· Kuantan-based planter & property developer. Tanah Makmur Berhad (TMAKMUR)’s core businesses are Plantation (contributed to 50% of FY14 revenue or RM194m) and Property (50% contribution or RM195m). Under its Plantation segment, TMAKMUR owns a landbank of 17,969ha of which 17,057ha is planted as of FY14, with an average tree age of 9.6 years. Under its Property segment, TMAKMUR also conducts bauxite mining on its own property, which contributed RM86m or 22% of FY14 revenue.

· Expecting solid FY17E FFB growth at 10%. TMAKMUR’s average tree age at 9.6 years is close to the sector average of 10.5 years, hence we expect flattish FY15-16E FFB growth at 0-1%. However, their new planting of 1,973ha in FY14 and 1,069ha in FY15E (totalling 18% of plantable area) should contribute to a declining FY15/16E age profile of 8.5/7.8 years. Consequently, we expect TMAKMUR to post better FFB growth of 10% from FY17E onwards.

· Ramping up property launches. TMAKMUR is also involved in property development with its KotaSAS town-ship, which is located 10km north of Kuantan city. The company is targeting to launch 774 residential units in FY15 double that of FY14’s launching of 320 residential units and 40 shoplots. We gather that the new launches are mainly targeted at the affordable housing market which could help insulate the company from the property sector slowdown. Long-term development potential is also good as the state government has recently acknowledged the Letter of Intent to construct the state administrative complex in KotaSAS in a 60:30:10 JV with TMAKMUR, GABAQRS and other parties. We expect the new launches to contribute positively to FY15-16E property revenue growths at 18-31% to RM129-169m.

· Above-average dividend yield against other planters. Based on its last closing price of RM1.37, we expect a solid FY15E dividend yield (DY) of 5.1%, higher than the sector average of 2.7%. TMAKMUR has a strong balance sheet with a FY14 net cash position of RM69m or 22.0 sen per share. Hence, we believe the company will be able to sustain a payout ratio of 40%-50% for FY15- 16E NDPS at 7.0-8.5 sen, implying an above-average DY of 5.1%-6.2%.

· Bauxite to sustain earnings at least to FY16E. We understand that some 1.2m dry metric tons (MT) of bauxite were discovered on TMAKMUR’s KotaSAS township landbank in 2014, and mining of the bauxite commenced in mid-FY14. Based on current remaining reserves of 0.8m MT, we expect current mining operations to contribute RM92-65m to FY15-16E revenue. Furthermore, management has mentioned that preliminary studies indicate that there is another c.0.8m dry MT of bauxite reserves which we estimate could contribute c.RM140m additional revenue in FY16-17E, if confirmed.

· However, NP is expecting to decline moving forward. Excluding the potential new reserves of bauxite, we expect FY15-16E CNP to gradually decline due to lower CPO prices in FY15E (RM2,200/MT or -8% YoY) and lower volume of bauxite to be mined in FY16E (-27% to 0.4k MT). Hence, we estimate TMAKMUR’s FY15E and FY16E CNPs to decline 3% and 1% to RM53.3m and RM53.0m, respectively.

· NOT RATED with Fair Value of RM1.42 based on Sum-of-Parts with a 15% discount applied to both Plantation and Property segments. Our FV implies a decent total return of 9.8% (upside 3.6%, DY 6.2%). We believe our discount applied to its Plantation segment is fair due to TMAKMUR’s flattish short-term growth prospects, although the long-term outlook is better due to their recent new plantings. We also believe the discount for its Property segment is fair as well as TMAKMUR is not a full-fledged property developer, and is only focused on one township development. Meanwhile, we value bauxite mining operations based on the remaining life of current reserves, which we estimate at about one year. Note that should new reserves be confirmed, assuming a 2.5 year lifespan to bauxite mining operations, this would result in a potential FV of RM1.50, implying a better total return at 15.7% (upside 9.5%, DY 6.2%).

Source: Kenanga Research - 13 Oct 2015