Having entered into a conditional agreement to sell 13,898 Ha of largely undeveloped oil palm land in NE Kalimantan for RM712m cash in April 2022, TSH has now issued a circular for an EGM on 29 June 2022 to decide on the matter. We favour the proposed divestment as it will address several issues in one go namely: (a) paring down debts and gearing, (b) accelerate development of its remaining land bank in Indonesia, and (c) the disposal is expected to be EPS accretive. As such we expect minimal opposition during the EGM. Nevertheless, as TSH has to change the land status first before the sale, the exercise is likely to complete only in early FY23 with some risks that the sales may suffer delay or, in the worst case, fall through. Consequently, we are maintaining FY22-23E Core EPS and TP of RM1.90. OUTPERFORM.
TSH first announced entering into a non-binding Head of Agreement (HOA) for this deal on 12 December 2021. On 4 April 2022, TSH announced a conditional sale, purchase and compensation agreement to divest 13,898 Ha for RM712 m cash. This circular essentially provides further details ahead of the pending EGM.
Rationale: The intention remains unchanged, the divestment of a largely non-contributing, less strategic assets to help pare down debts, fund the development of new oil palm planting, and the entire exercise should end up EPS accretive. On the last point, the circular highlighted that FY21 contribution from this Kalimantan land amounted to only RM10m in profit despite good palm oil prices. This is because only 3,819 Ha of the 13,989 Ha have been planted. Meanwhile, TSH plans to repay RM550m of debts from the RM712m proceeds and this is estimated to save the Group about RM19m in annual interest expense.
Sales price: CH Willian Talhar & Wong’s Sabah office valued the 13,898 Ha at RM296m using a combination of DCF and Comparison Method while audited NBV as at 31 Dec 2021 stood at RM263m. As such, the divestment is expected to result in a pro-forma gain of RM422m. The agreed selling price of RM51.2K per Ha is also above market price of around RM45K per Ha for agriculture land in Kalimantan. Altogether, having paid for agriculture or Hak Guna Usaha land earlier and now selling it with some development land (Hak Guna Bangunan) premium imputed into the price, TSH has come out well. Note that TSH is responsible for changing the status of the land prior to selling but the cost will be borne by the buyer.
Impact to earnings: FY22 Core Net Profit (CNP) will not be impacted as we expect the agreement to conclude only in 1HFY23. The impact on FY23 CNP is positive but given that it will be for only half a year, the CNP uplift is limited to only about 3%. Nevertheless, FY23 PBT and Net Profit will see YoY jump due to the estimated disposal gain of RM422m.
We welcome the planned divestment as it will improve TSH’s longer term prospects. Essentially it will lower the Group’s gearing and associated risk as well as accelerate the development of its sizeable remaining unplanted oil palm land. Maintain OUTPERFORM and TP of RM1.90 based on FY22E PER of 11x and 1.0x prospective FY23 NTA of RM1.87 after imputing the RM422m divestment gain. Risks to our call include: (i) adverse weather, (ii) revision in Indonesia’s biodiesel levy and export tax structure, and (iii) volatile CPO prices.
Source: Kenanga Research - 8 Jun 2022
