• TSH Resources has proposed to sell two oil palm estates in East Kalimantan for RM517.6mil (including assumption of loans by KL Kepong) to KL Kepong (KLK).

• The two oil palm estates in East Kalimantan have planted areas of 10,816ha. The balance of land that is plantable is about 6,794ha. Total landbank (based on HGU titles) amounts to 22,375ha. One of the oil palm estates has a palm oil mill. We do not know the capacity of the palm oil mill.

• The oil palm trees in the two oil palm estates in East Kalimantan were planted between 2007 and 2016. Total FFB production produced by the two oil palm estates were 231,255 tonnes in FY19.

• The two oil palm estates were just barely profitable in 1HFY20. Hence, we do not expect earnings contribution to KLK to be significant in the near term. KLK’s planted areas of oil palm stood at 224,416ha as at end-September 2019.

• Based on the planted areas of 10,816ha and purchase consideration of RM517.6mil, we estimate that KLK is paying about RM47,857 per hectare for TSH’s oil palm estates in East Kalimantan. We believe that the effective cost per hectare is lower as KLK would be getting a palm oil mill and there is plantable land left.

• In April 2020, KLK paid about RM40,355/ha (ignoring the value of a palm oil mill) for 14,106ha of oil palm estates in South Sumatra from Perak State Agricultural Development Corporation.

• TSH would be recording a one-off gain on disposal of RM38.8mil in FY21F as the disposal is expected to be completed in 1QFY21.

• TSH would be using the disposal proceeds of RM517.6mil to repay RM513.1mil of its borrowings. This should help reduce the group’s net gearing, which stood at 83.4% as at end-June 2020.

• We maintain BUY on TSH Resources with a fair value of RM1.21/share

Source: AmInvest Research - 27 Aug 2020