- TSH Resources has proposed to acquire a 60% equity interest in Sg Kalabakan Estate Sdn Bhd (SKE) for RM150mil cash. TSH will also assume liabilities of not more than RM30mil.

- Including the assumption of liabilities, total purchase consideration for the 60% shareholding in SKE would come up to RM180mil. The proposed acquisition is expected to be completed by 2QFY14.

- SKE owns 26,794ha of land in Kalabakan, Sabah. Kalabakan is located on the south-west of Tawau.

- Out of the 26,794ha of land, about 2,979ha or 11% has already been planted. The balance of the plantable area is roughly 23,815ha.

- The proposed acquisition is positive as the increase in TSH’s plantation landbank would sustain its profitability in the future.

- In the short term, we do not expect any earnings enhancement as the planted area is small. In addition, we do not think SKE is profitable yet as its shareholders’ funds is only RM35,531.

- The proposed acquisition would increase TSH’s plantation landbank by 26,794ha to 135,803ha. The group’s landbank in Sabah would rise from 4,448ha to 31,242ha. Unplanted area would rise to approximately 90,835ha.

- We believe that TSH would have to finance part of the acquisition with borrowings. According to the Bursa announcement, TSH’s net gearing is expected to rise from 0.55x after the disposal of shares in Pontian United Plantation to 0.71x.

- We maintain HOLD on TSH as it is fairly valued. The group is currently trading at a FY14F PE of 22.7x. 

Source: AmeSecurities