Tanah  Makmur,  a  Pahang-based  palm  oil  player  with  exposure  to property  development  and  bauxite  mining,  will  be  listed  on  the  Main Market  on  17  July.  Earnings  growth  prospects  are  driven  by  the company’s well-planned expansion strategy for the next few years. This is  expected  to  spur  earnings  from  all  its  business  segments.  We estimate the value of the stock at MYR1.74, based on 10x FY15F P/E.

• Key  investment  highlights.  Tanah  Makmur  is  a  palm  oil  company based in Pahang with a planted acreage  of 17,969ha. We project  for  the company  to  post  an  approximately  24%  earnings  compound  annual growth rate (CAGR) over the next two years. This will be underpinned by the  capacity expansion of its  oil mill, improving fresh fruit bunches (FFB)yield,  future  property  launches  and  a  new  stream  of  income  from  its bauxite  mining  business.  Investors  should  expect    a  decent  dividend yield of 4.1%,  since  management intends  to adopt a dividend policy of paying out a minimum of 30% of net profit.
• Royal links.  Tanah Makmur  has close  ties to  Pahang’s royal family  as well  as  the  State  Government.  The  crown  prince  of  Pahang  and  his family,  via  TAS  Industries  SB,  have  the  largest  stake  in  the  company (26.2%  in total). The state’s  Lembaga Kemajuan Perusahaan Pertanian Negeri Pahang (LKPP)  agency  holds the second  largest  stake (20.0%). The  company’s  strong  relationship  with  these  parties  has  allowed  it  to enjoy  continuous  support  from  the  State  Government,  particularly  with regards to land matters.       
• MYR1.74 FV, with a potential 39% upside. We value Tanah Makmur at MYR1.74, which is  based on  10x  FY15F  P/E. We derive the target P/E by applying a 10% discount to  the 11.2x average  multiple  of its peers. This  is  due  to  the  company’s  smaller  landbank  and  lower  market capitalisation  when compared to  peers  such as  Far East Holdings (FEH MK,  NR),  Kim  Loong  Resources  (KIML  MK,  NR),  Sarawak  Plantation (SPLB MK, NR) and United Malacca (UMR MK, NR).
• Risks:  Reliance  on  foreign  workers;  Tanah  Makmur’s  plantation business  is  labour  intensive.  The  company  relies  heavily  on  foreign labour,  primarily  Indonesian  workers.    Any  shortage  of  workers  may affect the operations at the company’s plantation estates.  Unfavourable weather  conditions;  Insufficient  rainfall  or,  conversely,  excessive downpour  that  can  cause  flooding  can  adversely  affect  the  quantity  of FFB  harvested  and  lower  yields.  Other  risks  include  the  outbreak  of diseases  or  damage  to  its  oil  palm  trees  at  its  plantations  could  also disrupt production.

IPO Details

Main  Market  listing. Tanah  Makmur  is  set  to  list  on  the  Main  Market  of  Bursa Malaysia on 17 July with an offering of 101,590,000 shares. This  represents  25.51% of its enlarged issued and paid up capital. Based on the IPO price of MYR1.25/share, the  company’s  total  market  capitalisation  will  be  MYR497.7m.  Tanah  Makmur expects to raise about MYR65.18m  from the  public issue. Of the  proceeds, 43.73% will  be  utilised  to  fund  its  new  estate  development.  This  includes  new  field developments  at  Ladang  Ulu  Lepar  and  Ladang  Alur   Seri,  and  the  replantingactivities  at  its  plantations  at  Ladang  Charuk  Puting,  Ladang  Sungai  Sering  and Ladang Empang Jaleh. All of the company’s plantation acreage is in Pahang. Of  the  remaining  balance  of  the  proceeds,  20.06%  has  been  earmarked  for  the repayment  of  bank  borrowings,  19.95%  for  infrastructure  work s  at  its  KotaSAS township, 8.59% for listing expenses and 7.67% for  the expansion of its  palm oil mill in Pekan, Pahang. The plant’s current annual capacity is 187,200 tonnes per annum .

