MARKET DEVELOPMENT
TSH Sees Doubling of Profit
TSH Sees Doubling of Profit
17/11/2015 (Daily Express) - TSH Resources is upbeat on the Crude Palm Oil (CPO) front despite the lower prices and potential effects of the imminent El Nino. The confidence is based on its young trees due to attain peak production in the next three to five years.
"The next three to five years will be when we will achieve a steady income stream," Group Managing director Datuk Tan Aik Sim said.
TSH has been following a planting schedule of between 4,000ha and 5,000ha every year. Which means a steady number of trees reaching maturity each year.
Currently, the group's 54,000 planted hectares in Sabah and Kalimantan, Indonesia, have an average age of five to six years. Some 45 per cent of the palms are immature and 30 per cent, young mature.
"Our profit will probably more than double in the next two to three years, even at current CPO prices. If prices go up, it will be fantastic," said its chairman Datuk Kelvin Tan.
CPO prices at the RM2,500 level amid high stocks.
CPO traded in the RM2,000 to RM2,300 range this year, and then slid to RM1,867 in August.
Talk of a possible El Niño sent prices back up to more than RM2,400, but most analysts believe this is probably the highest the prices would go with competition from soybean oil.
The brothers are usually reluctant to predict CPO prices. They believe that in the longer term, prices will strengthen as global demand for palm oil grows.
The growing population and burgeoning middle class in countries like China and India could mean higher consumption of palm oil. "We also noticed that Indonesia's plantings have halved in recent years and this points to a structural deficit in the future," said Aik Sim.
TSH remains fairly insulated from CPO price fluctuations due to its ability to keep the cost of production low unlike rivals.
The group's cost of production last year was RM890 per tonne. The Malaysian average is RM1,200 to RM1,500 per tonne.
The group's earnings took a hit in the first half of its financial year ending Dec 31, 2015 (1HFY2015).
Net profit dropped to RM13.5 million from RM87.6 million a year ago while revenue slipped 30 per cent to RM412.2 million. The obvious culprit was a 14 per cent decline in the average CPO selling price to RM2,152 in 1HFY2015 from RM2,501 in FY2014.
The decrease in earnings was also attributed to a lower fresh fruit bunch production of 297,221 tonnes compared with 319,417 tonnes a year ago, due to a drought in Kalimantan last year.
Core operating profit halved to RM57.8 million, after booking RM34 million on unrealised foreign exchange losses. In FY2014, net profit stood at RM125.5 million on revenue of RM1.08 billion, compared with a net profit of RM151 million on revenue of RM1.02 billion in FY2013.
While 2015 is shaping up to be worse than expected for TSH, Kelvin says out that the group still made a respectable profit in 1HFY2015 and it will remain focused on growth.
"We still have land to continue planting to maintain growth even for the next 10 years. Over the next few years, as we gain a stronger and better financial position, we may increase our yearly planting target," he says.
TSH still has some 65,000ha of greenfield land available for planting – the product of an aggressive acquisition trail over the last few years.
This year, it made two more acquisitions – 9,000ha in Kalimantan and 5,000ha in Sabah.
"For the next 5 to 10 years, we want to focus on Sabah and Indonesia," says Kelvin.
Land scarcity is becoming a reality, and although TSH continues to look, Kelvin admits that good land is difficult to come by.
But TSH can afford to slow down its buying spree. At its current rate of planting, its landbank can last another 13 years, time enough to clean up its balance sheet.
As a fairly young plantation company – 18 years – TSH has had to gear up to finance its acquisitions. As at June 2015, it had RM1.17 billion in net debt, translating into a gearing ratio of 0.94 times, a level it is comfortable with as long as it does not exceed a ratio of one.
"We try to strike a balance between gearing and growth. As income increases in the next few years, we will pare down our debt to about 0.6 times gearing," says Kelvin.
For investors, it is of interest that TSH intends to maintain dividends at about 30 per cent of net profit (FY2013: 30 per cent; FY2014: 27 per cent).
When TSH's oil palms reach their prime and production peaks, its dividend would grow in tandem, but investors have to be patient for a while.
