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Saturday, November 26, 2011

Tradewinds (M) Bhd (RM9.30; TP: RM13.50): Another commendable quarter

TWS earned a net profit of RM144.4mil for 3Q2011, an increase of 16% qoq and 16.6% yoy. 9M2011 net profit reached RM358.7mil, an increase of 24.3% yoy. The earnings growth was mainly buoyed by superb EBIT of RM169mil from its 70% owned Tradewinds Plantation Bhd which I highlighted a few days back coupled with its EBIT from sugar refining division which improved to RM65.7mil from the previous 2 quarters of about RM49-50mil per quarter. However, the earnings growth was offset by its lower EBIT from rice division which slid to RM57mil from RM103mil in 2Q2011 and RM87mil in 3Q2010.

Going forward, its plantation division is expected to perform well owing to favorable prices and double-digit production growth. Sugar division is expected to perform comparably well. However, there might be pressure on the rice division due to the rising prices of imported rice from new paddy pledging scheme and floods in Thailand in addition to the Malaysian government’s constraints on price raise as GE13 is nearing. Having said that, TWS’ tone remains optimistic for all its divisions and expects satisfactory results for the rest of this year.

Assuming that TWS performs equally well in 4Q2011, net profit could reach RM500mil or EPS of RM1.69. Thus, its stock price of RM9.28 is trading at PER 2011 of only 5.5x. Giving TWS PER 2011 of 8x will yield a fair value of RM13.50. One thing which might hold investors back is its net borrowings amounting to RM2.5bil. However, this is not much of a big concern owing to its huge and resilient earnings of RM400-500mil annually, which could cover its debt in 5 years. Given its low PER, rather attractive dividend yield of about 4% coupled with its three business divisions that are recession-proof, this is a stock worth investing over the long term.

Having said all the above, I still think Tradewinds Plantation is a better bet as it is ‘leaner’ owing to its lower price at RM3.74 per share, better growth prospects (TWS’ rice and sugar divisions growth could be rather stagnant, thus dragging the growth of its oil palm division) and lower net gearing of 0.33x vs TWS’ 0.78x.


Market Data:
Share price: RM9.28
Shares issued: 296.47mil
Market Cap: RM2,751.24mil
PER 2011: 5.5x
PBV: 0.85x
Net gearing: 0.78x

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