TDM (TDM MK) Neutral. Decent Mid-Sized Planter With Long Term Potential

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1 Company Update, TDM (TDM MK) Neutral Consumers Staples - Consumer Products Target Price: MYR0.97 Market Cap: USD425m Price: MYR0.91 Decent Mid-Sized Planter With Long Term Potential Macro Risks Growth Value Price Close TDM (TDM MK) Relative to FTSE Bursa Malaysia KLCI Index (RHS) We initiate coverage on TDM with a NEUTRAL recommendation and SOP-based FV of MYR0.97. As its share price has risen by 16% since we launched our Top Malaysia Small Cap Companies book in July, we deem its current valuations slightly rich. We believe TDM has better longer term potential as significant contribution from its Indonesian plantations will only kick in from FY16/17 onwards. Vol m Nov-12 Jan-13 Source: Bloomberg Mar-13 Avg Turnover (MYR/USD) May-13 Jul-13 Sep m/0.94m Cons. Upside (%) 6.6 Upside (%) wk Price low/high (MYR) Free float (%) 40 Shareholders (%) Terengganu Incorporated S.B Perbadanan Memajukan Iktisad Negeri Terengganu 13.3 Indonesian plantations to start maturing from FY13 onwards. TDM s 70,000 ha plantation landbank spans 32,437 ha in Terengganu and 37,856 ha in West Kalimantan. The company has been steadily planting up its Indonesian landbank since 2009, with year 2013 being the maiden year of maturity for some 400+ ha in that country. The group s planted area as at end-fy12 totalled 40,518 ha, of which 30,574 ha is mature. Management expects another 1,800 ha of land to come into maturity in FY14, with 4,500 ha more reaching this stage in FY15. Given the low yields during the first few years of maturity, we expect the Indonesian estates to contribute more significantly to earnings only from FY16/FY17. Number of beds in hospital segment to double within 3 years. The company, which is in the midst of expanding capacity at three of its existing private hospitals, aims to double the number of beds within the next three years to 430 from 204 currently. Initiating coverage with NEUTRAL call. TDM s FY14 P/E of 15.7x is at a slight discount to its peers, which are trading at 17-19x 1-year forward P/Es. We value the stock using a SOP approach, ascribing 16x and 20x FY14 P/Es to its plantation and healthcare operations respectively, to derive a FV of MYR0.97. Although we see the company as having longterm potential, its stock valuations are a bit rich at this juncture, since a big jump in profits would only come in FY16/17 when its Indonesian plantations start contributing more significantly. In addition, as TDM s earnings are highly sensitive to CPO prices (every MYR100/tonne change would affect its earnings by 8-9% per annum), a positive change in CPO price direction may benefit the company significantly. Since the launch of RHB s annual 2013 Top Malaysia Small Cap Companies publication featuring TDM at end-july, its share price has jumped 16%. As such, we initiate coverage on TDM with a NEUTRAL call. Shariah compliant Hoe Lee Leng hoe.lee.leng@rhbgroup.com Forecasts and Valuations Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Total turnover (MYRm) Reported net profit (MYRm) Recurring net profit (MYRm) Recurring net profit growth (%) (40.8) (52.8) 90.4 Core EPS (MYR) DPS (MYR) Dividend Yield (%) Core P/E (x) Return on average equity (%) P/B (x) P/CF (x) EV/EBITDA (x) Net debt to equity (%) net cash net cash net cash Our vs consensus EPS (%) Source: Company data, RHB estimates See important disclosures at the end of this report Powered by EFA TM Platform 1

2 Background Two core businesses. TDM s core businesses are in palm oil plantation and healthcare. Although the listed plantation arm of the Terengganu state government owns a 60.7% stake, the company is managed professionally. It started out as a plantation management company in 1965, and by end-2012, was managing 32,437 ha of palm oil estates in Terengganu, of which 26,794 ha was owned by TDM and the remainder by the Terengganu state government and external shareholders through a sublease scheme. TDM earns a small management fee for managing the sublease scheme. Owns 70,293 ha of plantation land. TDM now owns approximately 70,293 ha of palm oil plantations, of which 32,473 ha are in Malaysia and 37,856 ha are in West Kalimantan, Indonesia. It expanded into Indonesia in 2007, and has since planted up about 8,081 ha of land as at end Besides this, it also owns two palm oil mills in Terengganu, with total capacity of 60 tonnes per hour, or 600,000 tonnes a year. Figure 1: Locations of TDM s assets Source: Company Operates four private hospitals. TDM s healthcare division operates four specialist hospitals, namely the: i) Kelana Jaya Medical Centre in Petaling Jaya, Selangor, ii) Taman Desa Medical Centre off Jalan Kelang Lama, Kuala Lumpur, iii) Kuantan Medical Centre in Kuantan, Pahang, and iv) the Kuala Terengganu Specialist Hospital in Kuala Terengganu, Terengganu. Currently, TDM has 204 beds at its four hospitals. See important disclosures at the end of this report 2