Company Background

Introduction.  Tanah Makmur  was primarily an oil palm plantation company  before it expanded to include palm oil milling, property development and  the ancillary business of mining for  bauxite.  The company  is currently operating in Pahang only. All its  oil palm plantation  estates  and  its  township development  –  KotaSAS  –  are located  in Pahang.

Historically, all of  its  plantation business was  held by Kurnia Setia Bhd, a company that  was previously listed by LKPP on  the  Malaysia Stock Exchange on 1 Dec 1984. In 2009,  Tanah Makmur  offered  to acquire the entire business and undertakings  – including all assets and liabilities  –  of  Kurnia Setia, which resulted in the  privatisation of  the  latter.  This  exercise  was  completed  in  2010  and  Kurnia  Setia  was  officially delisted on 21 Dec of that year.

Plantation  business.  Tanah  Makmur  currently  operates  13  plantation  estates  in Pahang with  an  aggregate  plantation land  acreage  of 17,969ha. Of this,  65% is  selfowned  and  the  remaining 35%  is  leased  from LKPP,  a  Pahang  State  Government body  that  holds  a  20%  stake  in  the  company.  In  FY13,  Tanah  Makmur’s  estates produced about 232,605 tonnes of FFB. These were sold to the company’s own palm oil mill (49.2% of the total produced, which  were supplied by seven of its estates), third-party traders  and other millers.  Tanah Makmur  believes that by having its own mill, higher oil extraction rate (OER)  is achievable due to better control of the milling process.  Easy  access  to  the  mill  and  its  strategic  location  helps  ensure  timely delivery of the FFB, which, in turn, allows for quick processing post harvesting. Tanah Makmur ventured into downstream activities with the production of CPO, palm kernel(PK) and compost fertiliser in July 2012. Property  development.  Tanah  Makmur  ventured  into  the  property  development business in 2008. This was undertaken in order to maximise the potential value of its land  via the commencement of its maiden township development  called  KotaSAS  in Kuantan, Pahang. The  project  is being developed on part of  the company’s  Ladang Bukit Goh estate  and  measures  approximately  1,500 acres. KotaSAS’ development is slated to span over  the next 15 years. Ancillary to this business,  Tanah Makmur has  also  commenced  mining  bauxite  after  obtaining  the  necessary  licenses.  This business came about when it  discovered  bauxite deposits while clearing land for  its property  development  initiative.  The  mining  will  be  undertaken  for  a  3-year  period, subject to renewal of the necessary licenses.

Key management personnel
Tengku Dato’ Zubir bin Tengku Dato’ Ubaidillah. Tengku Dato’ Zubir had 19 years of experience in various companies prior to joining Kurnia Setia in 2005 as its general manager  of  corporate  development.  He  was  promoted  to  general  manager  a  year later. Subsequent to  the  privatisation of Kurnia Setia, he was transferred to Tanah Makmur where he assumed his current position as MD. Teh Foo Hock.  Prior to his  recent appointment as Tanah Makmur’s  CFO,  Teh  was attached  to  PricewaterhouseCoopers  (PwC)  in  1985-1997,  where  he  held  various positions. He joined  public-listed  Kinsteel  (KSB MK, NR) in  1997 where he held the position of group accountant (and later head of treasury) before he left in April 2014.

Business Overview

Tanah Makmur’s planted areas stand at  13,529ha,  of which 11,729ha is mature and the rest of 1,800ha is immature as at 15 May. There are another 3,093ha that can be planted  up  going  forward.  The  company’s  plantation  estates  are  observed  to  have produced  a  higher  FFB  yield/ha  when  compared  to  the  Malaysian  Palm  Oil  Board (MPOB) industry average for  the entire state of Pahang, West Malaysia and Malaysiaas a whole (see Figure 7). Tanah Makmur was able to achieve an average of 20.43m tonnes/ha in FY13, ie in line with its 15-year average. This was due to its adoption of good practices in the process of cultivating, harvesting, manuring and weeding.

CPO  mill set up in 2012.  Tanah Makmur  set up a CPO mill in July 2012, which has a  30  tonne/hour  capacity.   The  capacity  of  this  mill  could  be  expanded  to  75tonnes/hour. Having such capabilities has allowed  the company  to better manage its oil yield  and improve  profits.  It  achieved an average OER of  19.98% in 2013, in line with the national average. The CPO mill is currently running at an estimated average utilisation rate of 85%.

