TSH Resources faces downgrades after disappointing 1Q results

KENANGA Investment Bank Bhd (Kenanga Research) has cut TSH Resources Bhd’s net profit for the fiscal year ending 2023 and 2024 by 33% and 11% respectively, and reduced the plantation group’s target price by 19% to RM1.1 from RM1.35 previously.

Analyst Teh Kian Yeong in a note last week also downgraded the stock to ‘Market Perform’ from ‘Outperform’.

In its analysis, Teh cited TSH Resources’ underwhelming performance in the first quarter of fiscal year 2023 (1QFY23) as the primary reason for the downgrades.

The company’s disappointing results were attributed to significantly lower crude palm oil (CPO) prices achieved, which were approximately RM500 below the average spot prices.

Additionally, TSH Resources’ refining joint venture (JV) with Wilmar International Ltd incurred losses during the period.

Despite the divestment of two matured Sabah estates in March 2022, TSH Resources managed to maintain flat fresh fruit bunch (FFB) production.

However, the lower CPO prices had a substantial impact on the company’s earnings.

Teh noted that the 1QFY23 net profit of RM3.6 million accounted for less than 3% of both their full-year forecast and the consensus estimate.

The spot CPO prices during the quarter were even higher than what TSH Resources realised, leading Teh to believe that the company’s forward position should unwind, enabling them to achieve prices closer to market levels in the future.

The 1QFY23 net profit also included a disposal gain of RM27.6 million from the agreed sale of land in Northeast (NE) Kalimantan.

Regarding FFB harvest, TSH Resources recorded a 0.4% quarter-on-quarter (QoQ) increase in CPO prices, reaching RM3,550 per metric tonne (MT).

However, this figure remained 26% lower year-on-year and RM500 below the spot prices for the January-March 2023 period, thereby impacting the company’s earnings negatively.

Despite a slight decline of 11% QoQ in FFB output, which was attributed to seasonal factors, TSH Resources’ production remained relatively stable.

Teh expects TSH Resources’ earnings to reach their bottom point in fiscal year 2023. He has adjusted the average CPO price forecast for the year from RM3,800 per MT to RM3,700 per MT.

This downward revision is based on factors such as supply recovery, the potential threat of El Nino in the second half of fiscal year 2023, and the recovery of demand, which was affected during the Covid-19 pandemic years.

Teh believes that these factors could provide some support to CPO prices in the future.

Additionally, while rising costs have tightened margins since mid-2022, Teh anticipates a potential plateauing of these costs due to softer fertiliser and fuel costs, along with higher FFB yields that may temper wage inflation.

These factors could contribute to a recovery in earnings by fiscal year 2024, it said.

TSH Resources’ long-term expansion plans, which involve planting an additional 20,000ha to 25,000ha of land, have been hindered by high borrowings prior to fiscal year 2022.

However, the company’s strong operating cashflows in fiscal year 2022, along with proceeds from the disposal of land in NE Kalimantan and the divestment of the two Sabah estates, have significantly reduced TSH Resources’ net debt.

As of March 31, 2023, the company’s net gearing stands at 7%, with a net debt of RM131 million.

In light of the revised net profit forecast, smaller market capitalisation, three-star ESG rating, and the risks associated with TSH Resources’ long-term upstream expansion plans, Teh downgraded the company’s rating to ‘Market Perform’ from ‘Outperform’

Nonetheless, he remains positive about the company’s longer-term growth prospects and the value creation potential from expanding its planted area from 40,000 hectares to 60,000-65,000ha.

The current rating of 0.6x price-to-net tangible asset (P/NTA) is considered reasonable by Teh.

The downgrades by Kenanga Research reflect the challenges faced by TSH Resources in the current market conditions.

The disappointing CPO prices in 1QFY23, coupled with losses from the refining JV, have impacted the company’s profitability.

Despite the downgrade, Kenanga Research acknowledges TSH Resources’ potential for long-term growth. The reduction in net debt, along with the planned expansion of planted areas, presents an opportunity for the company to capitalise on future market dynamics.

However, the research house emphasises the need to consider the risks associated with the expansion plans, as well as potential fluctuations in commodity prices and cost inflation.

The future outlook for TSH Resources hinges on several factors. Supply recovery and the looming possibility of El Nino could impact CPO prices in the coming months. On the other hand, recovering demand, which was stifled by the Covid-19 pandemic, is expected to provide some support to prices moving forward.

Additionally, cost stabilisation, driven by softer fertiliser and fuel costs, along with increased FFB yields, is anticipated to contribute to the company’s earnings recovery in fiscal year 2024. — TMR