• TSH Resources has proposed to sell 2,933ha of oil palm estates in Kinabatangan, Sabah to Sharikat Keratong Sdn Bhd for RM228.0mil. TSH will also be selling a 40-tonne-per-hour palm oil mill to the same buyer for RM20.0mil.

• In total, TSH will be receiving RM248.0mil from Sharikat Keratong Sdn Bhd. Sharikat Keratong Sdn Bhd is majority-owned by JC Chang Holdings Sdn Bhd. The proposed disposal is expected to be completed in 1QFY22.

• We are neutral on the proposed disposal. Although TSH’s interest expense would fall, this would be offset by the loss of FFB resulting from the proposed disposal. TSH’s interest expense may decline by RM3mil to RM4mil per year due to the repayment of borrowings over two years.

• We believe that the selling price is fair as it translates into RM77,736/ha. This is higher than the RM60,480/ha, which IOI Corporation is paying for NPC Resources’ oil palm estates in Sabah.

• TSH will be recording a net gain of RM104.3mil on the disposal of the 2,933ha of planted areas in Sabah. Out of the proceeds of RM248.0mil, TSH will be using RM231.5mil to repay borrowings. The balance RM16.5mil will be used to pay for expenses related to the proposed disposal.

• We estimate that the repayment of borrowings of RM231.5mil would reduce TSH’s net gearing to 60% eventually. TSH would be repaying the borrowings over a period of two years.

• The loss of FFB due to the proposed disposal is about 50,388 tonnes based on FY20’s production. This was 5% of TSH’s FY20 FFB production. We estimate that TSH’s FFB output would fall by 2% in FY22F in contrast to our current forecast of a 2.5% increase.

• TSH’s proposed disposal comes after the recent termination of its sale of 10,816ha of oil palm estates in East Kalimantan.

• We maintain SELL on TSH Resources. Our fair value of RM1.24/share is under review.

Source: AmInvest Research - 7 Jul 2021