News  TSH Resources (“TSH”) announced that it has entered into a Share Sale Agreement (“SSA”) to acquire 60% stake in Sg Kalabakan Estate Sdn. Bhd. (“SKE”) for RM150m. Note that TSH will also assume the liability of RM30m from Ratus Awansari Sdn. Bhd. (“RASB”). Collectively, the amount will be RM180m for the 60% stake.

 We gather that SKE owns in total 26,794 ha of landbank in Kalabakan, Sabah. Out of this, 11% (or 2,979 ha) has been planted. However, the planted area should be still immature as we believe Kalabakan is relatively a new area for palm oil development in Sabah.

 The rationale for the purchase is that it will enable TSH to increase its oil palm plantation areas in Sabah.

Comments  Effective valuation of the land works out to be about RM11,200 per ha. This is fair in our view. Although the valuation falls within the lower range of RM10,000-RM20,000 per ha for Sabah land, we think this is fair as the area is still relatively new area for oil palm development and its location is not very close to otherdeveloped estates in Sabah such as Tawau and Sandakan.

 We are positive on the announcement as this should support TSH mid to long term FFB growth.

 We expect earnings contribution only from FY15E onwards when the currently planted area matures.

 Balance sheet impact is manageable as we expect net gearing to increase from 0.55x to 0.71x.

Outlook  Near-term outlook is positive as TSH should benefit more from recent CPO prices increase due to its high FFB growth. Recall that its 9M13 FFB is already showing 34% growth YoY to 379,673 MT.

Forecast  We have raised our CY2014 CPO price forecast to RM2800/mt due to our more bullish view on CPO prices. Hence, we upgrade TSH FY14E core earnings by 6% to RM200m.

Rating Maintain OUTPERFORM

 TSH is our top pick in plantation sector for 2014 as its should benefit the most from the CPO prices increase as it has the strongest FFB growth among all planters under our coverage.

Valuation  We have raised our Target Price to RM3.38 (from RM3.18). This is in line with the increase in our FY14E EPS to 22.6 sen (from 21.2 sen previously). Our Fwd. PE remains unchanged at 15.0x.

Risks to our call   Lower than expected CPO prices.

 Lower than expected FFB production.

Source: Kenanga