TSH - Strong growth for next few years

It was among the few plantation companies where earnings held up fairly well in the first half of 2013 amid falling CPO prices.

Its earnings underscore the strength of its production output on the back of young tree profile which more than offset persistent weakness in CPO prices.

Recall that the company acquired its first land bank in Indonesia in 2006 and only started new planting in earnest in 2009. About 4000ha and 3000had of planted areas will come into maturity in 2013 and 2014 respectively – underpinning growth for the next few years from 2013.

The company is committed to acquiring more land bank and expanding its planted area.

The company still has over 68000ha of unplanted land in Indonesia and is keen to acquire more. It is also exploring opportunities in Sabah, where it currently (Sept 2013) has some 4500ha of planted oil palm.

It intends to undertake some 4000ha at least, in new planting each year going forward to maintain output growth momentum although the pace of growth will decline due to larger base effect. TSH completed about 1500ha of new planting in 1HFY2013 and expects to pick up the pace in 2HFY2013.

The successful sale of its 16% stake in Pontian United Plantation to FGV will bolster its cash flow for new planting activities as well as acquisition of more land. A comparatively high gearing – of 107% at end June 2013 – had previously kept a lid on the scope of its expansion.

The sale will net some rm196 million in proceed and rm86 million gains.

TSH’s balance sheet is further strengthened by three private placements undertaken in 2013 for a total of some 63 million new shares that raised some rm140 million.

Monies from Pontian sale and cash calls will reduce both gearing level and borrowing costs and allow the company to undertake more aggressive planting up.

Cost of production is expected to trend lower as economies of scale kick in with the rising FFB volume particularly as newly mature trees move into higher yielding brackets.

Strong growth in FFB and lower costs are expected to drive TSH’s earnings over the next two to three years from 2013 even if CPO prices remain at current (Oct 2013) levels.

Its shares are currently (Sept 2013) are trading at 24 times estimated 2013 earnings, expect valuations to narrow quickly over the next few year from 2013 on the back of earnings expansion.