Saturday, November 26, 2011

Sarawak Oil Palms Bhd (RM4.66; TP: RM5.80): Results in-line

SOP achieved a net profit of RM75.14mil in 3Q2011, an increase of 52.1% yoy and 7.4% qoq. 9M2011 net profit rose to RM199.6mil, an increase of 94.2% yoy. However, profit before tax in 3Q2011 dropped qoq to RM103.8mil from RM112mil in 2Q2011 as palm oil production growth could not offset the drop in palm oil prices. Net cash stood at RM104mil. Going forward, 4Q2011 might retain the same performance or a marginal drop in profits owing to slightly lower production (judging from its historical production in 4Q vs 3Q), assuming palm oil prices remain at RM3,000/MT.

Net profit is on track to reach about RM270-280mil in the whole year of 2011, equivalent to EPS of 62.2 sen to 64.5 sen. It is currently trading at PER 2011 of 7.2-7.5x which remains undemanding. PBV is at 1.48x. Fair value maintained at RM5.80 per share, an upside of 24.5%. Over the past 2 weeks, its share price remained very resilient supported by very strong buying power, despite the drop in the overall market over the few weeks. It’s a stock worth putting in your portfolio over the long term. Strong earnings growth would come from its young tree age profile as 43% of its immature trees mature over the next few years.

Market Data:
Share price: RM4.66
Shares issued: 434.146mil
Market Cap: RM2,023mil
PER 2011: 7.2-7.5x
PBV: 1.48x

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

Thursday, November 24, 2011

TDM Results (RM3.29; TP: RM5.40): Spectacular! The best quarter achieved thus far!

TDM results just came out. It was the best quarterly results that TDM had achieved thus far and even beyond my expectations. Net profit for 3Q2011 at RM51.5mil, an increase of 82.1% yoy and 60.9% qoq. The rise in net income was due to double-digit production growth of CPO and PK by 25% and 13% respectively coupled with higher CPO and PK prices by 24.2% and 54.5% respectively. Net cash level rose to RM212.6mil (RM0.98/share) in 3Q2011 from RM155.4mil in 2Q2011.

YTD 9M net profit was already at RM112.5mil. Another RM50mil net profit for 4Q2011 would boost its net profit to surpass RM160mil for the whole year of 2011 with net cash level to surpass RM250mil by the end of this year. This translates to EPS of 67.6 sen and net cash per share of RM1.06.

In view of the spectacular results, fair value should be even higher at RM5.40, based on EPS of 67.6 sen and PER of 8x. Potential upside would be 64% from current levels. At current price of RM3.29, it is trading at a ridiculously low PER of 4.8x!!! This is perhaps the cheapest plantation counter I’ve encountered thus far!!

Market Data: 
Share price: RM3.29
Shares issued: 236.8 mil
Market Cap: RM779.06 mil
Net cash: RM212.5 mil/RM0.90 per share
PER 2011: 4.8x
PBV: 0.94x

Friday, November 18, 2011

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:

  • 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

Tuesday, November 15, 2011

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

Monday, November 14, 2011

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%.

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