HDBSVR: TSH Resources, Maintain Buy

TSH Resources: 1Q08 results better than forecast

-Story: TSH Resources 1QFY08 results were slightly better than expected on an annualised basis. The company booked revenues of RM284.1m (+68.3% y-o-y) and net profit of RM34.3m (+73.9% y-o-y) – respectively representing 26.3% and 28.7% of our full year forecast. The jump was attributable to higher palm oil prices (+63.1% y-o-y to RM3,100/MT), yield recovery which increased own FFB production by +10.0% y-o-y, and a doubling in share of profit from palm oil refinery JV with Wilmar. The Group's wood product manufacturing revenues however declined by 2.0% y-o-y, dragging this segment's EBIT down by 6.4% y-o-y to RM4.9m. Meanwhile, cocoa-manufacturing revenues rose by 24.2% y-o-y to RM39.2m, contributing RM5.8m EBIT (+83.1% y-o-y).

-Point: We have made adjustments to take into account restatements made in the Group's annual report. Amongst others, new planting expenditure incurred on land clearing and upkeep until maturity are now capitalised under biological assets and are not amortised beginning 2007. TSH also adopted FRS 112 (investment tax allowance) and 117 (leasehold land held for own use). These and other changes resulted in fine-tuning of FY08F to FY10F earnings forecasts upwards by up to 1.7%. We have also cut the company's new planting to 2,000 hectares in FY08F as TSH made no significant new planting in 1Q08 given the small claims in one of its Kalimantan estates. The cut in new planting does not affect earnings until FY11F but our DCF valuation will be slightly lowered to RM4.10 from RM4.30 as a result.

-Relevance: With the prospect of continued y-o-y own FFB production growth over the next 3 quarters, we expect TSH to expand its share of CPO from own FFB, hence improving margins. At the current price, TSH is trading at 11.1x FY08F PE and offers 28% upside potential to our target price (implying 14.2x FY08F PE). TSH is one of the cheapest plantation stocks under our coverage. Maintain Buy.