Yesterday,  TH  Plantations  (THP)  announced  a  bonus  issue  of  up  to 149.7m shares on the basis of one bonus share for every five existing shares.

Adjusting Fair Value. The 1-for-5 bonus issue, when completed, will increase the  number  of  THP’s outstanding shares  by  20%  to  898.4m  shares.  This  will dilute  the  current  share  price  of  MYR2.28  to  MYR1.90.  Accordingly,  we  will adjust  downward  our  present  MYR2.12  FV  to  RM1.77.  THP  estimates  the expenses relating to the bonus issue at MYRM0.15m.

No changes to fundamentals. While the proposed bonus issue may boost liquidity and also perk up trading sentiment, we do not see it making any impact on the company’s fundamentals. In tandem with this bonus issue, we will be cutting our FY13 and FY14 EPS forecasts by 16.7% to MYR0.136 and MYR0.199 respectively from MYR0.163 and MYR0.239 previously.

Expect a short term run-up. While the proposal may not bring about any fundamental changes to the company’s prospects, historical evidence in Malaysia shows that share prices tend to run up following an announcement of a bonus issue. In actual fact, investors essentially get no benefit from such exercises other than better liquidity as they would still be holding the same equity interest in a company and would not be receiving any cash proceeds.

Maintain NEUTRAL. We maintain NEUTRAL on THP with a FV of RM2.12, based on a 13.0x FY13F P/E. We expect fresh fruit bunches (FFB) production and earnings to surge 45.2% and 81.5% respectively this year. The 40.4% increase in the company’s share base following its recent purchase of planted areas will, however, see its EPS expand at a slower 26.8%. While much of this year’s growth will be inorganic, THP’s younger tree age profile following the acquisitions will bolster organic growth moving forward.

Source: RHB