LONG TERM PROSPECTS: Photo shows oil palm fruit bunches stored for milling at one of TDM’s facilities. The stock has been regarded as being ‘deeply undervalued’ as the company’s long term prospects remain attractive, particularly with its landbank in Kalimantan.
KUCHING: TDM Bhd (TDM), with a market capitalisation of RM1.07 billion, has been viewed as a ‘deeply undervalued’ stock as the company’s long term prospects remain attractive, particularly on its landbank in Kalimantan.
Lim Seong Chun, an analyst from the research arm of Kenanga Investment Bank Bhd (Kenanga Research) stated yesterday in a research note that TDM had planted areas of 39,035 hectares (ha), of which 32,460ha were in Terengganu while the rest were in Melawi, Kalimantan.
“As of end-2011, 6,575ha have been planted in Kalimantan (all immature) and we expect maiden fresh fruit bunch (FFB) contribution here from 2013 onwards at about 6,600 metric tonnes (mt).
“In 2014, the FFB production should be more significant at about 42,000mt (seven per cent 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,” the analyst outlined.
He added that TDM’s balance sheet was ‘very strong’ with net cash of RM247 million or RM1 per share. Along with its annual strong cash flow of about RM140 million or 57 sen per share, Lim expected TDM to continue paying attractive dividends of 21.9 sen to 22 sen in financial years 2012 and 2013 (FY12 and FY13).
This payout assumption implied a net dividend yield of five per cent, where “all planters under our coverage net dividend yield are in the one to 4.2 per cent range,” he stated.
“Based on FY13 estimated earnings per share (EPS), TDM is currently trading at only 7.4 times forward price earnings ratio (PER), representing a steep discount of 42 to 59 per cent against other planters under our coverage, which trade at forward PERs of 12.8 to 18.2 times.
“Its enterprise value (EV) per ha is also extremely attractive at RM21,742 per ha, 62 to 77 per cent below other mid-cap planters’ EV per ha of RM56,500 per ha to RM94,100 per 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 per ha and attractive FY13 estimated dividend yield of 4.8 per cent,” the analyst rationalised.
He also noted ‘good prospects’ for TDM’s healthcare division, which contributed five per cent of the group’s profit before tax (PBT), as its long term prospect was underpinned by its plan to double its beds to 412 by end-2014 (from 204 beds in 2011).
This would be achieved through the construction of a new building in Kuantan Medical Centre and Kuala Terengganu Specialist Hospital. The group currently had four hospitals under its portfolio.
Nonetheless, the healthcare division’s PBT contribution in the long term was expected to remain at five per cent moving forward given the robust growth potential in the plantation sector, he said to The Borneo Post.
“As a result of a strategic revamp to streamline TDM’s businesses in 2004, the company has started to divest its non-core businesses, rehabilitate its palm oil trees and engineer a turnaround at its hospitals.
“As a result, TDM’s net profit has grown at a seven-year compound annual growth rate of 40 per cent to RM157 million in FY11 (from FY04 net profit of RM15 million).
“A rerating is likely as more investors notice the company’s consistent earnings delivery and narrowing hence its current huge discount against its peers’ forward PER valuation of 13 to 15 times going forward,” he stated.
The analyst valued TDM at RM5.05 per share based on a sum-of-parts approach with the plantation and healthcare divisions valued at eight times and 12 times forward PER division respectively.