Highlights 

TSH proposed to dispose its entire 16.2% stake in Pontian United Plantations to Felda Global Ventures (FGV) for RM195.8m (or RM140 per Pontian United share).

The proposed disposal is conditional upon FGV holding more than 50% of the voting shares of Pontian.

Recall, TSH and its joint offerors attempted to acquire the remaining stake in Pontian United for RM624.8m. The acquisition failed as TSH and its offerors only raised their stake in Pontian United from 19.7% to 27.9%.

The proposed disposal is expected to complete by 4Q13.

Financial Impact

Impact to earnings… Except for a one-off disposal gain of RM86m, the proposed disposal has minimal impact to TSH’s future earnings (in the form of loss of potential dividend from Pontian but offset but interest cost saving).

Impact to balance sheet… Net gearing will reduce from 1.04x (as at end-2012) to 0.69x, post disposal and the recently announced private placement.

Pros/Cons

Positive, as: (1) It allows TSH to unlock the value of its investment in Pontian; and (2) It reduces TSH’s net gearing.

Earnings Forecasts

Maintained, pending completion of the disposal. In any case, we deem the disposal gain of RM86m as one-off item, which will not affect our core earnings forecasts.

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- 19 Jul 2013