News  TSH Resources (“TSH”) announced that it has completed its 2nd private placement of 20.86m shares at an issue price of RM2.24. The new issue represents 2.5% of its current share base and will increase the total shares issued to 876.08m shares.

 Note that the issue price of RM2.24 is based on a discount of approximately 3.4% to the 5-day volume weighted average market price of TSH’s shares up to and including 11 September of RM2.32.

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

Comments  We are neutral on the news.

 On the positive side, TSH’s current net gearing is expected to decline to a healthier level of 0.61x (from 0.69x post Pontian shares sale).

 However, we do expect slight FY14E EPS dilution by 1.4% to 19.87 sen from 20.16 sen as the share base will expand at a higher rate of 2.5% compared to the net income growth by 0.9%.

Outlook  Short-term outlook should be positive as we expect its strong FFB production growth to cushion its 3Q13 earnings against the significant YoY drop in CPO prices.

 Long-term outlook remains bright with 77% of its oil palm trees below 7 years old which support higher yields going forward. Hence, we believe its plantation can sustain FFB growth of more than 18% p.a. over the next 3 years.

Forecast  We increase our FY14E core earnings marginally by 0.9% to RM176m after imputing interest savings resulting from lower debt. However, we maintain our FY13E earnings forecast of RM104m due to minimal impact.

Rating   Maintain OUTPERFORM

Valuation  Our CY14E EPS is lowered by 1.4% to 19.87 sen (from 20.16 sen). Accordingly, our TP is reduced by 1.5% to RM2.56 (from RM2.60) based on an unchanged 12.9x Fwd. PE on CY14E EPS.

Risks to our call  Lower than expected CPO prices.

 Lower than expected FFB production.

Source: Kenanga