FV: RM1.48 Main Market Listing. Tanah Makmur Berhad A Value Buy. NEW LISTING Tuesday, July 01, 2014 FBM KLCI: 1, Sector: Plantation

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1 A Member of the TA Group MENARA TA ONE, 22 JALAN P. RAMLEE, KUALA LUMPUR, MALAYSIA TEL: / FAX: Tanah Makmur Berhad A Value Buy NEW LISTING Tuesday, July 01, 2014 FBM KLCI: 1, Sector: Plantation FV: RM1.48 Main Market Listing THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* James Ratnam james@ta.com.my The listing of Tanah Makmur Bhd (TMB) marks the return of a rebranded and expanded Kurnai Setia Bhd. The group is controlled by Lembaga Kemajuan Perusahaan Pertanian Negeri Pahang (LKPP) and the Pahang royal family. We estimate net profit to post strong growth ahead (+22% YoY in FY14 and +13% YoY in FY15), driven by higher CPO price and, while non-recurring, contribution from bauxite mining activity. A further rerating catalyst the Pahang state administrative centre and assembly hall are likely to be relocated within TMB owned KotaSAS property development project. If the relocation materialises, we expect significant increase in the land price and GDV value. We have applied Sum-of-Parts valuation methodology and derived at the fair value of RM1.48 for TMB. Company Background The listing of Tanah Makmur Bhd (TMB) marks the return of a rebranded and expanded Kurnai Setia Bhd, which was taken private back in Nov The group is controlled by Lembaga Kemajuan Perusahaan Pertanian Negeri Pahang (LKPP) and the Pahang royal family. Since the de-listing of Kurnia Setia, the group has expanded its plantation assets (about 18k ha plantation land bank now vs. 14.4k ha previously), constructed its first own mill that commenced in July 2012 and expanded into property development. As part of the IPO scheme, TMB will issue 52.1mn share at RM1.25/share, raising a total of RM65.2mn and giving the group a market cap of RM498mn. Figure 1: TMB s business profile Share Information Listing Main Market Enlarged Share Capital (mn) Market RM1.25 (RM mn) Par Value (RM) 0.50 Issue Price 1.25 Oversubscription rate NA Estimated free float (%) NA Tentative Listing Date 17-Jul-14 Tentative Listing Dates Event Tentative Date Opening of the IPO 26-Jun-14 Closing of the IPO 3-Jul-14 Balloting of Applications 7-Jul-14 Allotment of Shares 11-Jul-14 Listing 17-Jul-14 Ratio & Analysis NTA per share (post IPO)(RM) 0.90 Price to NTA (x) 1.4 Proforma ROE (%) 10.8 Proforma ROA (%) 8.4 Proforma Net Gearing (x) Net Cash Proforma Current Ratio (x) 8.1 Utilisation of Proceeds RMmn % Estate development Expansion of palm oil mill Infrastructure work of the Kota Repayment of bank borrowings Listing Expenses TOTAL Page 1 of 7

2 Figure 2: Key milestones * TAS Group refers to TAS Industries S/B Figure 3: Breakdown of revenue Plantation Property Development 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Bulk of IPO Proceeds Earmarked for Plantation Business Presently, TMB s entire plantation assets are located in the state of Pahang. Out of the planted area of approximately 13,500 ha, 11,729 ha (87%) are mature estates. We estimate the average palm trees age is about years old (20.6% of planted area > 19 years old). Despite the relatively mature trees, FFB yield has been consistently above both Pahang and P. Malaysia average (Figure 6). We estimate FFB production could grow by approximately 3% to 240k tonnes in FY14. Estate rejuvenation appears to be the main focus for the next 4 years. RM28.5mn (43.7%) out of the IPO proceeds has been earmarked for replanting of 2k ha and new planting of 3.1k ha (Figure 7). Another RM5.0mn (7.7%) to upgrade capacity of its sole mill to 45 MT/h from 30 MT/h currently (about 51% of FFB production are sold to third parties in FY13). As with other plantation companies, TMB targets to expand its plantation land bank by 25k ha over the next 3 years, possibly even outside of Pahang. Page 2 of 7

