TH Plantations - On an acquisition spree HOLD

- We downgrade TH Plantations Bhd (TH Plant) from Buy to Hold as the proposed acquisition of land in Sarawak would not be earnings-enhancing in the short term. 

- We estimate that TH Plant’s FY13F earnings would be reduced by 5% to 7% due to higher interest expense from the financing of the acquisition. We believe that TH Plant would be financing its acquisition with borrowings.

- TH Plant has proposed to acquire 6,513ha of land in Sarawak from Weida (M) Bhd and a group of individuals for RM254.6mil cash.

- Out of the 6,513ha land, about 83% or 5,424ha has already been planted with oil palm. The age of the oil palm trees are between one and four years old. The oil palm estates are contiguous, located between Bintulu and Sibu. 

- Also, the oil palm estates have leasehold titles and are not under native customary rights. Additionally, the estates are located on mineral soil and not peat. TH Plant would need to incur about RM30mil over four years or RM7.5mil/year to cultivate all immature oil palms to maturity. 

- The acquisition is positive for TH Plant in the longer term as it would expand the group’s landbank from 59,153ha currently to 65,666ha (excluding the proposed acquisition of landbank from Lembaga Tabung Haji, which may face obstacles due to the rejection from the Sabah Forestry Department).  

- However, in the short term, the acquisition would not be earnings-generative as the oil palm trees are just coming into maturity. The oil palm estates to be acquired recorded a net profit of RM0.2mil in FYE3/12. The proposed acquisition is due for completion by 1QFY13.

- Professional valuers have valued the land at RM360mil or RM63,119/ha. On a per ha basis, the acquisition cost of RM254.6mil translates into RM39,084. Based on comparative market transactions, this is a tad expensive.

- Last month, Sarawak Oil Palms Bhd (SOP) proposed to acquire 10,366ha of land in Bintulu for RM33,102/ha from Shin Yang Holding Sdn Bhd. The land is planted with oil palm trees aged between three and five years old. 

- SOP had also proposed to acquire another parcel of land measuring 12,910ha in Baram, Sarawak from Shin Yang at an estimated RM23,703/ha. The land is partly planted with oil palm trees aged one to four years old.  

Source: AmeSecurities