Higher CPO prices a boon to TSH earnings

PETALING JAYA: TSH Resources Bhd’s earnings are expected to come in stronger on the back of higher fresh fruit bunches (FFB) production and recovery in crude palm oil (CPO) prices over the next two years.

AllianceDBS Research said it expected higher CPO prices this year on better supply and demand dynamics, adding that it is upgrading its 2019 to 2020 earnings by 2% and 8% respectively to account for TSH’S higher FFB growth numbers.

“TSH is our top pick in the plantation sector due to its long-term prospects arising from its young tree profile, as well as its relatively low enterprise value per ha of US$16,900 (RM68,785), one of the lowest in our coverage.”

The research house also said the incremental demand coming from the B20 mandate from Indonesia could raise palm oil demand by almost two million tonnes, as the Indonesian government is serious about implementing the measure to stimulate palm oil demand.

“Indonesia has mentioned about plans to implement the B30 mandate. Furthermore, we expect Indonesia’s CPO production growth to decrease as we expect production levels to normalise from the bumper harvest last year.

“We expect the lower production growth in Indonesia to offer some support to CPO prices.”

AllianceDBS Research also noted that India’s import duty rose to 44% for CPO and 54% for refined palm oil in March 2018.

“This was the highest ever import duties recorded since 2007. Import duties for palm oil at that time were the highest among other edible oils. This was negative for global palm oil demand as India is the largest importer of CPO. We believe that India’s import duty structure is one of the contributors towards lower palm oil prices in 2018 as exporters have to lower palm oil prices sold to the Indian market to remain competitive.”

However, the research house said India’s import duty has since been revised from 44% to 40% for CPO and 54% to 45% for RPO, effective from January 2019.

“We believe that the revision of the tax structure in India is one of the contributing factors towards the year-to-date recovery in CPO prices.”

Being a pure upstream planter, AllianceDBS Research said TSH’s profitability is sensitive to CPO prices and currency fluctuations due its high operating leverage.

“Due to its aggressive planting over the past few years, TSH is expected to see a steady climb in mature hectarage, which currently makes up 69% of 42,000ha of total planted area. We expect the mature planted area to grow by 19% to 34,600ha from 2017 to 2020 and total planted area to grow by 11% to 46,900ha.

“These will support its internal FFB output, which we expect to grow 16%, 11% and 7% respectively from 2018 to 2020 respectively, or at a compounded annual growth rate of 11% over 2018 to 2020.”