3 Figure 4: Palm tree age profile > 25 yrs old 9% 0-1 yrs old 4% 2 yrs old 7% 3 yrs old 2% yrs old 17% yrs old 16% 9-13 yrs old 25% 4-8 yrs old 20% Figure 5: Location of plantation estates Figure 6: Key plantation statistics For the year ended Dec Group FFB Production (mt) 240, , ,605 Matured plantation (ha) 10, , , FFB yield per ha (mt/ha) Group Pahang Peninsular Malaysia Malaysia (including Sabah and Sarawak) Page 3 of 7

4 Average FFB Yield (mt/ha) between Jan 2013 and Dec 2013 OER (%) between Jan 2013 and Dec 2013 PK recovery rate (%) between Jan 2013 and Dec 2013 TMB Pahang Malaysia Figure 7: Utilisation of IPO proceeds KotaSAS a Jewel in the Crown Launched in 2010, this is the brainchild of TMB s MD, Tengku Dato Zubir. Located about 15 minutes drive from the Kuantan city, this development likely to power TMB s growth ahead. Already, demand for residential properties in Kuantan had seen strong growth, stimulated by East Coast Economic Region (ECER) project. Transactions of residential properties grew by a CAGR of 24.9% in 2009/13. A key catalyst - negotiations are underway to relocate the state administrative complex and state assembly hall to within the KotaSAS township. The relocation, if materialises, will be completed within 3 years and significantly enhance the land value. We strongly believe TMB will be given the mandate, since the state government (via LKKP) is the substantial shareholder of TMB as well as the strong royalty connection. In addition, to a certain extent, KotaSAS could be a beneficiary of the massive flood that engulfed Kuantan town in Dec last year. The township is located on a higher ground compared with Kuantan town and therefore, less prone to the flash flood. This should be an important consideration for new home buyers, given the expensive direct and indirect replacement costs incurred post-floods. As highlighted above, the close proximity to Kuantan town means fewer hurdles to relocate. The project involves 1,500 acres land bank to be developed into a mixed residential commercial properties over the next 10 to 15 years. According to the Prospectus, on a base case scenario, the development could fetch 1.8bn in GDV. On a blue sky scenario, that value could increase to RM3.0bn, if the relocation of the state administrative complex materialises. For FY14, the group targets to launch RM245mn worth of GDV, comprises of residential units, bungalows and commercial shop lots. Page 4 of 7

5 Bauxite - The Unintended Fortune Near term earnings will also be boosted by discovery of bauxite within the Ladang Bukit Goh, the site for the KotaSAS development. According to the Prospectus, a total of 8 hills were identified with potentially economic bauxite that is exploitable without major earthwork. An independent report prepared by a geological consulting company, Aycel Geoservices S/B estimates bauxite deposit of 1.4mn tonnes in this area. Given that the bauxite deposit is located right on the land that has been earmarked for property development, the excavation work is expected for completion within 2 3 years. Excavation work commenced in April The mining activity is undertaken via TMB s 60% owned subsidiary, Kreatif Selaras Mining S/B. The balance 40% stake is held by members of the royal family. The physical mining work has been outsourced to another company, SE Satu S/B, which is controlled by Bursa Malaysia listed company, WZ Satu Bhd and Tengku Dato Uzir Ubaidillah, a substantial shareholder of TMB. Figure 8: Bauxite resources estimate Raw Ore Concretions > 2 mm Volume (m3) Tonnage (tons) Thickness (m) % Tonnage (tons) Hill SE 509,265 1,018, ,592 SW 380, , ,893 WE 425, , ,550 WW 680,000 1,360, ,733 WS* 81, , * NW 311, , ,493 NN 109, , ,425 NE 72, , ,614 Total: Total: Average: Average: Total: 2,568,165 5,135, ,426,500 Note: bauxite deposit found on 8 hills, as denoted by the left-most column * WS" Hill calculated by manual blocks Strong Growth Ahead. Fair Value of RM1.48 We estimate net profit to grow to RM52.5mn (+22.4% YoY) and RM59.4mn (+13.1% YoY) in FY14 and FY15 respectively (Figure 9). Earnings growth in FY14 is largely driven by higher CPO price. We have also assumed 6 months contribution from bauxite mining in FY14 and 12 months contribution in FY15. Our CPO price assumption of RM2,800/tonne for both FY14/15 reflects our bullish view on plantation sector, underpinned by supply risk (unfavourable weather) and potential upside to demand (gradual increase in biodiesel consumption). As for property, we have imputed RM245mn and RM250mn GDV launch in FY14 and FY15 respectively. For bauxite mining, we have assumed output of 60k tonnes/month in FY14 and 70k tonnes/month in FY15. We have also assumed 85% recoverable rate (1.2mn tonnes) in our model. Page 5 of 7

