News  TSH Resources (“TSH”) has completed the sale of 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 stands to gain RM86m from the deal.

 Note that the offer from FGV has become unconditional after FGV received in total valid acceptances of 50.25% (or 4.35m shares) of Pontian United Plantations (“Pontian”) shares.

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

Comments  We believe the valuation of the deal at RM74,794/ha is fair as it is comparable to market 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 the 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 0.86x (from 1.07x currently).

Outlook  FY13 earnings should grow 16% YoY to RM104m despite the lower CPO prices. This should be driven by superior FFB growth of 30% YoY and better contribution from its JV with Wilmar. Both of these factors should be enough to counter CPO prices decline of about 13% YoY to RM2400/mt. As it is, TSH’s 1H13core net profit outperformed its peers by growing 25% YoY to RM46m, which is the best earnings growth among mid cap planters under our coverage.

Forecast  We raised our forecast for FY13 net income by 83% to RM190m to reflect the RM86m one-off gains while maintaining FY13E core net profit at RM104m.

 FY14E core earning is increased by 2% (or RM4m) to RM175m due to interest savings.

Rating  Maintain OUTPERFORM

 This good news should be positive to its share price in the short-term. In the longer term, we expect its next 3-year FFB growth CAGR at 19% to support its earnings growth.

Valuation  Increase our TP to RM2.60 (from RM2.57) based on unchanged 12.9x Fwd. PE on higher CY14E EPS of 20.2 sen.

Risks  Lower than expected CPO prices.

Source: Kenanga