TSH has proposed to dispose two of its Sabah estates (2,933 Ha planted) for RM248m. We are positive on the move as: (i) the deal valued at EV/planted Ha of RM84.6k is in line with Sabah’s typical transaction value of c.RM80k per Ha, (ii) it enables TSH to realise net disposal gain of RM104.3m, and (iii) it relieves TSH from major replanting activities. Loss of FFB is minimal at 5%, while earnings decline will be offset by interest savings (est. RM8-9m). No changes to estimates pending completion. Maintain MP with TP of RM1.05 @ FY21E PER of 17x.

Proposed disposal. TSH announced that it has entered into a conditional share sale and purchase agreement with Sharikat Keratong Sdn. Bhd. (SKSB) for the disposal of Ladang Gomantong and Ladang Ong Yah Ho together with a 40MT/hour palm oil mill in Kinabatangan, Sabah for a total consideration of RM248m. Planted area for the two estates are 974 Ha and 1,959 Ha, respectively (collectively 2,933 Ha). The proceeds will be used to pare down the group’s borrowings and the transaction is expected to be completed by 1QCY22.

Positive on the move. EV/planted Ha for the TSH-SKSB deal is at c.RM84.6k, which is fair when compared against Sabah’s typical transaction value of c.RM80k. It is also at a 39% premium to IOI’s offer (EV/planted Ha of RM60.8k) for estates in Labuk & Sugut, Kinabatangan and Beluran. This deal is a more favorable arrangement compared to the terminated TSH-KLK deal, which required TSH to sell its prime Indonesian estates (9,734 Ha) for c.RM460m (EV/planted Ha of RM47.1k). With an average age profile of 18.3 years (74% trees >21 years), the TSH-SKSB deal also relieves TSH from major replanting activities.

Impact to TSH. Upon completion, we estimate the group’s total planted area to decline (-7%) to c.39.2k Ha, with the following concentration – Sabah (8%) and Indonesia (92%). Loss of FFB is minimal at c.50k MT (5% of group’s total), while earnings decline will be offset by interest savings (estimated c.RM8- 9m). TSH will also realize a net gain on disposal of c.RM104.3m.

No changes to earnings estimate pending completion.

Maintain MARKET PERFORM with an unchanged TP of RM1.05 based on FY22E PER of 17x (in-line with peers’ 16-18x), reflecting -0.75SD from mean. Our in-house ESG score for TSH is 71%. Risks to our call include: (i) adverse dry weather impact on Indonesia’s production, and (ii) logistics disruptions (virus-led).

Source: Kenanga Research - 7 Jul 2021