May 21, 2010

TSH - TSH earnings dragged by wood, cocoa businesses

Stock Name: TSH
Company Name: TSH RESOURCES BHD
Research House: MIDF

TSH Resources Bhd
(May 20, RM1.82)
Maintain buy at RM1.80 with lower target price of RM2.30
: TSH registered an increase of 31.7% in 1Q10 revenue to RM240.5 million from RM182.6 million in 1Q09.

This was mainly contributed by higher crude palm oil (CPO) and palm kernel prices in 1Q10.

The improvement in top line figure was achieved despite lower sales volume as CPO production dropped by 11.1% to 50,353 tonnes in 1Q10 vis-''-vis 56,614 tonnes recorded in 1Q09.

In 1Q10, net profit was significantly higher by 97.4% to RM11.3 million compared to RM5.7 million for the same quarter last year.

While TSH's palm oil division registered an operational gain of RM29.5 million in 1Q10, its wood products and cocoa manufacturing businesses posted operational losses of RM1.1 million and RM5.3 million respectively.

As the bulk of the finished products from the wood products and cocoa manufacturing businesses are exported to Europe and the US, the uneven recovery among the major western economies coupled with the strengthening of the ringgit have resulted in the less-than-favourable results.

At this juncture, we are maintaining our earnings forecasts for FY10 and FY11 as we expect a turnaround in the wood and cocoa divisions just as the economies of major western countries are beginning to find their footings.

Moreover, we expect CPO prices to remain on an upward secular trend despite the intermittent volatilities, for as long as the general bullishness in the world's commodities market continues. We reiterate our mean CPO price targets of RM2,450 per tonne and RM2,650 per tonne for 2010 and 2011, respectively.

While we previously attached a slight premium to our valuation of TSH due to the expected double-digit growth in output (from its mostly young and maturing oil palm estates), however, due to the recent underperformance of its wood and cocoa businesses, we now believe a mean historical benchmark would suffice.

Hence we maintain our buy recommendation on the stock but with a revised target price of RM2.30, based on FY11 multiples of 10.8 times, which is equivalent to its 10-year, mean historical PER (price-earnings ratio). ' MIDF Research, May 20


This article appeared in The Edge Financial Daily, May 21, 2010.

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