TSH Resources – 2QFY09 : Improving Sequentially

August 7, 2009 at 2:34 am Leave a comment

· Earnings sequentially stronger, but below expectations
Annualised, TSH 6MFY09 net profits came in 23% below our estimates and 11% below consensus numbers. The Group performed well in 2Q comparing q-o-q from a profitability perspective owing to CPO prices which hit a high of RM2800 during the period. However, results were still weaker when compared y-o-y. The group also noted q-o-q improvements in their cocoa and wood business which saw revenue growth of 37% and 7% respectively. The cocoa segment turned to the black this quarter while wood products continued to turn in a loss. We note that the cocoa segment has performed below our expectation and are hence adjusting down our assumptions.

· Ekowood losses narrow
Ekowood reported a PBT loss of RM1.3m for the quarter compared to the 1QFY09 loss of RM2.2m. The group notes that the narrowing losses have been due to cost cutting exercises within the company. We think the year will continue to be difficult as their earnings rely on the recovery of housing markets in the US and EU. We maintain our expectations of an RM10m loss for the company for this year.

· Look to Indonesia for future growth
TSH, despite these trying times, continues to have bright prospects. The group has now a hectarage of 78,000ha, of which only 21,000ha is planted. Of their planted area, some 60% is still under the age of 4 years hence FFB growth for the group will drive earnings going forward. Besides that, they continue with their planting programme in Indonesia and are planting 5000ha this year and gradually more in 2010 onwards.

· Slight downgrade to earnings, Buy call maintained
We adjust our earnings downwards slightly by 5.3% for FY09 and 1.2% for FY10. We continue to like TSH for their large tract of immature and unplanted land in Indonesia. We are moving our DCF based TP to a PE based valuation methodology. Using a historical average PE of 11x (average since 2006) and pegging FY10 EPS, we derive a value of RM2.10 for the stock and hence maintain our BUY call.


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