The conditional agreement to sell 13,898 Ha of a largely undeveloped oil palm land in NE Kalimantan for RM731m cash has now been completed as all the conditions have been met. The divestment is positive for TSH as it addresses the Group’s high gearing and will help recapitalise TSH to accelerate development of its remaining land bank in Indonesia. It is expected to enhance Core EPS (CEPS) for FY22 and beyond. We are revising up FY22 PATMI due to an estimated disposal gain of RM441m. As we had earlier expected TSH to complete the deal only in early 2023, we are also revising up FY22E and FY23E Core EPS (CEPS) by 1% and 6%, respectively. However, we are keeping our OP recommendation and tentatively keeping our TP of RM1.90 pending the 1HFY22 results release, expected end of this month.

Background: A non-binding Head of Agreement (HOA) for this deal was first announced on 12 December 2021 followed by a conditional sale, purchase and compensation agreement to divest 13,898 Ha for RM712m cash on 4 April 2022. The sale is to PT Kawasan Industri Kalimantan Indonesia (KIKI) and PT Kalimantan Industrial Park Indonesia (KIPI).

Rationale: TSH has been trying to divest a less strategic asset to help pare down its gearing. This NE Kalimantan land bank is sizeable but largely non-contributing. The proceeds will help pare down a significant amount of debts as well as providing funds toward the development of new planting. Moreover, the entire exercise should end up CEPS accretive. TSH already indicated RM550m of debts will be repaid using the proceeds which is estimated to save the Group about RM19m in annual interest expense. Offsetting this is the loss of an estimated profit of RM10m from the 3,819 Ha of the 13,989 Ha which have been planted with oil palm.

Selling price: CH Willian Talhar & Wong’s Sabah office valued the 13,898 Ha at RM296m using a combination of DCF and Comparison Method while the audited NBV as at 31 Dec 2021 stood at RM263m. As such, the divestment is expected to result in a pro-forma gain of RM441m. The agreed selling price of RM52K per Ha is also above market price of around RM45K per Ha for agriculture land in Kalimantan. Altogether, having paid for agriculture or Hak Guna Usaha land earlier and now selling it with some development land (Hak Guna Bangunan) premium imputed into the price, TSH has come out well. Note that TSH is responsible for changing the status of the land prior to selling but the cost will be borne by the buyer.

Impact to earnings: FY22E PATMI is boosted from RM238.6m to RM683.1m due to the divestment gains. However, FY22 Core Net Profit (CNP) will also see a slight upward revision of 1% to 17.5 sen and by 6% for FY23 CNP We are keeping our NDPS of 10.0 sen for FY22 but a special dividend cannot be ruled out.

This divestment is expected to be transformative for TSH’s longer term prospects. Essentially it will lower the Group’s gearing and accelerate the development of its sizeable remaining unplanted oil palm land. ESG wise, certification for its Indonesian operations is still ongoing but overall score is above average at 3.5 stars. Maintain OUTPERFORM and TP of RM1.90 based on FY22E PER of 11x.

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 - 10 Aug 2022