News    TSH Resources (“TSH”) announced that it has agreed to sell its 16.17% stake in Pontian United Plantation (“Pontian”) to Felda Global Ventures (“FGV”) for RM196m cash. This is based on the agreed price of RM140 per Pontian share. 

TSH is set to gain RM86m (or estimated one off 83% boost to FY13E net income of RM104m) if the deal materialize.

However, the offer is conditional as it will be valid if FGV received more than 50% of Pontian’s shares. As of 18-July-2013, FGV has obtained irrevocable undertakings from multiple Pontian shareholders amounted to 23.81% stake.

Pontian owns 40,000 acres (16,188 ha) in which its plantation landbank is mostly in Sabah (Kinabatangan and Lahad Datu). In addition, Pontian owns a CPO processing mill with capacity of 90 mt/hour.

Comments    We believe the valuation of the deal at RM74,794/ha is fair as it is comparable to valuation of RM75,000 –RM80,000 per ha for mature Sabah plantation estate.We believe more than 95% of Pontian estates are mature as the surrounding area has been developed into palm oil estate many years ago.

We are positive on the deal as valuation of Pontian at 30.7x historical PE is higher than TSH’s 22.1x, hence the deal should create value for TSH shareholders. In addition, the RM196m cash will strengthen TSH balance sheet with its net gearing expected to decline to 0.69x (from 0.94x currently). FY14E earnings impact is minimal as we expect the interest savings (assuming the RM196m is used to pare down debt) to be neutralized by the loss of dividend from Pontian.

Outlook   Excluding the deal, TSH short term outlook should be good as we expect its 2Q13 FFB growth to exceed 30% YoY and this should cushion its earnings against 28% YoY fall in CPO prices.

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

Forecast   Pending the possible acceptance of more than 50% from Pontian shareholders, we maintain our FY13EFY14E core earnings of RM104m-RM171m.

Rating   Maintain OUTPERFORM

Valuation    Maintain our TP of RM2.57 based on unchanged 12.9x Fwd. PE on CY14E EPS of 19.9 sen.

Risks   Lower than expected CPO prices.

Source: Kenanga