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. 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. BUY with a TP of RM1.90 based on FY22E PER of 11x.

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).

TSH has been trying to divest its 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 portion of debts as well as providing funds toward the development of new planting. 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.

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.

FY22E PATMI is boosted from RM238.6m to RM683.1m due to the divestment gains. We are keeping our DPS of 10.0 sen for FY22 but a special dividend cannot be ruled out. Essentially it will lower the Group’s gearing and accelerate the development of its sizeable remaining unplanted oil palm land.

Source: Rakuten Research - 10 Aug 2022