3 Figure 2: TDM s healthcare assets Source: Company Plantation division the main profit earner. The plantation division contributed 77% to revenue in FY12 and 93% to PBT in the same year. The healthcare division contributed the remaining 23% to revenue and 7% to PBT. Figure 3: TDM s revenue breakdown by segment Source: Company Steered by professional management team. TDM is managed by a team of professional managers led by CEO Badrul Hisham Mahari, who has many years of experience in the corporate sector. The CEO of the plantations division, Haji Abdul Halim, has >35 years in estate management, while the healthcare division s CEO, Bryan Lim, has >20 years experience in the healthcare industry in US and Malaysia. See important disclosures at the end of this report 3

4 Outlook plantation division 48,338 ha planted with trees averaging 16 years. Of the total 70,293 ha of land, TDM had planted 48,338 ha as at end-1h13, ie 32,437 ha in Malaysia and 15,901 ha in Indonesia. Of these, approximately 31,000 ha were mature as at end-1h13. The average age of TDM s landbank in Malaysia is about 16 years, while the landbank in Indonesia is mostly immature. Figure 4: TDM s plantation land Source: Company Figure 5: TDM's tree age profile (at end-1h13) Old (21-25 years), 12.6% Very Old (> 25 years), 0.8% Old Prime (16-20 years), 22.6% Immature, 36.3% Young Prime (11-15 years), 20.1% Young (4-10 years), 7.5% Source: RHB estimates See important disclosures at the end of this report 4

5 Landbank to be planted up by TDM has been steadily planting up its Indonesian landbank since 2009, and in 1H13, planted up some 3,074 ha of land. For the rest of FY13, it expects to plant up another 3,000-4,000 ha of land, in order to achieve its yearly planting target of 7,000 ha. New planting cost-to-maturity is estimated at MYR15,000/ha. The company aims to fully plant up its Indonesian landbank by After that, it intends to expand its landbank size to 100,000ha by 2022 by acquiring greenfield and brownfield land, possibly in Terengganu and Indonesia. New mature areas on the rise is the maiden year of maturity of some 400+ ha of planted land in Indonesia. Meanwhile, TDM s management expects another 1,800 ha of land to come into maturity in FY14 while 4,500 ha will reach this stage in FY15. Given the low yields during the first few years of maturity, we expect the Indonesian estates to contribute more significantly to earnings only from FY16/17 onwards. Figure 6: TDM s planting plans Source: Company Malaysian estates undergoing rehabilitation. In Malaysia, the company has been rehabilitating its estates and implementing best practices since This involves the consistent replanting of older areas with better planting material, improving inventory management and the timely delivery of products to ensure high oil quality. It targets to replant on about 1,500 ha every year, at a cost-to-maturity of about MYR10,000/ha. As of 9M13, TDM had replanted some 1,700ha, more than the annual target of 1,500ha. The effects of this have already started to come through given the improved CPO yield of 1.41 tonnes/ha in 1H13, up 5% y-o-y from 1.34 tonnes/ha in 1H12. FY13 FFB production projected at -3.2% y-o-y. In 9M13, TDM produced 339,190 tonnes of fresh fruit bunches (FFB), down 10.9% from 9M12. The decline was mainly due to the lower mature acreage from replanting activities, as well as seasonal factors. Management expects 4Q to be the year s peak quarter, similar to previous years. It is worth noting that management expects to be able to realise about 65% of its annual production in 2H, as was the case in FY12. This is due to seasonally very wet weather in 1Q in Terengganu state. Management is now guiding for a 3% decline in FFB production for FY13, which is in line with our -3.2% y-o-y projection. For FY14, we are projecting relatively flat FFB production while for FY15, we expect FFB production to pick up by 3.7%. This is after taking into account the new areas coming into maturity as well as the progress of replanting. Production cost to come down in 2H13. TDM s CPO production cost in 1H13 was about MYR1,700-1,800/tonne. However, management expects production cost to decline in 2H13, thereby driving down the average FY13 production cost to MYR1,300-1,400/tonne. This is due to the fact that the company applied close to 70% of its fertiliser requirements in 1H13 due to the seasonality in Terengganu. We understand that by 3Q13, all of the manuring for the year had been completed. TDM s fertiliser cost was about 6% lower y-o-y for FY13. We have been slightly more conservative in our forecasts, projecting a production cost of MYR1,500-1,600/tonne for FY13. This implies a 10-15% y-o-y increase from FY12 due to the lower FFB See important disclosures at the end of this report 5