6 Risk Factors 1. Fluctuation in CPO price. Downside risk to CPO may emanate from sharp deceleration in economic outlook in key consumer countries, stronger RM and biodiesel mandate in Indonesia and Malaysia falling significantly below target. 2. Relocation of state administrative center falls through. A failure to get the state government to relocate to KotaSAS wil have negative impact on image and significantly suppressed land value. On a worst case scenario, as highlighted above, potential total GDV may only amount to RM1.8bn. 3. Convoluted business structure. Both the property and bauxite mining are undertaken via a various shareholding agreements with members of the royal family. While the terms of these agreements, as disclosed in the Prospectus appear to be on arms-length basis, execution and transparency risks cannot be ruled out entirely going forward. Valuation We have applied Sum-of-Parts valuation methodology and derived at the fair value of RM1.48 for TMB. We assigned a blended average of 10x PER for the plantation and property segments. That is some 33% discount to market-cap weighted average PER of plantation industry peers. The discount is to reflect TMB s relatively smaller market cap and the fact that small-cap property companies are trading at a relatively lower PER (7x average). As for bauxite, we use cash value (DCF method) as this is a non-core business and will only generate profit for 2 3 years. Hence, PER is not a suitable method to value the bauxite assets, in our view. Figure 9: Earnings summary FYE Dec E 2015E Plantation Property Bauxite Revenue Cost of sale (103.2) (151.6) (203.5) (268.8) Gross profit Other expenses (22.6) (27.4) (29.7) (31.3) EBITDA Depreciation (4.2) (5.8) (6.1) (6.4) Amortisation (3.2) (3.5) (3.5) (3.5) OP. Profit Other op. income Interest income Interest expense (4.3) (4.6) (4.0) (3.6) PBT Taxation (17.3) (17.0) (20.5) (24.1) Effective tax rate 20.9% 27.5% 26.0% 25.0% PAT MI (3.2) (1.8) (5.9) (13.0) PATAMI EPS (sen)* Key assumptions: Page 6 of 7

7 Mature area (ha) 10,416 11,729 11,521 11,866 FFB yield (tonnes/ha) FFB production (tonnes) 229, , , ,937 FFB processed (tonnes) 69, , , ,692 CPO production (tonnes) 14,243 31,676 36,097 39,338 KER production (tonnes) 3,564 9,465 14,152 14,805 Selling price (RM/tonne): CPO 2,777 2,376 2,800 2,800 KER 1,539 1,353 1,960 1,960 CPO production cost na 1,315 1,381 1,450 (RM/tonne) Bauxite production ,000 70,000 (tonnes/month) Bauxite selling price (USD/tonne) * for comparison purposes, share capital standardized to post-ipo (398.2mn) Figure 10: TMB s Sum-of-Parts valuation table Segments PER (x) Value (RMmn) RM/share Plantation & property Bauxite (DCF@ 10% WACC % stake) Net cash (incl. IPO proceeds) * Total Share cap (mn) Fair Value (RM) 1.48 * takes into account group net debts as information on company level is not available Source: TA Research Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. for TA SECURITIES HOLDINGS BERHAD (14948-M) MENARA TA ONE, 22 JALAN P. RAMLEE, KUALA LUMPUR, MALAYSIA TEL: / FAX: (A Participating Organisation of Bursa Malaysia Securities Berhad) Kaladher Govindan Head of Research Page 7 of 7