Highlights

TSH entered into a share sale agreement with Ratus Awansari to acquire a 60% stake in Sg Kalabakan Estate Sdn Bhd for RM150m and assumption of liabilities of not more than RM30m.

Sg Kebalakan Estate was established for the undertaking of oil palm development in Kebalakan, Sabah. To date, Sg Kebalakan Estates has planted a total of 2,979ha, with 23,815 ha available for future planting.

The acquisition is expected to complete by 2Q 2014.

Financial Impact

Minimal impact to net gearing… the latest acquisition will raise TSH’s net debt and net gearing from RM607.3m and 0.55x (post disposal of Pontian shares) to RM787.3m and 0.71x respectively.

The latest acquisition will boost TSH’s total landbank in Sabah by more than 6x to 31,242 ha (or 67% to 7,427 ha in terms of total planted landbank in Sabah).

Pros/Cons

TSH is effectively paying RM11,197/ha. We believe the price tag is fair, given that sizeable landbank in Sabah is hard to come by.

Earnings Forecasts

Maintained.

Risks

• Weaker-than-expected FFB production and OER;
• A sharp increase in production cost; and
• A sharp decline in vegetable oil prices.

Rating

HOLD

Positives - (1) Strong FFB growth; (2) Stable cash flow from alternative power plant; (3) Improving net gearing ratio (post Pontian stake sale and private placement); and (4) Favourable long term outlook of the oil palm business.

Negatives – Unattractive valuations.

Valuation

Maintain SOP-derived TP at RM2.58 (see Figure 1).

Source: Hong Leong Investment Bank Research - 9 Dec 2013