TSH entered into an agreement to acquire  a 60% stake in Sg Kalabakan Estate for MYR150m and  assume  no more than MYR30m liabilities.  We are  positive  on  the  acquisition  as  it  is  a  fairly  sizeable  estate  at  a location  near  Tawau.  We  maintain  our  NEUTRAL  call,  with  our  FV unchanged  at  MYR2.89,  pending  a  revision  in  our  CPO  price assumption.

• About  Sg  Kalabakan  Estate  (SKE).  SKE  is  located  in  Kalabakan, Sabah, with the nearest major town being  Tawau. SKE has 2,979 ha of planted area with 23,815 ha of land for future planting.  Its  total size of 26,794 ha is similar to IJM Plantations’ Sabah plantation.
• Fair  valuation.  A  100%  stake  in  SKE  would  have  cost  MYR280m including the MYR30m liabilities.  Assuming the price of MYR6k per ha for the unplanted area, TSH effectively paid MYR46k per planted area, which  is  lower than  its recent sale of Pontian United and   the  price IOI Corp  paid  for  Unico  Desa  at  nearly  MYR70k  per  planted  ha.  SKE’s planted area is immature and will not contribute  positively to earnings in another two  to  three  years.  On the plus side, unlike Pontian United  and Unico Desa  which need  significant replanting, no replanting is required for SKE.
• Net gearing to rise.  TSH’s net gearing will rise to 71% from 55% post the  disposal  of  Pontian  United.  At  a  development  cost  of MYR15k  per ha, it will cost TSH some MYR357m to fully develop the unplanted area. We believe TSH will have to pace itself to order to manage its gearing level.  Moreover,  the  group  still  has  about  60k  ha  of  unplanted  land  in Indonesia.  This means upon full development of its unplanted area, TSH will have 120k ha of planted area, which is roughly the current size of First Resources (FR SP, BUY, FV: SGD2.65).
• Fair value.  Our FV is based on SOP with the plantation business at 16x CY14  earnings,  which  is consistent  with  other  mid-sized  plantation companies.

Recommendation Chart

Source: RHB