TDM - Still deeply undervalued

We recently visited TDM and believe that the company’s long term prospects are still attractive. TDM is a mid-cap planter with planted areas of 39,035 ha (18% immature). Out of this, 32,460 ha are in Terengganu with the rest in Melawi, Kalimantan. We like TDM for its attractive valuation of only 7.4x Fwd. PER, its superior FY12E-FY13E dividend yield of ~5% and long term sustainable growth from its maturing Kalimantan estates. We value TDM at RM5.05 based on Sum-Of-Parts with the plantation division valued at 8x Fwd PER and healthcare at 12x. Our valuation of 8x Fwd. PE is peg on current Sarawak Plantation FY13E Fwd. PE which is still 38% discount to mid cap planters valuation of 13x Fwd. PE.

Trading at only 7x Fwd. PER.  Based on FY13E EPS, TDM is currently trading at only 7.4x Fwd. PER, representing a steep discount of 42%-59% against other planters under our coverage, which trade at Fwd. PER of 12.8x-18.2x. Its EV/ha is also extremely attractive at RM21,742/ha, 62%-77% below other mid-cap planters’ EV/ha of RM56,500/ha-RM94,100/ha. We believe that such a discount is not justified as TDM has a sizeable planted area of 39,035 ha, decent FFB yields of 19.4mt/ha and attractive FY13E dividend yield of 4.8%.

Superior dividend yield of 5% supported by net cash of RM1.00 per share. TDM balance sheet is very strong with net cash of RM247m or RM1.00 per share. Along with its annual strong cash flow of ~RM140m or 57 sen per share, we expect TDM to continue paying attractive dividend of 21.9 sen – 22.0 sen in FY12E-FY13E, implying net dividend yield of 5% (all planters under our coverage net dividend yield are in 1.0%-4.2% range).

Next stage of growth from 2014 onwards as Indonesian estates mature. On top of its 32,459 ha of palm oil estates in Terengganu, TDM owns 36,775 ha of palm oil estates in Kalimantan. As of end-2011, 6,575 ha have been planted in Kalimantan (all immature) and we expect maiden FFB contribution here from 2013 onwards at ~6,600 mt. In 2014, the FFB production should be more significant at ~42,000 mt (7% of the group’s total production). As the Kalimantan estates mature, TDM will enjoy better FFB growth, hence providing it sustainable earnings in the longer term.

Good prospects for healthcare division. The healthcare division’s (5% of the group’s PBT) long term prospect is underpinned by its plan to double its beds to 412 by end-2014 (from 204 beds in 2011). This will be achieved through the construction of a new building in Kuantan Medical Centre and Kuala Terengganu Specialist Hospital. 

Better FY13E earnings.  Our estimation shows that FY12E earnings should moderate to RM137m (-13% YoY) due to the flat average CPO prices of RM3,150 (-2% YoY) and lower FFB volume of 612k mt (-2% YoY). However, FY13E earnings should improve to RM141m (+3% YoY) as FFB production improves to 628k mt then. Despite expected earnings decline in FY12E, current share price at low valuation (<7.5x  FY13E Fwd. PE) is a good opportunity to accumulate ahead of 2014 FFB surge.

Plantation valued at 8x Fwd PE is already at steep  discount against other planters.  Our valuation of 8x Fwd. PE is peg on current Sarawak Plantation Fwd. PE on its FY13E earnings using consensus forecast. We believe both companies should have similar valuation due to its status as state owned planters and comparable planted estate size of 35k-40k ha. Note that our 8x Fwd. PE is conservative as it is still 38% discount to other mid cap planters valuation of 13x Fwd. PE

Source: Kenanga