Price: MYR2.32
12-Month Target Price: MYR2.70
Market Value - Total: MYR958.7 mln
Analyst: Siti Rudziah Salikin
Summary: TSH Resources (TSH) is an integrated plantation group, with oil palm plantations and palm oil mills in Sabah and Indonesia, a refinery and bio-energy power plants. The group is also involved in the manufacturing of engineered hardwood flooring and cocoa products.
Results Review & Earnings Outlook
TSH’s 2Q08 net profit rose 28% YoY to MYR29.5 mln, bringing YTD profit to MYR60.3 mln (up 47.9% YoY). The performance was slightly better than our expectations due to strong contribution from 50%- owned TSH-Wilmar Sdn Bhd (TWSB).The results for the other divisions were within expectations
The palm and bio-integration operations benefited from the strong palm oil prices and contributed MYR55.4 mln, up 48.2% YoY, to group operating profit for 1H08. TSH’s share of TWSB’s profit amounted to MYR20.7mln (vs. our full-year forecast of MYR25 mln). We had originally expected higher palm oil price to put downward pressure on margins for TWSB’s refining business
As expected, weaker demand and higher raw material prices resulted in lower revenue and margins for the wood division. Operating profit for 1H dropped 36.4% YoY to MYR6.8 mln. Profit for cocoa manufacturing rose 86.5% YoY to MYR12 mln due to improved throughput and higher cocoa butter ratio
We raise our projected net profit for 2008 by 9.6% and for 2009 by 8% after factoring in higher profit from TWSB. We project a better 2H as seasonally stronger crop production should make up for the lower palm oil prices. We also expect higher margins for TWSB due to lower feedstock prices. We remain cautious on the prospect of the wood flooring business due to the uncertain outlook of the property markets in Europe and the U.S., its main export markets
Recommendation & Investment Risks
We maintain our Hold recommendation with an unchanged 12-month target price of MYR2.70
We prefer to be less aggressive in our recommendation due to execution risks with the new plantings in Indonesia. TSH owns over 80,000 ha of plantation land, of which 20,000 ha are planted with oil palm. Except for 4,500 ha of planted estates in Sabah, the remaining land is located in Indonesia, where execution risks are higher. A less promising earnings outlook for the wood flooring division will also place additional bearing on its valuation, in our opinion
The target price is derived using a PER-based sum-of-parts valuation and includes our projected dividend of 7.5 sen for 2008. We, however, have reduced our assigned PER for the palm and bio-integration operations to 9x (from 10x) to be in line with the recent fall in valuations of plantation stocks. We accord a PER of between 6x and 7x for the wood-based and cocoa manufacturing divisions, in line with the singledigit forward PER for timber and food-based stocks
Risks to our recommendation and target price include a continued downtrend in CPO price and slow progress of its new plantings. A significant economic downturn in Europe and the U.S. would also hurt prospects for its flooring business.
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