TSH's shares were trading sideways for most of the year – between RM2.20 and RM2.30 – but plunged 21 per cent in end-August to RM1.75 as a selldown swept across global equity markets.
"The next three to five years will be when we will achieve a steady income stream," Group Managing director Datuk Tan Aik Sim said.
TSH has been following a planting schedule of between 4,000ha and 5,000ha every year. Which means a steady number of trees reaching maturity each year.
Currently, the group's 54,000 planted hectares in Sabah and Kalimantan, Indonesia, have an average age of five to six years. Some 45 per cent of the palms are immature and 30 per cent, young mature.
"Our profit will probably more than double in the next two to three years, even at current CPO prices. If prices go up, it will be fantastic," said its chairman Datuk Kelvin Tan.
CPO prices at the RM2,500 level amid high stocks.
CPO traded in the RM2,000 to RM2,300 range this year, and then slid to RM1,867 in August.
Talk of a possible El Niño sent prices back up to more than RM2,400, but most analysts believe this is probably the highest the prices would go with competition from soybean oil.
The brothers are usually reluctant to predict CPO prices. They believe that in the longer term, prices will strengthen as global demand for palm oil grows.
The growing population and burgeoning middle class in countries like China and India could mean higher consumption of palm oil. "We also noticed that Indonesia's plantings have halved in recent years and this points to a structural deficit in the future," said Aik Sim.
TSH remains fairly insulated from CPO price fluctuations due to its ability to keep the cost of production low unlike rivals.
The group's cost of production last year was RM890 per tonne. The Malaysian average is RM1,200 to RM1,500 per tonne.
The group's earnings took a hit in the first half of its financial year ending Dec 31, 2015 (1HFY2015).
Net profit dropped to RM13.5 million from RM87.6 million a year ago while revenue slipped 30 per cent to RM412.2 million. The obvious culprit was a 14 per cent decline in the average CPO selling price to RM2,152 in 1HFY2015 from RM2,501 in FY2014.
The decrease in earnings was also attributed to a lower fresh fruit bunch production of 297,221 tonnes compared with 319,417 tonnes a year ago, due to a drought in Kalimantan last year.
Core operating profit halved to RM57.8 million, after booking RM34 million on unrealised foreign exchange losses. In FY2014, net profit stood at RM125.5 million on revenue of RM1.08 billion, compared with a net profit of RM151 million on revenue of RM1.02 billion in FY2013.
While 2015 is shaping up to be worse than expected for TSH, Kelvin says out that the group still made a respectable profit in 1HFY2015 and it will remain focused on growth.
"We still have land to continue planting to maintain growth even for the next 10 years. Over the next few years, as we gain a stronger and better financial position, we may increase our yearly planting target," he says.
TSH still has some 65,000ha of greenfield land available for planting – the product of an aggressive acquisition trail over the last few years.
This year, it made two more acquisitions – 9,000ha in Kalimantan and 5,000ha in Sabah.
"For the next 5 to 10 years, we want to focus on Sabah and Indonesia," says Kelvin.
Land scarcity is becoming a reality, and although TSH continues to look, Kelvin admits that good land is difficult to come by.
But TSH can afford to slow down its buying spree. At its current rate of planting, its landbank can last another 13 years, time enough to clean up its balance sheet.
As a fairly young plantation company – 18 years – TSH has had to gear up to finance its acquisitions. As at June 2015, it had RM1.17 billion in net debt, translating into a gearing ratio of 0.94 times, a level it is comfortable with as long as it does not exceed a ratio of one.
"We try to strike a balance between gearing and growth. As income increases in the next few years, we will pare down our debt to about 0.6 times gearing," says Kelvin.
For investors, it is of interest that TSH intends to maintain dividends at about 30 per cent of net profit (FY2013: 30 per cent; FY2014: 27 per cent).
When TSH's oil palms reach their prime and production peaks, its dividend would grow in tandem, but investors have to be patient for a while.
TSH's shares were trading sideways for most of the year – between RM2.20 and RM2.30 – but plunged 21 per cent in end-August to RM1.75 as a selldown swept across global equity markets.