Posted on 17 Apr 2012
TSH Resources Bhd's fresh fruit bunch (FFB) production growth was spectacular last year, surging by more than 40% year-on-year, with its young Indonesian estates being the key growth driver.
Its management is looking to quicken the pace of new planting over the next few years and also shed light on why the company is further expanding in Kalimantan.
The plantation company's planted area was 30,521ha.
TSH planted on 2,584ha in 2011, which was slower than the aggressive 31,000ha to 52,000ha it covered annually between 2006 and 2009.
Planting has been slow over the past two years as the company endeavoured to keep its net gearing, which was calculated based on total equity instead of shareholders' equity, below 0.8 times to maintain its AA- credit rating from MARC.
With this ratio now having trended lower to 0.71 times, the company is looking to plant 4,000ha of oil palms and 1,000ha of rubber annually, which translates into a 10% to 13% growth in oil palm planted areas over the next three years.
TSH continues to have one of the best tree age profiles, with 75.0% of its trees below peak. Of the total area planted, 47.5% has immature trees, which is the highest in our Malaysian plantation coverage.
Indonesia represented only 42.2% of the company's planted area at the turn of the millennium but this has risen to 85.5%.
The company will continue to enlarge its 94,003ha landbank in Indonesia, of which only 27.8% is planted.
Indonesia was the driver last year, with FFB production surging 59.4% compared with an overall FFB production growth of 43.2%.
Indonesia will continue to be TSH's key growth engine given its young tree profile while Sabah should see declining production.
Management forecasts the firm's FFB production will grow by 21.4% in 2012 while we expect a weaker but still commendable growth of 18.2%.
We gather from management that as the heavy rainfall during the first two months of the year had affected harvesting, first quarter production should thus be relatively weak, although it may bounce back in the second quarter.
TSH continues to be a buy as it has one of the youngest tree age profiles and strongest production growth among Malaysian companies in our plantation universe.
There may be further upside to our fair value as we look to revise our calendar years 2012 and 2013 average crude palm oil price assumptions from the current RM3,000 and RM3,100 per tonne respectively.
Hiap Teck's domestic steel pipe sales remained weak as water-related projects have yet to get off the ground in a major way.
While large scale public civil engineering projects will result in demand for smaller-diameter pipes, demand will only come during the later stages of the implementation of the projects.
Reflecting the weak outlook of the domestic market, our forecasts assume Hiap Teck's domestic steel pipe sales to only grow 1% to 3% per annum in financial years ending July 31, 2012 till 2013 (FY12-13).
Hiap Teck's export sales are slowly picking up, partially thanks to its maiden sales of American Petroleum Institute (API)-certified steel pipes to the United States.
As at end-Mar 2012, Hiap Teck had already sent out five shipments of about 3,000 tonnes each of API pipes to the United States.
The first phase of Hiap Teck's blast furnace project is on track for completion by September 2013.
Currently, the RM754mil project, boasting a capacity of 700,000 tones of steel slabs per annum, is 10% to 12% completed.
Hiap Teck's signing of the iron ore mining concession with the Terengganu state government is still pending.
We understand that the iron ore mine will be divided into four blocks and one block each will be awarded to Hiap Teck and Perwaja respectively.
We are cutting our FY12-14 net profit forecasts by 12% to 24% largely to reflect higher input costs.
The steel company's risks include a steep rise in global steel consumption that will boost steel prices and a significant decline in input costs.
Despite decent sales volume, we believe margins and earnings of Malaysian steel producers will continue to come under pressure due to weak pricing power and relatively high input costs.
The global outlook of the steel sector for the remainder of 2012 remains unfavourable due to the soft demand in China and developed countries.
We have maintained a fair value of RM0.64 for Hiap Teck.
This is based on 0.5 times its book value of RM1.28, at a discount to its 5-year historical average of 0.65 times, to reflect the weak earnings prospects amid the current downcycle of the steel sector.
