News    TSH Resources (“TSH”) announced that the Group has fixed the issue price its private placement of 20.86m shares at RM2.28. The new issue represents 2.5% of its current share base and will increase total shares issued to 855.22m shares post the exercise. The exercise is expected to be completed in 3QCY13.

Note that the issue price of RM2.28 is set based on a 4.6% discount over the 5-day VWAP of RM2.39.

Recall that the rationale for TSH to raise such fund is to meet its working capital requirements without incurring additional interest costs as compared to bank borrowings.

Comments    We are neutral on the news. 

On the positive side, TSH current net gearing of 1.04x will be pared down to a healthier level of 0.93x.

However, we do expect slight FY14E EPS dilution by 1.5% to 19.89 sen (from 20.19 sen). While we expect FY14E net income to increase by 1.0%, share base increase rate is higher at 2.5%.

Outlook   Short-term outlook should be positive as we expect its 2Q13 FFB production growth to exceed 30% YoY and this should cushion its earnings against the 28% YoY drop in CPO prices.

Long-term outlook remains bright as 77% of TSH’s palm oil trees are still below 7 years old, promising higher yields ahead. Hence, we believe FFB growth of more than 18% can be sustained in the next 3 years.

Forecast   We increase our FY14E core earnings marginally by 1.0% to RM173m after imputing interest savings resulting from lower debt. However, we maintain FY13E earnings of RM104m as we think the impact is minimal since the exercise will be completed only in 3Q13.

Rating   Maintain OUTPERFORM

Valuation    Our CY14E EPS is lowered by 1.5% to 19.89 sen (from 20.19 sen). Accordingly, our TP is reduced by 1.5% to RM2.57 (from RM2.60) based on an unchanged 12.9x Fwd. PE on CY14E EPS.

Risks   Lower than expected CPO prices.

Lower than expected FFB production.

Source: Kenanga