News  TSH Resources (“TSH”) is proposing a private placement exercise of up to 2.5% of its shares issued which will raise up to 20.86m new shares. Post the exercise which is expected to be completed in 4QCY13, TSH’s share base will be increased to 876.08m shares.

 We gather 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 as the maximum potential dilution on the FY14E EPS is only 1.3% assuming that the maximum 10% discount is applied to the latest 5-day VWAP of RM2.29. While FY14E net income may increase by 1.1% to RM177m, its share base will expand at a higher rate of 2.5%. As a result, our FY14E EPS may be trimmed by 1.3% to 19.90 sen and exprivate placement Target Price will be RM2.57 (currently RM2.60). On the positive side, the exercise will strengthen TSH balance sheet with its net gearing expected to decline further to 0.61x (from 0.69x post Pontian shares sale).

Outlook  Recent good news of its successful sale of Pontian shares should be supportive to share prices. In the medium-term, FY13 earnings should grow 16% YoY to RM104m despite the lower CPO prices driven by superior FFB growth of 30% YoY and better contribution from its JV with Wilmar.

 In the longer term, we expect a forward 3-year FFB growth CAGR at 19% to support its earnings growth.

Forecast  Pending the actual price of the private placement, we are maintaining our FY13E-FY14E core earnings forecasts of RM104m-RM175m. Our key assumptions are FY13E-FY14E CPO prices of RM2400-RM2700 per mt.

Rating  Maintain OUTPERFORM

Valuation  Maintain TP of RM2.60 based on unchanged 12.9x Fwd.

PE on CY14E EPS of 20.2 sen.

Risks  Lower than expected CPO prices.

 Lower than expected FFB production.

Source: Kenanga