TSH Resources - Brownfield Acquisition

THE BUZZ

TSH Resources (TSH) is seeking to acquire a plot of brownfield plantation estate in Lahad Datu, Sabah for a consideration of RM624.8m. The acquisition, should it proceed, will be 50.1% funded through bank borrowings and the remaining 49.9% through new share issuance.

OUR TAKE

Half in cash, half in shares. TSH looks to acquire the remaining 80.2% it does not own in Pontian United Plantations (Pontian) for a consideration of RM624.8m. Pontian, a non-listed company, owns a landbank comprising planted oil palm areas, unplanted land and a palm oil mill (or mills).  The purchase, should it be successfully completed, will be funded through a cash consideration of RM312.8m and new share issuance for the remaining RM312.0m. The cash portion will be satisfied by bank borrowings, of which the company is said to have already obtained sufficient credit facilities to raise the needed cash. On the other hand, the share portion will be satisfied through the issuance of new TSH shares totaling 145.8m shares, which will increase TSH’s share capital by 17.6%. The deal prices the new shares at RM2.14, which reflects a 10% discount to the stock’s latest 5-day volume-weighted average price (VWAP).

Lacking details. TSH has yet to have access to certain basic operational information on Pontian despite making an offer to purchase the company. Thus, the size of the landbank and its planted area are pretty much unknown at this juncture, pending further announcements on the purchase. What we do know is that the plantation lands under Pontian are mainly adjacent to TSH’s existing planted area in Lahad Datu, Sabah. Some of TSH’s plantations even share the same access road with Pontian’s estates, thus helping to moderate incremental infrastructure costs and possibly bring about higher economies of scale in operations.

Appears to be a sizeable acquisition. Our guess is that the much of the trees on Pontian estates have hit peak maturity, judging from: i) Pontian’s need for annual replanting expenditures, and ii) the proximity between TSH’s estates and the Pontian estates (99.5% of TSH’s Sabah trees are above 10 years old). Assuming the Pontian estate has a similar age profile with TSH’s Sabah plantations and achieves FFB yields of about 28 to 29 tonnes per ha, we estimate Pontian’s planted area to be approximately 13,200 ha in size, which could lead to a sizeable 43.2% increase in TSH’s total planted area. The offer values Pontian’s planted area at RM59,000 per ha, based on our Pontian estate size estimate and after taking into account TSH’s existing stake in the company.

11x FY11 acquisition PER, EPS accretive right off the bat. Pontian made RM71.7m in net profits last year and the offer values Pontian at 10.9x FY11 PER, which we deem reasonable. Assuming a 10% decline in Pontian’s profitability, interest charges of 5% for the additional RM312.8m of borrowings taken up to fund the purchase, and keeping in mind the 17.6% increase in TSH’s share base, we believe the deal will be EPS accretive right from the start, increasing TSH’s FY12 EPS by some 4.6% assuming 4 months contribution this year. We think Pontian’s FY12 earnings will have to decline by 40% y-o-y for the acquisition to be EPS neutral for TSH.

Net gearing to rise above 0.8x. If the acquisition offer is accepted and executed, TSH’s net gearing will increase from 0.79x to 0.85x as a result of a 46.6% rise in net borrowings and a 36.8% jump in shareholders’ funds. The recurring cash flows from the acquired estates will, however, help moderate the increase in net gearing.

Maintain BUY. We are not factoring in the acquisition’s potential earnings contribution into our forecasts just yet given the insufficient details provided in the announcement with regards to Pontian’s landbank, tree age profile and historical production. Thus, we are keeping our FV unchanged at RM2.58, based on 15.0x FY12 PER and RM0.32 per share for its rubber estates.

Source: OSK