News  TSH Resources (TSH) has announced that it is acquiring a full stake in Icon Field Ventures Sdn. Bhd.

(ICON) for RM24.5m. We gather that ICON has entered into a sale and purchase agreement with PT Tirta Agung Selaras and PT Teguh Aman Sentosa to purchase 90% of the entire share capital of PT Prima Usaha Sukses (PTPUS) which owns 9,000 ha of plantation landbank in Central Kalimantan. Additionally, we gather that land is located within close proximity to TSH’s existing estate.

 Justification for the deal is that TSH will further increase its oil palm plantation areas in Indonesia.

 Separately, TSH has announced the non-fulfilment of certain conditions precedent in relation to its acquisition of Sg Kalabakan Estate Sdn. Bhd (SKE). Accordingly, TSH is expected to receive its previous deposit of RM15.0m in 14 days’ time.

 Recall that in Dec-2013, TSH has proposed to acquire 60% stake in SKE for RM150m. As TSH would have also assumed the liability of RM30m from Ratus Awansari Sdn. Bhd. (RASB) from the deal at that time, the collective amount that TSH would have effectively paid would be RM180m for the 60% stake. SKE owns 26,794 ha of plantation land in Sabah.

Comments  We are positive on the landbank purchase in Indonesia as it bodes well for TSH’s long-term FFB production growth. Our estimate shows that TSH’s total landbank should increase by 10% to 99,663 ha post the deal. With only 37,203 ha planted so far as of 1Q14, this means visibility of more than 10 years for planting the remaining estate, assuming minimum 4,000 ha annually.

 The valuation of RM3022/ha is fair as it is close to previous deal transacted at RM2732/ha in Jun-2013 for the land in East Kalimantan. Despite the 11% premium, we believe that it is justified due to land scarcity and the potential synergy to TSH as the landbank is adjacent to its current estate; hence providing cost savings benefit in estate management.

 We are neutral on the terminated SKE deal as we have yet to impute any earnings potential.

Outlook  TSH’s FFB growth is the strongest among planters under our coverage as we expect 3-year Fwd CAGR of 18% (against peers about 10%). Hence, it is likely to outperform its peers.

Forecast  Maintain FY14E-FY15E CNP of RM204m-RM214m. We believe that the PTPUS landbank should only affect earnings from FY17 onwards as palm oil tree only bears fruit from year three onwards.

Rating Maintain OUTPERFORM

 We continue to like TSH for to its young trees age profile of about 6.5 years and superior FFB growth of 18% in FY14E (against peers’ average of 10%).

Valuation  Increase our TP to RM4.30 (from RM4.10) after a rollover to FY15E EPS of 23.8 sen (from FY14E EPS of 22.7 sen). Our Fwd. PE of 18x is unchanged and based on +1.0SD valuation to reflect TSH’s good cost management and superior FFB growth potential.

Risks to Our Call  Lower-than-expected CPO prices.

Source: Kenanga