Township  development.  The  KotaSAS  township  started  with  a  joint-venture  (JV)agreement  signed  between  KotaSAS  and  OMNI  Holdings  SB,  a  property development company  based in Kuantan. The JV sought  to develop and construct  a township  in  Bukit  Goh,  with  the  project  focused  on  developing  residential, commercial, institutional and government properties . KotaSAS was designed to come equipped  with  necessary  township  facilities  like  schools,  recreational  parks  and lakes. The take-up rate for the properties within the development has been good, with a total of 1,045 residential units sold out of the 1,074 launched since Jan 2010.

Bauxite extraction.  Bauxite was discovered in its  Ladang Bukit Goh acreage during clearing of the land for  the  development  of KotaSAS.  An evaluation report estimatesthat  the  total tonnage of bauxite deposits on the surveyed lands  stands at  1,426,500 tonnes. The company has been extracting and selling bauxite since April 2014.

Strategies

Future  growth  to  be  driven  by  its  replanting  and  new  planting  programmes. Tanah Makmur intends to improve its oil palm age profile by replanting its old matureplantation estates,  which account for about  9.5% of its  total planted area,  as well as planting  on  its  landbank  reserves.  The  company  plans  to  replant  2,061ha  of  itsmatured  estates  over  the  next  four  years.  Tanah  Makmur  expects  new  plantingactivities  at  its  Ladang  Alur  Seri  and  Ladang  Ulu  Lepar  plantations  –  involving another 3,093ha of land  –  to be completed  over the next three  years.  With the new plantings  in place,  Tanah Makmur’s total planted area is expected to further improve by 23% and this ought to provide some future output growth. 

Our estimates. 
- We project FFB growth of 3.4% for FY14 and 7.9% for FY15, after taking into account the planting and replanting programmes currently underway. 
- We assume a FFB yield of 20 tonnes/ha for FY14 and FY15. 
- We  project  CPO  prices  to  increase  to  MYR2,700/tonne  in  FY14  and MYR2,900/tonne in FY15. With the assumptions above, we expect Tanah Makmur  to generate  GPMs of 42% and 43% for FY14 and FY15 respectively for its plantation division. The company’s average  production  cost  of  MYR1,200-MYR1,300/tonne  is  in  line  with  the  industry average.

Continuous  landbank  expansion  plan.  Tanah  Makmur  plans  to  increase  its plantation landbank to at least 25,000ha over the next three years, ie by 39% from its current  17,969ha  landbank.  The  company  intends  to  achieve  this  by  acquiring suitable  land  within  Pahang,  ie  its  primary  concentration  area.  It  may  consider expanding into Sabah, Sarawak or overseas. Currently, Tanah Makmur has identified two  pieces  of  greenfield  plantation  land  in  Kampong  Bongsu  (measuring  1,214ha) and Ulu Lepar (measuring 1,436ha), both in Pahang. The  company  is working with LKPP  to  secure  the  acquisition  of  this  land  from  the  State  Government.  Tanah Makmur  has  estimated  that  the  acquisition  of  these  two  plots  of  land  will  cost approximately MYR10.0m  (approximately MYR3,774/ha), which is inexpensive  whencompared with the industry average.

Palm  oil  mill  expansion  to  cater  for  anticipated  FFB  growth.  Tanah  Makmurplans to expand the capacity of its palm oil mill by 2016. It is looking to boost capacity to 45 tonnes/hour from  30 tonnes/hour  by  upgrading the existing processing  line at the  mill.  W ith  the  additional  15  tonnes/hour,  it  is  targeting  total  CPO  and  PK production  to  increase  by  another  50%.  The  company  expects  expansion  costs, estimated for a period of not more than eight  months, to be  at about MYR500,000. This will be funded by its IPO proceeds.  We do not expect  Tanah Makmur to  have any  problems  in  acquiring  more  external  FFB  to  service  the  expanded  CPO  mill. Currently, the company acquires about 45% of FFB for its mill from external sources.

Source: RHB