Highlights

TSH made 2 announcements yesterday:

The deal to acquire a 60% stake in Sg Kalabakan Estate Sdn Bhd (SKE) from Ratus Awansari has lapsed due to absence of relevant written consent and/or documents. According to the announcement, Ratus Awansari will have to refund TSH the RM15m deposit (10% of the purchase price); and

The company acquired Icon Field Ventures, which will then enter into a sale and purchase agreement to acquire a 90% stake in PT Prima Usaha Sukses (PT PUS, which has obtained the Ijin Lokasi for ~9,000 ha of land in Central Kalimantan) for RM24.5m. The land is located within close proximity to TSH’s existing estate in PT MItra Jaya Cemerlang, with accessibility and good infrastructure and near to river for the transportation of commodity.

Pros/Cons

On the first announcement… Neutral, as TSH will be able to recover back its deposits paid for the acquisition.

On the second announcement… While the price tag (US$944/ha) seems to be on the high side (relative to other recently announced plantation land deals), we note that the premium is justified, as PT PUS has obtained the necessary licence to develop the land into oil palm plantation and its close proximity to TSH’s existing landbank.

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 RM3.36 (see Figure 1).

Source: Hong Leong Investment Bank Research- 16 Jul 2014