Tradewinds Plantation Bhd (RM3.72; TP: RM6.24): Highlights

I just read the headlines this morning from TheEdge featuring TWSP and its results are just breathtaking. RM99mil for a quarter at net margins of 43%!!! Very seldom have I seen this kind of margins. Profits gonna be above RM300mil annually from now on. This should catch the attention of analysts and investors, right? Not so sure about Malaysian analysts though :( Some details on TWSP:


Financials:

• Net profit (3Q2011/9M2011/Estimated 2011): RM98.8mil/RM237.5mil/RM330mil
• Earnings growth 3Q2011(qoq/yoy): 9.7%/96.4%
• Earnings growth 9M2011: 130.4% yoy
• PER 2011: 5.96x
• PBV: 1.01x
• Dividend Yield: About 3%
• Net gearing: 0.33x (Decreasing every quarter from 0.58x in 1Q2010)

Palm oil plantation details:

• FFB production growth (3Q qoq/9M yoy): 15.7%/15.8%
• Mature plantations: 70,166ha
• Immature plantations: 20,940ha
• Under development: 10,909ha
• Reserves: 24,491ha
• Expansion plans: 24,491ha in 4 years

Conclusion: A definite buy. PER 2011 only at 5.96x. PBV at 1x. Net gearing not excessive at 0.33x. Expected to be in net cash position within 2 years. Compare this with TSH’s PER 2011 of 11.9x, PBV of 1.64 and net gearing of 0.67x, TWSP is definitely superior!! But but but….TSH is flying to the sky…

TWSP is a giant plantation company in the making with profits of more than RM300mil. Just look at how many oil and gas counters with profits above this amount and the higher risks involved such as high gearing, dependence on projects handout, execution risks of projects etc; And they are trading way way up and above the level these plantation companies are trading at. I just think plantation companies deserve better. 

Going forward, production growth will come from their immature plantations of 20,940ha, 10,909ha that is under development coupled with 6,000ha p.a. plantation expansion over the next 4 years.

Fair value: PER 2011 of 10x will give a fair value of RM6.24 per share. I think PER of 10x is appropriate in view of its size of plantation (about 140,000ha inclusive of rubber plantation and other land) coupled with strong earnings and production growth. Proxy for exposure to TWSP would be TWS, another buy list which I’ve highlighted in my previous posts. Having said that, TWSP would be a better bet for now owing to its lower price (thus higher liquidity) and full exposure to the plantation sector (Favorable prices now and good growth prospects), but TWS would be more stable owing to its diversified businesses in rice and sugar in addition to higher dividend yield. It depends on your risk appetite in the end.

I can't help but to compare IJMP, TH plantations and TSH with TWSP, SOP and TDM. If TWSP, SOP and TDM are to trade close to the valuations of IJMP, TH or TSH, their share prices have to double up. 


Market Data
Share price: RM3.72
Shares issued: 529.15mil
Market Cap: RM1.97bil

Sarawak Oil Palms Bhd (RM4.48; TP: >RM5.80): High production growth, PER of ~7x, cash-rich

Another plantation counter worth looking at: Sarawak Oil Palms Bhd. Someone must have been buying up this stock lately looking at its rally over the past few days. Some details on SOP:

• 10-months year-to-date CPO production growth (y-o-y): 31.6%
• 1H2011 net profit: RM125.5mil 
• Expected 2011 net profit: RM280mil
• 1H2011 earnings growth y-o-y: 135%
• Net cash position: RM116mil
• Immature plantation: 25,063ha
• Mature plantation: 33,877ha
• Reserves: ~15,000ha
• Plantation expansion: Historically about 5K-10K ha p.a.
• Growth prospects: Favorable tree age profile as about 43% of palm trees are immature. This will underpin strong growth in palm oil production over the next few years. SOP also invested downstream into palm oil refinery coupled with property development, but muted impact on earnings until about mid FY2012.
• PER 2011: 6.95x assuming RM280mil net profit
• PBV: 1.5x
• Fair value: RM5.80 assuming PER of 9x, an upside of 29.5%; RM6.45 assuming PER of 10x, an upside of 46%.

