Highlights 

TSH entered into a share sale agreement to acquire a 100% stake in Casa Logistic Sdn Bhd, which will eventually hold a 90% stake in PT Perkebunan Sentawar Membangun (PT PSM, which has obtained Ijin Lokasi for 5,084 ha of land in East Kalimantan, Indonesia).

PT PSM has also obtained the necessary licence to develop the land into oil palm plantation.

Financial Impact

No immediate impact on earnings, as it takes time to develop a greenfield plantation land.

Minor impact to balance sheet. The latest acquisition will bring TSH’s net debt and net gearing slightly higher by 1.3% to RM993.5m and 1.1x.

The latest acquisition will raise TSH’s total land bank by 5% from 98,843ha to 103,927 ha.

Pros/ Cons

• Based on its 90% stake, TSH is paying RM2,732/ha for the land.

Earnings Forecasts

Maintained.

Risks 

• Earlier-than-expected recovery in the world’s major economies, resulting in better edible oil demand and prices; and
• Weather uncertainties revisit, which would in turn result in edible oil supply distortion, hence boosting edible oil prices.

Rating

SELL

Negatives - (1) High net gearing ratio; and (2) Weak nearterm earnings outlook on low CPO price.

Positives - (1) Strong FFB growth; (2) Stable cash flow from alternative power plant; and (3) Favourable long term outlook of the oil palm business.

Valuation 

SOP-derived TP maintained at RM1.86 (see Figure 1). Maintain SELL recommendation on the stock.

Source:Hong Leong Investment Bank Research - 21 Jun 2013