Both KLK and TSH announced the termination of the land transaction, as certain conditions precedent under the conditional share sale and purchase agreement between both parties had not been satisfied. While TSH will not be able to pare down its borrowings in a substantial manner following the termination of the disposal, it does, on the other hand, allow TSH to continue to capture the high earnings contribution from the abovementioned subsidiaries (amidst current high price environment). Impact on KLK, is minimal given its large planted area (particularly following its recent acquisition of IJM Plantations). Maintain BUY on KLK, with unchanged TP of RM26.60. Upgrade TSH to BUY (from Hold earlier) with unchanged TP of RM1.20, following recent share price correction.

Land deal between KLK and TSH is now off. Both KLK and TSH announced the termination of the land transaction, as certain conditions precedent under the conditional share sale and purchase agreement between both parties had not been satisfied.

Recall in Aug-20, KLK (through its wholly-owned subsidiary, Taiko Plantations Pte. Ltd) entered into two conditional share sale and purchase agreements to acquire two of TSH Resources’ 90%-owned subsidiaries, which have a combined total land area of 22,975 ha in East Kalimantan, of which 47% of the land bank has already planted with oil palm aged between 3-12 years, for a total sum of RM517.6m.

HLIB’s VIEW

Impact on TSH – longer de-gearing path, but TSH will continue to capture the high earnings contribution from the two subsidiaries. While TSH will not be able to pare down its borrowings in a substantial manner following the termination of the disposal, it does, on the other hand, allow TSH to continue to capture the high earnings contribution from the abovementioned subsidiaries (amidst current high price environment). To note, the two subsidiaries accounted for ~53% of TSH’s reported net profit in 1Q21.

No major impact on KLK. The termination of acquisition will not have major impact on KLK, given its large planted area (particularly following its recent proposed acquisition of IJM Plantations). Based on our estimates, total planted landbank of the abovementioned subsidiaries (measuring 10,816 ha) accounts for less than 4% of KLK’s total planted landbank (following its acquisition of IJM Plantations).

Forecasts. Maintained for both companies, as the deal has yet to be reflected in our earnings forecasts.

Maintain BUY on KLK, with unchanged TP of RM26.60. Maintain BUY rating on KLK, with unchanged sum-of-parts TP of RM26.60 (see Figure #1).

Upgrade TSH to BUY, with unchanged TP of RM1.20. Maintain sub-of-parts TP of RM1.20 (see Figure #2). Rating on the other hand, is upgraded to BUY (from Hold earlier) following recent share price correction.

Source: Hong Leong Investment Bank Research - 23 Jun 2021