28/06/2012 (The Star) - TSH Resources Bhd hopes to create more value via economies of scale through integrating with Pontian United Plantations Bhd (PUPB), a public but unlisted plantation firm.

In filings with Bursa Malaysia on June 26, TSH announced a proposed acquisition of PUPB's entire voting shares of RM1 each via its indirect wholly-owned subsidiary, Bisa Jaya Sdn Bhd (BJSB), together with Chin Leong Thye Sdn Bhd, Lee Chin Hwa, Lee Min Huat and Lee Sep Pian.

“Our intention for the merger is to create more value. We can have better economies of scale and can benefit from creating value together,” chairman Datuk Kelvin Tan told reporters yesterday.

 Both TSH and PUPB plantation fields have been neighbours since the 1990s, sharing the same access road in Lahad Datu, Sabah.

Tan said the benefits of the merger included economies of scale in both companies' supply chains, logistics, distributions, finance and employee training.

Most of PUPB's plantations have matured, while 73% of TSH's plantations are immature. Furthermore, TSH has a landbank size of 70,000 ha for future planting. “PUPB can ride on the growth that we will have,” Tan said.

PUPB would also be able to reap benefits from TSH's biotech Wakuba high-yield clone, a technology developed by TSH's biotech centre in Sabah. The Wakuba ramets can produce around eight to 10 tonnes per hectare of palm oil yield, compared with the current industry average of four to six tonnes.

The merger will allow both TSH and PUPB to increase planted plantation landbank size and eventually lead to a higher fresh fruit bunch output.

To enable the integration of both companies, TSH needs to obtain a 50% plus one share stake in PUPB. Currently, TSH and the joint offerors hold 1.71 million shares in PUPB, representing a 19.72% stake. Through BJSB, TSH has been a shareholder of PUPB since 2005.

TSH is offering RM90 for each PUPB share, which will come in two segments. The first of which will be satisfied through RM45.06 in cash and RM44.94 via the issuance of 21 TSH shares. This offer price is 2.25 times the last known transacted price six months ago of PUPB at RM40.

The issuance of TSH shares represents the ordinary shares of 50 sen each, issued at a price of RM2.14 per TSH share, a 10% discount to the five-day volume weighted average market price of TSH shares up to and including June 25.

The remaining 80% stake in PUPB not already owned by TSH and the joint offerors, via the offer was valued at RM624mil. This was at least 14.6 times the price earnings ratio, based on the past three-year net profit average. The 100% valuation of the company currently stands at RM780mil. TSH expects to deliver the offer document to PUPB in three weeks.

However, PUPB will continue to operate as a separate legal entity following the merger.

Hwang DBS Vickers Research analysts said in a report: “The offer implies 11 times financial year ended Dec 31, 2011 earnings per share of RM8.29, which seems fair given the unlisted company discount to its listed peers' average of 15 times.”

Assuming full acceptance, representing the remaining 80.3% stake, TSH will need to pay out RM313mil in cash. This will increase the net gearing from the 79% in December 2011 to 85%.

Tan said it would be funded both internally and via bank borrowings.

PUPB's authorised share capital comprises 10 million ordinary shares of RM1 each, of which 8.65 million shares have been issued and fully paid up.

Besides oil palm cultivation, the company's other activities include the extraction of crude palm oil and palm kernel for sale, general insurance agency, property investment and money lending.

For FY11, net profits and net assets for PUPB and its subsidiaries stood at approximately RM71.68mil and RM388.36mil respectively.