6 yields, which would translate into higher unit costs. For FY14, however, we project production costs to decline by 5-10% y-o-y, largely owing to lower fertiliser prices. Fertiliser prices, in particular that of potash which is the most expensive fertiliser item and the biggest volume used - is widely expected to plunge by 30% y-o-y in 2014 due to the recent breakup of the cartel in Russia. Outlook healthcare division Carving a niche in the secondary care market. TDM s healthcare division is positioning itself in the secondary care market, between private clinics and tertiary care hospital chains like Pantai and Gleneagles. Its hospitals provide quality and affordable healthcare service to the neighbouring and surrounding communities, pricing its hospital services at about 20-30% lower than those at tertiary hospitals. Figure 7: TDM s market positioning Source: RHB estimates Beds to double in the next three years. TDM is in the midst of expanding the capacity of three of its existing private hospitals. It aims to double its bed capacity within the next three years to 430 beds from 204 currently. The first phase of expansion to come onstream would be the addition of 18 and 45 beds in Kelana Jaya Medical Centre and Taman Desa Medical Centre in 2013 respectively, followed by 66 new beds in Kuantan Medical Centre in 2014, and 97 new beds in Kuala Terengganu Specialist Hospital in Long-term plan to spin off or list healthcare assets. TDM aims to either acquire or build a new hospital in 2016, in keeping with its long-term target of having a total of 600 beds under its purview. This would enable the company to become big enough to spin off or list its healthcare assets in order to create a cleaner corporate structure, thereby separating its plantations and healthcare assets. Taman Desa Medical Centre to turn around in FY14. TDM s hospitals have been seeing improved performance over the last six years, although the segment s 2011 and 2012 profits were slightly dented by losses at newly-acquired Taman Desa Medical Centre. This hospital is the group s last remaining loss-making hospital (1H13: -MYR0.3m in PBT), but management expects this asset to turn around and report a profit in See important disclosures at the end of this report 6

7 Figure 8: Healthcare revenue (MYRm) Figure 9: Healthcare PBT (MYRm) H H2013 Source: Company, RHB estimates Source: Company, RHB Estimates Revenue per bed improving every year. On a revenue per bed basis, the company has shown significant improvements over the last six years. We expect revenue per bed to continue growing as TDM expands its capacity further to drive more inpatient revenue. Currently, 70% of its healthcare revenue comes from inpatients, who make up only 9% of its total number of patients. Within the next three years, as TDM s expanded capacity come on stream, we project this division will contribute 20-25% of PBT (up from 6-7% in FY12). Figure 10: TDM's historical revenue per bed 600, , , , , , (Ann) 0 No beds Revenue/Bed (MYR) Source: RHB estimates Net cash to reverse to manageable net debt position. As at end-1h13, TDM had net cash of MYR72.8m. We expect this to reverse to a net debt position (of <10%) by end-fy13 due to the group s need for capex for its new planting and healthcare expansion. The capex required for FY13 is approximately MYR300m-400m, while an additional MYR250m is expected to be required in FY14. However, as the group s operating cash flow of MYR100m-200m per year is healthy, we expect TDM s net gearing to remain manageable at less than 30% over the next few years. We also expect ROE to improve as it makes better use of its cash and gears up in order to reduce the cash drag on earnings. Minimum dividend payout of 30%, but payment has been higher historically. Although TDM s dividend policy is to pay out a minimum 30% of net earnings every year, it paid out >50% of earnings in FY12 and 30-50% in previous years. We are thus projecting the company to pay out a net dividend of 40-45% in FY13-14, which will translate into an annual dividend yield of 1.5-3%. See important disclosures at the end of this report 7

