TSH Resources - OUTPERFORM - 27 June 2012

News  TSH has announced a proposal to take over a 80.28% interest in Pontian United Plantations Berhad (Pontian) shares for RM624.8m*, with RM312.8m to be paid via cash and another RM312.0m via the issuance of TSH shares.

TSH will act with several minority shareholders of Pontian for the takeover. (See Page 2 for details).

All the funding for the cash portion will be from debt while 145.8m new TSH shares will be issued at RM2.14 (10% discount to TSH’s 5-day VWAP**).

Effectively, its stake in Pontian will increase to 88.24% assuming full acceptance, as TSH is holding 7.96% stake in Pontian shares.

   

Comments  Positive on the deal as our proforma analysis of the combined entity (TSH + Pontian) for FY11 earnings suggests that EPS will be boosted by 20%* (as compared to TSH’s current earnings). Net gearing will increase slightly to 0.85x (from 0.79x) but we think this is manageable as TSH will be able to gain control on Pontian’s cash flow, which will ultimately pare down the debts over the longer term.

The deal is priced at FY11 PER of 10.86x, which we think is attractive as smaller planters under our coverage typically trade between 14.8x to 15.9x historical PER.

Pontian’s plantation lands are located beside TSH plantation land in the outskirt of Lahad Datu, Sabah. We expect TSH to realize  better economies of scale through more optimum resources utilisation after the takeover of Pontian.

   

Outlook Pontian owns ~40,000 acres (or 16,188 ha) of gross oil palm land predominantly located in Sabah and a 90mt/hr palm oil mill, according to its website. Hence, TSH gross landbank will increase by 16% to 114,641 ha. No information has been provided on the FFB production and breakdown of planted area and unplanted area of Pontian.

   

Forecast Hence, we are maintaining our FY12E-FY13E core net profits of RM131m-RM165m for now, pending further details from management.

   

Rating Maintain OUTPERFORM

We continue to like TSH for its consistent expansion of plantation landbank, high efficiency with FY11 FFB yield of 24.9mt/ha and long-term growth visibility (as 47% as its total planted area is still immature).

   

Valuation  Maintaining Target Price  of RM2.50 based on Fwd.

PER of 15.8x on unchanged FY12E EPS of 15.90 sen.

   

Risks A sustained drop in CPO prices.

Worse than expected loss from its Wood and Reforestation division.  

Source: Kenanga