On 6 July 2021, TSH proposed to sell 3,001 Ha of matured oil palm estate and palm oil mill in Sabah for RM248 m cash. The proposal involved selling three assets under three separate agreements. Two of these assets were handed over in February 2022, leaving one final agreement which TSH announced had become unconditional on 25 March 2022. With this asset now merely pending hand over, the entire divestment is as good as concluded. Divesting less strategic assets is to pare down debts and to accelerate development of new oil palm area to near double current planted area makes sense. The impact of the completion of this deal has been imputed into our forecast earlier but we are taking the opportunity to revised upwards CPO prices for FY22-23. Consequently, we are upgrading FY22 Core EPS by 20% to 18.9 sen and TP from RM1.80 to RM2.08. Maintain OP.

Rationale: The selling price of 3,001 Ha at about RM75k per Ha was reasonable considering that over 2,000 Ha of the planted area are already in need of replanting with trees at or approaching 25 years old. The mill is also over 20-year in age. More importantly, the proceed coupled with stronger operating cashflow will allow the Group to not only pare down debts but also accelerate the development of 25K-30K Ha of land into oil palm plantations. On completion, this would near double existing planted area of 32k Ha.

Further divestment cannot be ruled out: In Dec 2021, 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 but recent extension of the original negotiation period suggests discussion could be serious. 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) further acceleration in new planting which should translate to earlier growth.

Impact to EPS: Impact of the 3,001 Ha divestment has been factored into our earlier forecast. However, in light of elevated CPO prices staying longer, we are raising our CPO assumption for FY22 from RM4,000 to RM4,500 and from RM3,500 to RM4,000 for FY23. Consequently, FY22 and FY23 Core EPS have been revised up by 20% and 35% respectively to 18.9 se and 19.7 sen.

Maintain OUTPERFORM but upgrading TP from RM1.80 to RM2.08 based on FY22E PER of 11x, after reflecting flattish CNP over FY22- 23 and improving but still weaker balance sheet. Nevertheless, TSH is fast re-capitalising thanks to strong CPO prices as well as asset divestment to develop 25-30K Ha of new oil palm planting which will nearly double its current planted area. Risks to our call include: (i) adverse weather (ii) revision in Indonesia’s biodiesel levy and export tax structure, and (iii) volatile CPO prices.

Source: Kenanga Research - 29 Mar 2022