TSH has aborted the disposal of 5,398 ha of plantation in NE Kalimantan, Indonesia. This was the second of a two-tranche disposal of a 13,898-ha oil palm plantation. As its balance sheet strength has significantly improved over the last two years, we deem the disposal no longer necessary to de-gear. We maintain our forecasts, TP of RM1.30 and OUTPERFORM call.

TSH has aborted the disposal of 5,398 ha of plantation in NE Kalimantan, Indonesia. This was the second of a two-tranche disposal of a 13,898-ha oil palm plantation, first proposed in 2022.

Recall, in Apr 2022, TSH sealed an agreement to sell 13,898 ha of largely unplanted oil palm plantation in NE Kalimantan to PT Kawasan Industri Kalimantan Indonesia and PT Kalimantan Industrial Park Indonesia for RM731m cash. The rationale then was to de-gear its balance sheet with a net gearing approaching 1x. The first tranche involving 8,500 ha was transacted for RM441m cash in Aug 2022.

We believe TSH now does not need to sell the second tranche as the disposal proceeds from the first tranche, coupled with strong cash flows generated from its group-wide operations over the last two years underpinned by firm CPO prices, have brought its net debt and gearing down to just RM47m and 0.02x, respectively, as at end- 1QFY24.

We are positive on the termination as 62% of the land is planted with oil palms, currently already in their prime (12 years on average), which is highly cash generative. We also see the latest move as an indication that TSH has moved from strengthening its balance sheet to embarking on growth again.

We believe its latest move makes a lot of sense as: (i) oil palm land is getting scarce even in Indonesia, (ii) the group’s finances are already strong with enough fund (RM250m-RM300m) to plant up 8k-10k of oil palm on land the group already owns over the next 2-3 years, and (iii) in the worst-case scenario, TSH can slow down and stretch the development period of the new planting longer or opt to sell the 5,398 Ha at a later date.

Forecasts. We maintain our core earnings forecasts but remove an estimated RM100m in disposal gain from our FY24F headline net profit forecast.

Maintain OUTPERFORM and TP of RM1.30 based on FY24F P/NTA of 0.8x which reflect the sector PBV for the smaller to mid-sized plantation players. There is no adjustment to our TP based on a given a 3-star ESG rating as appraised by us (see Page 2).

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 - 12 Aug 2024