• TSH announced yesterday that its wholly-owned subsidiary TSH Global Plantation Pte. Ltd. (“TGP”) and TSH Oversea Pte. Ltd. (“TO”) have entered into two Conditional Shares Sale and Purchase Agreement (“CSPA” and individually “CSPA”) with KLK’s wholly-owned subsidiary, Taiko Plantations Pte. Ltd (TPPL) to dispose 90% equity interest in PT Farida Bersaudara (“FDB”) and PT Teguh Swakarsa Sejahtera (“TSS”) for a total cash consideration of c. USD12.364m.

• We are positive on this deal as the proceed from the deals will be used to pay down borrowing, hence, resulting an earnings enhancement in FY21 after factoring in the realize gain on disposal, interest savings and loss contribution from the estates.

• Maintain BUY with unchanged earnings forecast and TP of RM1.23.

Details of proposal

According to the announcement, TSH’s subsidiaries TSH Global Plantation Pte. Ltd. (“TGP”) and TSH Oversea Pte. Ltd. (“TO”), have entered into 2 conditional agreement (CSSPA) with KLK’s wholly-owned subsidiary, Taiko Plantations Pte. Ltd to dispose free from all encumbrances, 1) 65.7k ordinary shares of total nominal value Rp.65,700,000/each or equivalent to 90% equity interest in in FDB; and 2) 139.5m ordinary shares of nominal value Rp.139,500,000/each or equivalent to 90% equity interest in TSS, for total consideration of USD12.364m, subject to adjustment - details in Appendix. The proposed acquisition is expected to be completed in the 1st quarter of 2021.

Rationale

The Group is expected to realise a cash proceeds of approx. RM517.62m from the proposed disposal and repayment of loans to TSH Group, of which RM513.12m will be used mainly to pare down its bank borrowing with balance will be used to defray taxation and estimated expenses relating to the proposed disposal. The improved gearing will provide greater capacity to raise additional funding to accelerate the development of its remaining unplanted plantation lands (approx. about 57% of total landbank) and will contribute positively towards the TSH Group’s financial performance.

Financial effects

The proposed acquisition is expected to have positive impact on TSH’s financial performance as the Group is expected to realize a net gain on disposal of RM38.76m with earnings enhancement after factoring in the gain. Based on Proforma profit attributable to owners of TSH Group as at 31 Dec 2019, the Group EPS will increase from 3.2sen to 6.0sen while net gearing will reduce from 0.83 times to 0.48 times.

Maintain call

Maintain BUY with new TP of RM1.23 (RM1.02 previously) based on P/B of 1.1x and FY21 BV/share of RM1.12. We expect performance of Palm Product segment in the coming quarter to sustain given that current palm product prices are trading above 2019 prices with production growth expected coming from Indonesian estates - as more planted areas come into maturity and harvesting due to better age profile (Indonesia: 9.5 years; Malaysian: 14 years; and Group: 10.2 years).

At closing, KLK’s shall pay the Consideration less the retention amounts:

1) The withholding tax on the Proposed Disposals to be paid to the Indonesian Tac Office, and

2) part of the purchase consideration relating to areas for which HGU titles are still pending issuance.

In addition, KLK shall also pay TSH Group approximately RM536.73m being the outstanding loans owed by the Disposal Companies to TSH Group (subject to adjustment for the variances in the Group Loans as at 31 March 2020 and set out in accounts at closing).

Source: BIMB Securities Research - 27 Aug 2020