TSH Resources’ Sabah oil palm asset sale a good deal — analysts

KUALA LUMPUR (July 7): Analysts have called TSH Resources Bhd’s proposed disposal of two oil palm estates and one palm oil mill in Sabah for RM248 million a good deal as the price is higher than IOI Corp Bhd’s planned acquisition of palm oil estates there.

They also view the asset sale — which will result in a divestment gain of RM104 million — positively as it will help pare down the company’s borrowings, and in turn result in interest savings.

TSH Resources said on Tuesday that it is selling its assets to oil palm plantation firm Sharikat Keratong Sdn Bhd.

The price for the two pieces of plantation land bank is equivalent to 18.1% of the company’s RM1.37 billion market capitalisation.

“Adjusted for the palm oil mill, the disposal values the above-mentioned land bank at about RM76k/ha, which is higher than IOI’s recent proposed acquisition of NPC’s palm oil estates in Sabah (RM65-66k/ha).

“One-off disposal gain aside, the loss of earnings arising from the loss of productivity from the proposed disposal (which accounted for ~5.6% of TSH’s total FFB [fresh fruit bunch] output in FY20) will be partly mitigated by interest cost savings,” said Hong Leong Investment (HLIB) Research analyst Chye Wen Fei in a note.

Chye said HLIB has maintained its “buy” call with an unchanged target price (TP) of RM1.20, as the research house considers the disposal gain as non-core.

RHB Research is fairly neutral on the disposal.

Assuming the transaction to be finalised by the first quarter ending March 31, 2022 (1QFY22), the research firm’s FY22 and FY23 earnings are expected to decline by 8% to 10% post sale.

Meanwhile, RHB analysts Hoe Lee Leng and Sean Chew said the research firm has maintained its “buy” call with a TP of RM1.20 based on target price-earnings (P/E) of 16 times on its FY22 earnings, in line with mid-cap peers.

“Our TP implies an EV/ha (enterprise value per hectare) of US$12,000, in line with its peer range of US$10,000-15,000/ha,” the analysts added.

PublicInvest Research deemed the offer attractive as it is valued based on EV of RM82,474/ha or P/B of 1.48 times.

“Based on our calculation, we think it is an earnings accretive deal for the group as it could potentially bump up its earnings by as much as RM8 million after taking into the consideration of significant interest savings despite the loss of income from the CPO (crude palm oil) production.

“It can have annual interest savings of up to RM11.6 million if it tends to settle the relatively high interest cost terms loans. In addition, the group would be able to save capex (capital expenditure) for land clearing and replanting in the coming years as a significant portion of the estates are due for replanting,” it said.

Pending the completion of the proposal disposal, the research firm retained its “outperform” call with an unchanged TP of RM1.46 based on 24x FY22 EPS.

In addition, MIDF Research also said it is positive about the proposed disposal, by maintaining its “buy” recommendation on the group with an unchanged TP of RM1.49.

“On a side note, it is worth noting that the group recorded an upbeat performance during the 1QFY21, as its registered normalised profit of RM36m (+45.1% year-on-year).

“Going ahead, we remain sanguine on the group’s earnings outlook particularly from its palm division premised on the current favourable CPO price level. The group’s FFB production is also expected to remain robust as it continues to maintain its commitment in diligently carrying out the fertiliser application and young age profile of its Indonesian oil palm estates, which will inadvertently lead to a better FFB yield. These would translate into positive developments to the group’s earnings growth in the upcoming quarter,” it said.

As at end-December 2020, TSH Resources’ net debt or borrowings stood at RM1.1 billion, while its net gearing was 0.71 times.

Upon disposal, HLIB’s Chye, PublicInvest and MIDF said the group’s net debt will decline to RM903 million, while its net gearing will fall to 0.53 times.

The RHB analysts commented: “The proceeds will allow TSH to immediately pare down its debts, with RM728 million due within a year (based on its latest annual report). This reduces TSH’s net gearing from 0.71x (as at end-2020) to 0.53x.”

At 3.10pm, TSH Resources shares were up two sen or 2.02% at RM1.01, valuing the group at RM1.37 billion. It saw some 3.52 million shares exchange hands.

Source : The Edge Markets

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