(March 24, 60.5 sen)
Maintain buy with a lower target price (TP) of RM1.10: We believe the Covid-19 pandemic has disrupted the palm oil supply chain globally as most affected countries have put travel and movement restrictions to curb the virus. We believe demand for crude palm oil (CPO) is relatively inelastic and expect a rebound in CPO exports when the supply chain disruption dissipates and movement restrictions are lifted.
TSH Resources Bhd’s share price has fallen more than 50% from its peak since the onset of Covid-19 outbreak and oil price crash. We believe the stock is oversold at 0.6 times book. TSH’s share price is 28% below its 2019 low of 87 sen, although CPO prices are still higher compared to the 2019 low. Our “buy” call is maintained with a lower TP of RM1.10.
We expect a lower sales growth for TSH due to trade restrictions imposed due to Covid-19. However, we believe low production yields caused by trees experiencing a resting period after two years of high production yields, coupled with the haze and El-Nino phenomenon in late-third quarter ended Sept 30, 2019 (3QFY19), would help mitigate the fall in exports due to Covid-19.
On the restricted movement order, the National Security Council has issued a notice that the plantation sector is considered an essential service and will continue operating without disruptions. Hence, TSH’s Sabah estates can operate normally. Channel checks with the management also showed no restrictions concerning the company’s operations in Kalimantan, Indonesia as almost 90% of its estates are in Kalimantan.
Unlike oil, it is not possible for plantation players to harvest their desired amounts of CPO as fresh fruit bunch (FFB) supply is finite and oil palm trees require a long gestation period to produce. Hence, we expect a V-shaped recovery for palm oil prices when the virus dissipates as supply is expected to remain constant while demand increases and the supply chain normalises.
We believe a recovery in oil prices or a dissipation of Covid-19 would boost CPO demand, resulting in higher prices.
TSH has always maintained an FFB yield per hectare way above the market average. Its pure upstream exposure also means the firm’s profit will grow exponentially with higher CPO prices. We believe plunging CPO prices are only temporary as most countries need to stock up exponentially when the virus dissipates.
We do not foresee production yields picking up significantly in the next six months — this would be a mitigating factor, keeping palm oil prices afloat at the current levels.
TSH’s current share price is also approaching its lowest point in almost 10 years; its current share price of 63 sen is 28% below its 2019 low of 87 sen. — AllianceDBS Research, March 24