8 Risks The main risks include: i) a reversal in crude oil price trend, resulting in a reversal in the prices of CPO and other vegetable oils, ii) weather abnormalities, which could trigger an over- or under-supply of vegetable oils, iii) changes in the emphasis on implementing global biofuel mandates, iv) a faster- or slower-than-expected global economic recovery, resulting in higher- or lower-than-expected demand for vegetable oils, and (v) unexpectedly low patient numbers, which could be due to slower-thanexpected economic recovery and serious disease outbreaks (such as SARS or swine flu) in Malaysia as well as a turnaround in its loss-making hospital coming slower than anticipated. Forecasts Fall in FY13 earnings in line with industry... In line with the decline in earnings seen for the overall plantation industry, TDM s earnings are also expected to plunge by 56.2% y-o-y in FY13, on the back of: i) lower CPO prices (MYR2,400/tonne projected for FY13 vs MYR2,946/tonne in FY12), ii) lower FFB production (-3.2% projected for FY13), and iii) higher unit production costs (estimated at % y-oy). We expect the decline in contribution from the plantation division to be slightly offset by the improvements in the healthcare division. but FY14 earnings to jump from low FY13 base. For FY14, we expect earnings to surge by 85% y-o-y, due to the low base in FY13. We project a higher CPO price assumption of MYR2,600/tonne, flattish FFB production growth and lower unit production costs (-5-10% y-o-y) for the year. We also project the healthcare division to post stronger earnings in FY14, as the Taman Desa Medical Centre turns around to profitability and the capacity expansion kicks in. Earnings highly sensitive to CPO price movement. We highlight that TDM s earnings are highly sensitive to CPO prices, where every MYR100/tonne change in CPO prices would affect its earnings by 8-9% per annum. Valuation and recommendation Trading at a slight discount to peers. TDM is considered a mid-sized plantation stock based on its landbank size. In comparison, its FY14 P/E valuation of 15.7x is at a slight discount to its peers, which are trading at 17-19x one-year forward P/Es. We value TDM using a SOP approach, attributing FY14 P/Es of 16x and 20x to its plantation and healthcare divisions respectively, from which we arrive at a FV of MYR0.97. The 16x FY14 target P/E we apply to the plantations division is the same valuation metric we use for peers like IJM Plantations (IJMP MK, SELL, FV: MYR2.46), TH Plantations (THP MK, SELL, FV: MYR1.15), TSH Resources (TSH MK, NEUTRAL, FV: MYR2.28) and Sarawak Oil Palm (SOP MK, BUY, FY: MYR6.05). In the meantime, the 20x target P/E for TDM s healthcare division is at a 25% discount to the CY14 P/E for the healthcare sector. We attach a 25% discount since TDM s healthcare operations are much smaller compared to those of KPJ Healthcare (KPJ MK, NEUTRAL, FV: MYR6.13) and IHH Healthcare (IHH MK, NEUTRAL, FV: MYR3.87). Long term-potential, but current valuations rich. Although we believe this company has long-term potential, its stock s valuations are a bit rich at this juncture given the fact that a big jump in earnings would only materialise in FY16/17 when its Indonesian plantations start contributing more significantly. On an EV/planted ha basis, TDM s MYR26,000-28,000/ha (USD8,000-9,000/ha) valuations are inexpensive compared to its Malaysian peers MYR35,000-55,000/ha (USD11,000-17,000/ha) and its Indonesian peers USD18,000-22,000/ha. Initiate with Neutral. Since the July launch of RHB s annual publication Top Malaysia Small Cap Companies featuring TDM, the company s share price has risen by 16%. Therefore, we initiate coverage on TDM with a NEUTRAL recommendation. Figure 11: SOP Valuation CY 14 PE MYRm Plantations 16 1, Healthcare , No shares ('m shares) 1, Target Price (MYR/share) 0.97 Source: RHB estimates See important disclosures at the end of this report 8

