TSH has entered into an exclusive negotiation to dispose off its North Kalimantan landbank for RM679m in cash. The proposal is welcomed as: (i) the land is currently not generating profit or cash-flows, (ii) it lowers interest payments as sizeable debts can be pared down while (iii) future expansion is not duly affected as TSH still owns large tracts of undeveloped land. TSH will also realise a net disposal gain of RM398m. However, the arrangement is not binding at this juncture. No changes to estimates pending finalisation. Maintain MP with TP of RM1.05 @ FY21E PER of 17x.

Proposed disposal. A 90% Indonesian subsidiary of TSH has entered into Heads of Agreement (HOA) to negotiate the sales of land to PT Kawasan Industri Kalimantan Indonesia (KIKI) and PT Kalimantan Industrial Park Indonesia (KIPI). The land is located in Tanah Kuning and Mangkupadi in Bulungan Regency by the north eastern coast of Kalimantan. 13,215 Ha of the land certified under Hak Guna Usaha (HGU) will be sold for about RM679m in cash while additional pieces of nearby land which TSH has acquired but still awaiting certification and registration will be sold for about RM51,380 per Ha. However, the HOA is not binding at this juncture with point 3.6 of the agreement specifically stating “The HOA is intended to be a non-binding expression of the Parties’ intent to negotiate in good faith …”

Other interesting possibilities. It is noteworthy that TSH had attempted to develop 9,000ha of this land into industrial properties with an Indonesian partner in 2018 but the deal was aborted in 2019. It is thus not clear whether TSH still harbour such ambition as the rationale for the HOA is quite open ended. This contrast with two earlier proposed divestments where TSH clearly announced its intention was to repay debts following its asset sales. One of the previous proposals involved the sales of matured Indonesian estates to KLK for US$141m but has since been terminated. The other proposal to sell matured Sabah estates and a mill for RM248m is still ongoing but.it is unclear whether this latest deal will have an impact on the negotiation.

Positive on the move. Assuming the HOA leads to a simple outright cash sale, the proposal is welcomed on several counts: (i) EPS uplift thanks to lower interest cost moving forward due to debts being repaid, (ii) less volatile EPS once debts are trimmed and (iii) an acceleration in new or re-planting which should translate to earlier growth.

Impact to TSH. On completion, we believe TSH will likely pare down some debts. If the entire consideration of RM679m is indeed used to repay borrowings, the reduction in after-tax interest expenses is estimated at RM25m a year. TSH will also realize a net gain on disposal of c.RM398m.

No changes to earnings estimate pending completion.

Maintain MARKET PERFORM with an unchanged TP of RM1.05 based on FY21E 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 - 13 Dec 2021