TSH to see improvement with better seasonal yields but full-year setbacks remain
KUCHING: TSH Resources Bhd ( TSH) is expected to see quarterly improvements with better seasonal yields but analysts noted that setbacks remain and this could impact its full-year earnings.
For the first quarter of 2018 (1Q18), TSH core net profit (CNP) came in at RM4.8 million which the research arm of Kenanga Investment Bank Bhd ( Kenanga Research) said, “fell far short of expectations”.
It noted that TSH’ 1Q18 made up only four per cent of consensus’ RM117.8 million and its RM106.6 million forecast.
“With fresh fruit bunches ( FFB) production of 181,200 metric tonnes ( MT) coming in within our expectations at 23 per cent, we think the abysmal performance was due to the drop in CPO prices (down 22 per cent to RM2,316 per MT) leading to narrower margins, and sharply higher depreciation charge (up 73 per cent to RM21.3 million).
“The increase in depreciation was due to the accounting change in MFRS 116 and 141 where most of TSH’s Biological Assets were restated into Property, Plant & Equipment (which increased by 1.4-times to RM1.97 billion) and therefore subjected to straightline depreciation charge,” the research team explained.
On a year- on-year ( y- o-y) basis, Kenanga Research said TSH saw a drastic drop in CNP which plunged 83 per cent as revenue declined 22 per cent due to lower CPO prices (down 22 per cent), compounded by higher depreciation as mentioned.
“We also note higher tax charges (up 17 per cent) for the quarter, which we expect should normalise going forward,” it added.
Production-wise, it noted that TSH’s operations in Sabah and Indonesia saw FFB volume improvement of 10 per cent to 29,300 metric tonnes and 24 per cent to 151,700 MT, respectively.
On a quarterly basis, it noted that TSH’ CNP fell 75 per cent on lower CPO prices (down 12 per cent) and higher depreciation charge (up 44 per cent), which could not be offset by production improvement (up seven per cent).
As a result, the research team said, TSH’s earnings before interest and tax ( EBIT) margin fell to 11.2 per cent from 19.6 per cent.
Overall, Kenanga Research said TSH expected production to continue improving in the current year on higher maturities.
“We gather that circa eight per cent of its Indonesian planted area are maturing this year. Although FFB production would increase, the low startup yields will still lead to high unit costs,” it added.
While it maintained its aboveaverage FFB growth assumption of 11 to 14 per cent (versus a sector average of eight to eight per cent), it believed that the significant earnings setback seen in 1Q18 would impact full-year earnings.
Nevertheless, it said, “We expect subsequent quarters to see improvement with better seasonal yields to reduce unit cost and tax rates to normalise.”
Kenanga Research cut its FY18 to FY19 estimated CNP by 39 and 25 per cent to RM65.3 million and RM82.4 million as it increased its depreciation estimate by 30 per cent to RM85.3 million to RM86.4 million.