SOP is currently exhibiting strong earnings growth coupled with strong production growth owing to its favorable tree age profile. This puts SOP above many other plantation counters as it is already reaping the fruits from its rapid expansion over the past few years, rather than having to wait a few more years for the fruits to ripe. Another counter having huge production growth in palm oil production is Jaya Tiasa, but the counter is not as attractive in my opinion as it is very illiquid with a higher PER and weaker balance sheet in addition to its major business in the timber industry (not that it's not good now, it's just not as solid as oil palm plantation).

SOP's current valuation remains attractive at PER of 6.95x, underpinned by strong balance sheet and solid growth. Having said that, TDM is still more undervalued as compared to SOP, but SOP receives wider coverage from research houses such as Maybank and OSK and it's recently included in the Mid-70 index as well, which might give some impetus to its share price and attract more investors. It's a stock worth putting into your basket of shares over the longer term. Exercise some caution though when buying as there might be some profit taking owing to the huge run-up in its share price.



Market Data:
Share price: RM4.48
Shares Issued: 434.15 mil
Market Cap: RM1,945 mil

TDM Bhd (RM2.96; TP: RM4.40): Grossly undervalued. A forgotten or ignored counter?

I've written about this company before and I will write it again now, so please bear with me for my cheong hei-ness (in Canto.) :P

After looking through some of the plantation counters, TDM Bhd stood out again as a very promising stock to go into. Despite its huge increase in profits over the past year with 1H2011 profits increasing by 90% year-on-year, its stock price didn’t really move much, still staying at about RM3.00 (Resilient as well as it dropped only about 10% in Oct 2011 before rebounding back close to RM3). Its balance sheet remains solid with a strong net cash position of RM155 million. This probably explains why it could pay generous dividends with dividend yield of approx. 6%, among the highest in the whole plantation sector.

In addition to that, it remains one of the more aggressive planters. It currently has matured plantation of 33,284ha and additional plantation landbank of 40,000ha in Kalimantan, Indonesia, of which 3,000ha has been planted. TDM plans to develop 20,000ha of oil palm plantation within the next 3 years, which is considered more aggressive as compared to other plantation counters (In the words of TDM's CEO in its 2010 annual report, TDM's Indonesian plantation is expanding very fast). TDM is at a very favorable position as it not only has an existing landbank to develop, but it also has the financial resources to do just that in view of its huge available cash pile. Recall how IOI wanted to buy Dutaland landbank at a massive price tag of more than RM69,700/ha. TDM plantations are currently valued at less than RM22,000/ha which is less than a third of what IOI wanted to pay for Dutaland landbank (Market Cap of RM700mil divide by its matured hectarage of 32K ha). If we include TDM's healthcare division plus its 40,000ha of plantation landbank in Kalimantan into the equation, its matured plantations are valued even lesser.

1H2011 net profit was already at RM61mil as compared to just RM32mil in 1H2010. Total net profit for 2011 is expected to be RM130mil. Production of FFB is also increasing in the double digits. For the first 9 months of 2011, production already rose about 15% year-on-year.

So, here you go. A company paying 6% dividend, PER 2011 at 5.4x, PBV at 0.9x, double digit production growth, an existing plantation landbank of 40K ha and net cash of RM155million which already smoothened the way for aggressive organic growth (no more troublesome and expensive search for funding and landbanks) in addition to expansion plans of 20,000ha plantation within 3 years which are already taking place. For myself, this is one stock that I must add to my portfolio.

For a comparison between EPIC and TDM of which both are controlled by Terengganu Incorporated S/B, EPIC was valued at PER of 10x with net profit of only RM60-70mil with growth prospects much lesser than TDM’s. Therefore, I see no reason why TDM shouldn’t be trading close to EPIC’s valuation or even higher since TDM is in many ways superior to EPIC. Thus, what’s the upside? If TDM is valued at PER of 8x (About the average for smaller planters), its fair value should be at RM4.40/share, an upside of almost 50%. If it’s valued at PER of 10x, its fair value should be at RM5.50/share, an upside of more than 80%.

Details:

Share Price: RM2.96

Shares Issued: 236.562 mil

Market Cap: RM700mil

Net Profit for 2010 and 2011: RM93.6mil and RM130mil

PER 2011: 5.4x

PBV: 0.9x

Dividend Yield: 6%

Net Cash: RM155mil

Expansion Plans: 20,000ha in 3 years