9 Financial Exhibits Profit & Loss (MYRm) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Total turnover Cost of sales (191) (219) (226) (220) (207) Gross profit Gen & admin expenses (49) (55) (68) (57) (50) Selling expenses (8) (9) (8) (7) (7) Other operating costs (9) (18) (20) (25) (25) Operating profit Operating EBITDA Depreciation of fixed assets (18) (21) (28) (30) (32) Amortisation of intangible assets (1) (0) Operating EBIT Interest income Interest expense (0) (0) (0) (9) (13) Exceptional income - net (8) Pre-tax profit Taxation (36) (58) (46) (20) (32) Minority interests (3) (2) (1) (1) (1) Profit after tax & minorities Reported net profit Recurring net profit Source: Company data, RHB estimates Cash flow (MYRm) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Operating profit Depreciation & amortisation Change in working capital 10 (9) (6) 13 (2) Other operating cash flow (1) 1 (2) - - Operating cash flow Interest received Interest paid (0) (0) (0) (9) (13) Tax paid (24) (55) (57) (20) (32) Cash flow from operations Capex (58) (93) (121) (320) (150) Other new investments Other investing cash flow 1 (9) Cash flow from investing activities (55) (101) (119) (320) (150) Dividends paid (26) (38) (45) (19) (36) Proceeds from issue of shares Increase in debt (1) (9) Other financing cash flow Cash flow from financing activities (16) (30) Cash at beginning of period Total cash generated (11) (51) 31 Implied cash at end of period Source: Company data, RHB estimates See important disclosures at the end of this report 9

10 Financial Exhibits Balance Sheet (MYRm) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Total cash and equivalents Inventories Accounts receivable Other current assets Total current assets Tangible fixed assets 665 1,095 1,186 1,477 1,595 Intangible assets Total non-current assets 671 1,108 1,201 1,492 1,610 Total assets 929 1,449 1,515 1,802 1,947 Short-term debt Accounts payable Other current liabilities Total current liabilities Total long-term debt Other liabilities Total non-current liabilities Total liabilities Share capital Retained earnings reserve Other reserves Shareholders' equity 709 1,150 1,234 1,311 1,360 Minority interests Other equity 0 (0) Total equity 727 1,175 1,260 1,337 1,388 Total liabilities & equity 929 1,449 1,515 1,802 1,947 Source: Company data, RHB estimates Key Ratios (MYR) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F Revenue growth (%) (11.7) (16.4) 9.8 Operating profit growth (%) (38.1) (46.4) 78.7 Net profit growth (%) (36.4) (56.2) 90.4 EPS growth (%) (36.4) (56.2) 90.4 Bv per share growth (%) Operating margin (%) Net profit margin (%) Return on average assets (%) Return on average equity (%) Net debt to equity (%) (23.6) (19.0) (14.5) DPS Recurrent cash flow per share Source: Company data, RHB estimates Figure 12: Earnings Assumptions FY12 FY13f FY14f FY15f CPO Price (MYR/tonne) 2,946 2,400 2,600 2,600 FFB Production Growth (%) (10.7) (3.2) No hospital beds Source: RHB estimates See important disclosures at the end of this report 10

11 SWOT Analysis TDM expects to fully plant up its landbank within the next five years, while its Indonesian landbank will start to come into maturity from FY13 onwards Number of beds at its private hospitals to double within the next three years, and it is set to become a full-fledged, medium-sized hospital operator TDM s healthcare business is on the verge of doubling its capacity and achieving full profitability. Once economies of scale have been reached, it may spin off its healthcare division New rules and regulations governing landbank acquisition or expansion in Indonesia could limit future longterm growth Continued scrutiny of the palm oil industry by the environmental groups could have a negative effect on the company High concentration of its plantation land in Terengganu means any extreme weather conditions there may significantly affect productivity Initial yields at newly mature areas are normally low and its Indonesian unit may incur losses in the first few years of operations P/E (x) vs EPS growth P/BV (x) vs ROAE % % % 49% % 20 23% % 15-3% 1.0 8% % -54% 0.5 4% 0-80% 0.0 0% Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 P/E (x) (lhs) EPS growth (rhs) P/B (x) (lhs) Return on average equity (rhs) Source: Company data, RHB estimates Source: Company data, RHB estimates Company Profile TDM has two main divisions - palm oil plantations and healthcare. It has a total landbank of 70,000ha in Malaysia and Indonesia, of which close to 50,000ha has been planted. TDM also operates four medium-sized specialist hospitals in Malaysia. See important disclosures at the end of this report 11

12 Recommendation Chart Price Close Nov-08 Feb-10 May-11 Aug-12 Source: RHB estimates, Bloomberg Date Recommendation Target Price Price Source : RHB estimates, Bloomberg See important disclosures at the end of this report 12

13 RHB Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage Disclosure & Disclaimer All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or warranty, express or implied, as to its accuracy, completeness or correctness. No part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. This report is general in nature and has been prepared for information purposes only. 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