TSH - FFB step rising trend

It reported a strong set of earnings results for the financial year ended Dec 31 2013. Net profit came in at rm153 million up from rm76.7 million in the previous year. This is in stark contrast to results for many plantation companies where earnings declined year on year due to weak selling prices for CPO.

To be sure, TSH earnings were boosted by a one off gain of rm85 million gain from the sale of its stake in Pontian to FELDA in the third quarter of 2013 which more than offset some rm63 million in foreign exchange translation losses resulted in its investment in Indonesia plantations.

But even after stripping out these factors, TSH’s results still underscore the company’s solid underlying fundamentals. Excluding the above mentioned items, pre tax profit grew by some 28% or so driven by strong 27% increase in FFB production, This is more than offset the 14% decline in average selling prices.

Expect the company to continue to do well in the current year.

Valuations are fairly in line with the sector of just over 18 times estimated earnings of rm148 million. Assuming no change in CPO price assumption of rm2600 per tonne, valuations are expected to fall to about 15 times by 2016 on the back of increasing FFB output and earnings.

Importantly, TSH still has substantial room for growth over the longer room.

FFB output remains in a steep rising trend, the fruits from expansions made in the past years prior to 2014. Expect double annual output growth for 2014 to 2016 underpinned by new areas coming into maturity as well as newly mature areas moving into higher yielding age brackets.

The weighted average age for TSH’s plantations is about eight years. This will be the primary driver for earnings growth for the foreseeable future.

TSH has substantial unplanted landbank. It currently (Feb 2014) has land totaling some 117430ha including the most proposed acquisition of about 27000ha of mostly unplanted land in Sabah. Of the total landbank, just about 40200ha have been planted leaving plenty of room for future growth.

Expect some 4000ha of new planting in the current year, primarily in its Indonesian estates. The pace of planting up is expected to pickup up from 2015 once the proposed acquisition in Sabah is completed, likely by mid 2014.

Meanwhile the average cost of production is expected to decline due to economies of scale – with fixed costs spread over rising FFB output – and higher yields as trees approach prime production ages as well as lower fertilizer costs.

A less predictable factor affecting earnings would be selling prices.