Last week, Tadmax Resources Bhd (formerly known as Wijaya Baru Global Bhd but changed its name in June 2012 after the emergence of new management) announced that it is disposing one of its non-yielding assets namely a piece of land in Pulau Indah, worth RM317.3m to Ivory Merge, a wholly-owned subsidiary of 1MDB Bhd. 71% of the proceeds will be utilized to settle its entire borrowings; hence Tadmax Resources Bhd (“Tadmax”) will be in a net cash position post this disposal and its bottomline will also improve significantly arising from the interest saving of RM12m p.a.. We had a meeting session with Tadmax’s Managing Director/Group CEO, Dato’ Faizal Abdullah last week and came away from the meeting feeling POSITIVE on Tadmax’s turnaround plan. Dato’ Faizal shared with us that the land disposal is just the beginning, with several major developments in the pipeline. He is keen to turn around the Group and leave the “Wijaya Baru-PKFZ scandal” legacy behind and more importantly rewarding its loyal shareholders. Tadmax’s indicative fair value is RM0.82, which we derived from a RNAV-based valuation (30% discount) taking into account its soon-to-be-disposed assets namely: (i) remaining 60 acres land in Pulau Indah and (ii) 80k ha plantation land in Irian Jaya, Indonesia.

Disposal of Pulau Indah land worth RM317m to totally clean up balance sheet. On 20th February, Tadmax entered into an agreement with Ivory Merge to dispose off Tadmax Power Sdn Bhd, a wholly-owned subsidiary of Tadmax, which owned 310 acres of land in Pulau Indah. The land disposal’s price tag is RM317m in which Tadmax will pocket a net gain of about RM138.4m (or 37sen/share). More importantly, the Group will utilise about 71% of total proceeds to settle the Group’s entire debts of about RM226.2m. The Group will also place RM50m into cash reserves with Tadmax ending up in a net cash position of about 8.9 sen/share after the disposal. We estimate its net asset/share to improve significantly to 92 sen from 56 sen.

Earnings will improve significantly after the disposal of Pulau Indah land. Postdisposal, Tadmax will enjoy about RM12m interest expense savings every year. This will improve the Group’s earnings significantly. We estimate if the disposal can be concluded by this year, the Group’s earnings will improve significantly to RM22.0m in 2015.

More disposals in store? We understand that Tadmax owns another 60 acres of land in Pulau Indah. Management mentioned that this land has been disposed to Inai Kiara Sdn Bhd vide sale and purchase agreement dated 9 April 2013 and completion is presently pending fulfillment of conditions precedent. That will bring additional RM40m cash to Tadmax’s book. Secondly, Tadmax is currently in talks with several parties, including Felda Global Ventures (FGV) to dispose its 80k ha plantation landbank in Papua, Indonesia. From a quick check in the 2012 annual report, the land’s net book value is at RM67.0m, timber concession at RM218m and goodwill of RM66.8m set-off by deferred tax of RM71.3m and minority interest of RM28.8m which will arrive at a net carrying amount of RM251.7m. Hence, if the Group manages to sell the land at USD100m (appx: RM320m), the Group will pocket about RM68.3m net gain. This amount will be much higher if the sale of the 80k ha land excludes the timber concession.

Turnaround in the making and targeting more than RM1.0b revenue in the next 3 years? We have witnessed that Tadmax has undertaken several corporate exercises (i.e. par value reduction & land disposals) to pave the way for the Group to restructure and turn around Tadmax after the “Wijaya Baru-PKFZ scandal”. Management mentioned to us that they aspire to make Tadmax a billion-dollar revenue company in the next three years. It might be a tall order since we have only seen the Group reporting less than RM10m revenue for the past two years. Nonetheless, management is confident that this target is achievable via (i) acquiring strategic assets, including local plantation companies or landbanks, (ii) landbanking for property development, and (iii) expanding its construction business by bidding for RM400m – RM1.0b contracts every year which, in fact, the management is confident of securing at least RM400m building-related job this year.

Reward to shareholders soon? The management also mentioned that they intend to reward shareholders by paying dividends whenever the Company has “extra cash”. We do not rule out potential dividend payments to shareholders once the definitive agreements of sale for the 80k ha plantation land in Irian Jaya, Indonesia are inked.

Tadmax should be fairly valued at RM0.82 based on 30% discount to RNAV. We think the best valuation method for this asset-rich company is asset-based valuation. Currently, Tadmax’s net asset is at 56 sen. Post-disposal of the 310 acres Pulau Indah land, the Group’s net asset will increase to 92 sen. If Tadmax manages to conclude the deal for the Indonesia land bank, we estimate its net asset will further increase to RM1.17. Using that as our valuation basis and imputing a 30% discount (based on average price-to-book value for the past three years), the stock is fairly valued at RM0.82.

Source: Kenanga