In scouring for jewels in Malaysia’s plantations universe, TDM and Chin Teck stood out among the 10 cheapest plantation stocks in terms of EV per planted ha valuation. We think these stocks’ EV valuations should still be, but are not, higher than Indonesia’s. These stocks could rerate on account of their severe under-valuation, even if the plantation sector stays unexciting.

Finding ‘jewels’ among the ruins. We generated the EV per planted ha of plantation companies listed in Malaysia and found the range to be wide - from MYR19k to MYR215k. For some of these companies, we think their cheap valuation is unjustified as they are even cheaper than Indonesian estates, which are changing hands at USD12k–USD15k per ha.

TDM and Chin Teck stand out. We looked for companies with: i) cheap EV per planted ha, ii) sufficiently sizeable planted areas, and iii) best profitability among the 10 cheapest stocks in terms of EV per ha. These criteria threw up TDM and Chin Teck, which have EV per planted ha of MYR20.2k and MYR27.5k respectively. TDM is obviously the cheaper of the two, with a stronger profit of MYR3,600 EBIT per mature ha. TDM is also bigger, possessing 40,942 ha of planted area.

Stocks to re-rate on under-valuation. While the plantation sector may still face poor forward earnings visibility, we believe these stocks could still re-rate due to severe under-valuation. In comparison, TWS Plant, which is to be privatised at MYR5.00 per share, has an EV per planted ha of MYR40.5k, which is twice as high as TDM’s although its EBIT per planted ha - at MYR3,170 - is lower than TDM’s MYR3,600 and on par with Chin Teck’s MYR3,032. TDM may trade up to MYR7.50 if it were to reflect TWS Plant’s privatization price.

Briefly on TDM. TDM, with a market capitalization of MYR980m, is a professionally-run Terengganu state-owned plantation company. It has a total planted area of 40,942 ha, of which 32,458 ha and 8,484 ha are in Malaysia and West Kalimantan respectively. Of its overall planted areas, 48% are in prime and 9% are young, 22% immature and 17% are with old trees. Last year, TDM produced 558.6k tonnes of FFB, at a FFB yield of 18.27 tonnes. The group also owns four hospitals with a combined total of 204 beds. Its balance sheet is strong, with a net cash of MYR182.1m, or 74 sen per share.

Briefly on Chin Teck. Chin Teck, with a market cap of MYR819m, is a plantation company run by the Goh family from Singapore. It has a planted areas totalling 10,925 ha in West Malaysia and a 50% stake in 21,122 ha of planted area in Sumatra. This gives it an effective planted area of 21,486 ha. When combined, 17% of its planted area is of immature trees, 34% young, 24% are prime while 23% are considered old. The company’s Malaysian operation produced 157.6k tonnes of FFB at a FFB yield of 18.81 tonnes in FY12 while its Indonesian estates produced just 77.6k tonnes after a disruption in routine harvesting due to unrest in the neighbouring villages. Its strong balance sheet is backed by net cash of MYR227m, or MYR2.48 per share.

Source: RHB