Highlights 

Proposed private placement of 20.86m shares, representing 2.5% of the paid-up share capital to third party institutional investors to be identified later.

The issue price of the placement shares will be determined at a later date.

Assuming an issue price of RM2.29 (at 5% to the 5-day VWAP of RM2.41), the proposed private placement will raise approximately RM47.6m, which will be utilized for additional working capital requirements and/or for potential investment projects.

Expected to be completed within 3Q13.

Financial Impact

Minimal dilution… Based on our estimates, the proposed exercise will dilute TSH’s 2014 EPS by 0.5%, assuming: (1) Net interest cost savings of 4.5%; and (2) Placement shares to be issued at RM2.29.

Reduces net gearing ratio to <1x… Net debt and net gearing ratio will be reduced from RM922.6m and 1.04x (as at 31 Dec 2012) to RM874.9m and 0.94x.

Pros/Cons

Neutral, as it reduces the company’s high gearing ratio (which was our main concern) but with marginal EPS dilution.

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 - 9 Jul 2013