged at around RM3,400-RM3,500 per tonne in the first four months of the year. The benchmark CPO futures contracts are trading at around RM3,600 per tonne currently.
It appears that prices at current levels are sustainable in the near term. Worldwide consumption of edible oils is still on the rise. There is also competing demand for oilseeds and commodities like corn to be used for the production of biofuel, which is supported by record high crude oil prices and government subsidies. Land is scarce and global supply is expected to remain tight.
Better off with new windfall tax
TSH should be better off with the newly-announced windfall tax, to be levied on all palm oil planters, in place of the existing cooking oil stabilisation scheme.
All of the company’s planted land in the country is located in Sabah, where the tax rate is half of that levied on planters in the peninsula. Under the new windfall tax scheme, a 7.5% tax on CPO output works out to be a lesser amount compared to that payable under the cooking oil stabilisation scheme structure.
research by insisderasia and paste from authorised publisher,theedge.
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.
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