Highlight

Proposed another 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 exercise is expected to complete by 4Q13.

Assuming an issue price of RM2.20 (at 5% to the 5-day VWAP of RM2.32), the proposed private placement will raise approximately RM45.5m, which will be utilized for additional working capital requirements and/or for potential investment projects. 

Recall, the first two tranches of private placement (with total shares of 41.72m shares and collectively account for 5% of the paid-up share capital) were announced in Jul and Sep respectively.

Financial Impact

Minimal dilution… Based on our estimates, the 3 private placements (which collectively accounts for 7.5% of TSH’s paid-up share capital) will dilute TSH’s 2014 EPS by 1.5%, assuming: (1) Net interest cost savings of 4.5%; and (2) The new placement shares to be issued at RM2.20.

Net gearing to reduce further. Post private placements and Pontian stake disposal, TSH’s net debt and net gearing will be reduced significantly from RM922.6m and 1.04x (as at 31 Dec 2012) to RM606.3m and 0.54x respectively. Should the company decide to undertake another round of private placement (20.86m shares), it would bring down net gearing further to 0.49x.

Pros/Cons

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

Earnings Forecasts

Maintained, pending for completion.

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. While we like TSH for its strong FFB output growth (which we forecasted to expand at 2-year CAGR of 24% to 655k tonnes in 2014), we believe the absence of demand and price catalyst of CPO, coupled with pricey valuations (at 17.8x 2014 P/E) will drag share price performance.

Source: Hong Leong Investment Bank Research - 13 Sep 2013