Tanah Makmur Berhad (TMB) is a Pahang-based company which is mainly involved in plantation and property businesses. Under its plantation division, TMB has total landbank of 17,969 ha (75% planted) in Pahang with average (avg.) age profile of 15 years old. We expect strong earnings growth of 46%-13% in FY14E-FY15E to RM62.4m-RM70.4m due to good CPO prices of RM2800/MT seen in both years. TMB’s valuation is very attractive at 7.1x FY15E Fwd. PE or EV/ha of RM37k as these represents ~50% discount to peers average. In addition, its dividend yield of 4.2% is higher than all planters under our coverage. Lastly, TMB is a good proxy to long term CPO prices upside. We value TMB at RM1.60 based on Fwd. PE of 9.1x to FY15E EPS of 17.7 sen. Our Fwd. PE of 9.1x is derived from 40% discount to avg. mid-cap Fwd. PE of 15.2x. The 40% discount is used to reflect TMB smaller market cap of RM0.5b (peers avg. RM2.7b).

Plantation + Property. TMB core business is oil palm plantation and this division contributed RM76.0m Gross Profit (GP) or 83% of the Group’s total GP in FY13. Under its plantation division, TMB has total landbank of 17,969 ha (13,530 ha or 75% planted) in Pahang with average age profile of 15 years old. Property division contributed 17% or RM15.8m GP to the total Group’s GP in FY13 through its on-going KotaSAS Township project. (Size: 1,500 acres, Period: 15 years; Estimated GDV RM1.8b).

Expect strong earnings growth of 46% in FY14E followed by another 13% in FY15E. Key driver behind the high earnings growth in FY14E will be the plantation division and better property division earnings due to ancillary income from bauxite mining. We expect plantation division to benefit from expected higher CPO prices YoY at RM2800/MT (+18% YoY). As for FY15E, the earnings should still grow at double digit but at lower growth of 13% as we expect CPO prices to be flat at RM2800/MT against FY14E level with the earnings growth solely depending on property division in FY15E.

Limited short term FFB growth but to return to 8% from FY17E onwards. As TMB age profile is relatively mature at 15 years old, we believe its FFB volume should decline 5% to 221,594 MT before showing a slight growth of 4% to 230,169 MT. However, FFB growth should return to around 8% from FY17E onwards as new planting and replanting (expected to be done from FY14E-FY16E) should rejuvenate TMB’s palm tree age profile to 12.5 years old by then.

Attractive valuation at 7.1x FY15E Fwd. PE or EV/ha of RM37k. The valuation of 7.1x Fwd. PE represents a huge discount of 52% against midcap peers planters avg. Fwd. PE of 14.7x. Its EV/ha at RM37k is also at 50% discount to average RM74k for mid cap planters. Although TMB market cap is smaller at RM0.5b against its peers’ avg. of RM2.7b, we believe that the huge discount is unjustified as TMB’s FFB yield is only slightly lower at 20.4MT/ha (or 9% below its peers average of 22.5MT/ha).

Superior dividend yield against other Malaysia based planters. Based on its IPO price of RM1.25 and FY15E dividend estimate of 5.3 sen, the dividend yield works out to be 4.2%. Note that this is higher than all planters under our coverage which has average dividend yield of only 2.9% and range from 1.1% to 3.9%. We have assumed dividend payout ratio of 30% in line with the Company’s dividend policy.

Proxy to long term CPO prices upside. We believe that TMB is a good stock to invest for the long term to ride the CPO price upside in the long run. While short term CPO prices is admittedly very volatile, the long term upside is clear with CPO prices has appreciated by 59% in the past 10 years to RM2484/MT on 30-Jun-2014 (against 30-Jun-2004 price of RM1566/MT). As mentioned previously, TMB derived 83% of its GP from plantation division.

Source: Kenanga