TSH Resources Berhad - Estate Sales to Reduce Borrowings

Date: 27/08/2020

Source  :  KENANGA
Stock  :  TSH       Price Target  :  1.10      |      Price Call  :  BUY
        Last Price  :  1.09      |      Upside/Downside  :  +0.01 (0.92%)

TSH has proposed to dispose 90% interest each in FBand TSS which collectively holds six HGUs totalling 22,375 Ha in East Kalimantan. We are positive on the move as it should result in lower FY21E net gearing of 0.49x (vs. 0.89x previously). Valuation of c.RM47.1k/planted Ha is broadly in-line with KLK’s previous East Kalimantan transaction (2018; c.RM43.8k). Reduce F21E CNP by 21% on loss of FFB contribution. Upgrade to OUTPERFORM with an unchanged TP of RM1.10 on FY21E PBV of 0.9x (-0.5SD). At current price, TSH is traded at 0.84x PBV (c.16% discount to peers’) and we think investors would reward a lower net gearing level.

Proposed divestment. TSH announced that it has entered into a conditional share sale and purchase agreement with Taiko Plantations, an indirect wholly owned subsidiary of KLK for the disposal of 90% stake each in PT Farinda Bersaudara (FB) and PT Teguh Swakarsa Sejahtera (TSS) for a purchase consideration of USD110.1m (RM459.17m @ USD/MYR of 4.1705). FB and TSS collectively holds six rights to cultivate (Hak Guna Usaha; HGU) for a total area of 22,375 Ha in East Kalimantan, of which 10,816 Ha is planted. The HGU land also includes a 60/MT palm oil mill which supports FB’s operations. The transaction is expected to be completed by 1QCY21.

Positive move to reduce borrowings. While we believe the disposal could be earnings dilutive, we view the strategic move to reduce borrowings positively and we think investors may reward TSH with a higher valuation given more palatable net gearing level. Upon completion, FY21E net gearing is expected to be reduced to 0.49x (from a high 0.89x). Assuming 50% utilization of proceeds to reduce borrowings in FY21E (remaining in FY22E), we estimate interest cost savings of c.RM8m. Valuation-wise, the sales consideration translates into EV/planted Ha of c.RM47,140, which we believe is fair when compared to KLK’s recent purchase of East Kalimantan plantation assets in 2018 at c.RM43,789/planted representing a premium of 7% over 2 years.

Keep FY20E CNP unchanged but reduce FY21E CNP by 21% on lower FY21E FFB growth of -18.5% (vs. +3.7% previously) accounting for loss of FFB contribution from FB and TSS.

More attractive net gearing level; Upgrade to OUTPERFORM (from MP) with an unchanged TP of RM1.10 based on an unchanged FY21E PBVof 0.9x, reflecting -0.5SD. At current price, TSH is traded at 0.84x PBV (at c.16% discount to peers’ average), reflecting close to -1.0SD from mean), despite being one of the more profitable upstream planters, having recorded decent profits (vs. losses suffered by its peers) during depressed CPO price environment. Furthermore, a more palatable FY21E net gearing of 0.49x (vs. 0.89x), which is now similar to peers should also result in valuation re rating closer to the likes of FGV and IJMPLNT, both of which are loss making, but traded at Fwd. PBV of >1x.

Risks to our call include: (i) adverse dry weather impact on Indonesia’s production, and (ii) logistics disruptions (virus-led).

Source: Kenanga Research - 27 Aug 2020

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