TDM’s  FFB  production  outlook  has  improved  significantly  since  1Q14, as weather conditions have improved in Terengganu. On the healthcare side,  expansion  plans  are  ongoing  with  a  new  hospital  building  in Kelana  Jaya.  While  we  like  its  long-term  potential,  valuations  are  not very  enticing currently.  As  such, we make no change to our NEUTRAL recommendation and raise slightly our TP to MYR1.07 (from MYR1.05).  
 
Key  highlights:  i)  FFB  production  outlook  has  improved  from  1Q14,  ii) Roundtable  for  Sustainable  Palm  Oil  (RSPO)  certification  is  positive  for prices;  iii)  it  still  has  plenty  of  land  to  plant  in,  iv)  production  costs  are stable,  v) the  expansion  of  its  healthcare  division  is  still ongoing,  with a new hospital building in Kelana Jaya, and vi) capex is on the rise.

Healthcare unit expansion still ongoing, with new hospital building in  Kelana  Jaya.  TDM  continues  to  expand  its  hospital  operations,  with new  capacity  coming  onstream  over  the  next  few  years.  The  latest upcoming expansion will be in Kelana Jaya, where TDM is in the midst of acquiring a building which it will convert into a new hospital with 80 beds. We  understand  that  construction  work  for  this  hospital  could  start  in early-2015,  before  completing  by  end-2015.  With  this  expansion,  its Kelana Jaya hospital bedcount will rise to 122 from 42. In total, TDM will go  from  having  204  beds  currently  to  an  estimated  495  beds  by  end-2015.  Management  maintains  its  long  term  plan  to  spin  off/list  its healthcare  division,  although  this  is  only  expected  to  happen  once  it reaches a more optimal size of 500-600 beds.  

Tweaking  forecasts.  All  in,  we  are  tweaking  our  forecasts  slightly: -0.5%  for  FY14  and  +2.3%  for  FY15,  after  taking  into  account  the changes in the healthcare division expansion plans.  

Still NEUTRAL. Post earnings revision, our SOP-based FV rises slightly to  MYR1.07  (from  MYR1.05).  We  continue  to  maintain  our  view  that although it has long-term potential, TDM’s valuations are a bit rich at this juncture  –  given  our  projection  that  a  big  earnings  jump  would  only materialise  in  FY16/FY17  when  its  Indonesian  plantations  start  to contribute more significantly. Maintain NEUTRAL.

Key  highlights:  i)  FFB  production  outlook  has  improved  from  1Q14,  ii)  Roundtable for Sustainable Palm Oil (RSPO) certification is positive for prices; iii) it still has plenty of land to plant in, iv) production costs are stable, v) the expansion of its healthcare division is still ongoing, with a new hospital building in Kelana Jaya, and vi) capex is on the rise.

FFB production outlook has improved from 1Q14. In YTD June 2014, TDM’s FFB production  was  down  -2.9%  y-o-y,  which  is  a  vast  improvement  from  the  -20% decline in 1QFY14, due to more conducive weather conditions. Management expects overall FY14 production to decrease 5% y-o-y  which seems conservative, given the oncoming  peak  production  period  in  3Q/4Q.  We  thus  maintain  our  -2.9%  y-o-y projection decline for FY14. For FY15-FY16, we are projecting FFB growth to return to  low  single-digits  of  2.5%-4%  per  annum,  which  is  also  in  line  with  management targets.  

RSPO certification positive for prices. TDM managed to obtain RSPO certification for  all  its  own  estates  in  Dec  2013,  and  started  selling  its  own  oil  as  Certified Sustainable  Palm  Oil  (CSPO)  to  certain  buyers  like  Cargill  and  Wilmar,  to  name  a few,  in  2014.  To  this  end,  TDM  has  signed  a  1+1  year  contract  with  Cargill  to  sell then  its  CSPO.  The  contract  locks  in  the  volume  of  oil  and  the  premium  to  the Malaysian  Palm  Oil  Board  (MPOB)’s  price  of  approximately  USD20/tonne-USD30/tonne.  Currently,  approximately  50%-55%  of  its  crop  is  sold  as  CSPO.  This explains  the  relatively  high  CPO  price  it  achieved  in  1QFY14  of  MYR2,654/tonne, which  is  close  to  the  MPOB  average  of  MYR2,693/tonne.  Going  forward,  TDM expects  to  be  able  to  sell  at  least  50%  of  its  own  crop  as  CSPO,  which  means  the average CPO price achieved would be at a slight premium to its peers’.

Still  plenty  of  land  to  plant  in.  TDM  has  40,000ha  of  plantable  landbank  in Kalimantan, of which 11,546ha has been planted at end-2013. 453 ha was mature at end-2013,  while  850ha  will  mature  in  2014,  and  another  2,700ha  in  2015.  In  2014, TDM  aims  to  plant  up  4,000ha  of  new  land,  with  another  5,000ha  of  new  planting earmarked  for  2015.  By  2018,  it  would  have  completed  planting  of  its  40,000ha  of land.  This  is  in  line  with  our  projections.  As  for  replanting  of  its  Malaysian  estates, which  are  averaging  16  years  of  age,  TDM  intends  to  replant  1,300ha-1,500ha  of land per year. Production  costs  stable.  TDM’s current cost of production is about MYR1,300-MYR1,400/tonne,  which  management  expects  to  be  able  to  maintain  for  the remainder of the year. TDM has already secured its fertiliser requirements for the full year,  at  prices  that  are  5%-10%  below  that  of  FY13.  This  is  in  line  with  our expectations.  

Healthcare  division  expansion  still  ongoing,  with  new  a  hospital  building  in Kelana  Jaya.  TDM  continues  to  expand  its  hospital  operations,  with  new  capacity coming onstream over the next few years. The Kuantan Medical Centre’s additional 66 beds will open by 3Q2014, slightly earlier than our projected end-2014 date. The Kuala  Terengganu  Specialist  Hospital’s  100-bed  expansion  is  due  to  open  in  mid-2015, while the  Taman Desa Medical Centre’s 45-bed expansion has been delayed and is now due to open in 3Q2015 (from beg-2015). As for its Kelana Jaya Medical Centre, TDM is no longer expanding its existing operations there, as we understand it is  in  the  midst  of  acquiring  a  building  in  Kelana  Jaya  for  approximately  MYR20m, which  it  will  convert  into  a  hospital  with  80  beds.  We  understand  that  construction work  for  this  hospital  could  start  in  early-2015,  completing  by  end-2015.  With  this expansion, Kelana Jaya will go from having 42 beds to 122 beds. In total, TDM’s  will go from having 204 beds currently to an estimated 495 beds by end-2015. We have imputed  these  new  assumptions  into  our  forecasts.  Management  maintains  its  long term  plan  to  spin  off/list  its  healthcare  division,  although  this  is  only  expected  to happen once it reaches a more optimal size of 500-600 beds.

Capex  on  the  rise.    We  expect  TDM  to  spend  approximately  MYR180-230m  in capex  in  FY14  and  FY15  (up  from  MYR120m  in  FY13).  Approximately  MYR100-150m per year would be spent on the plantation division (which includes a new mill in Indonesia) and the remaining MYR70-80m on the healthcare division. This should not be too much of a strain on TDM’s balance sheet, as its net gearing remains below 15% currently.  
 
Risks 
The main risks include: i) a reversal in crude oil price trend, resulting in a reversal in the  prices  of  CPO  and  other  vegetable  oils,  ii)  weather  abnormalities,  which  could trigger  an  over-  or  under-supply  of  vegetable  oils,  iii)  changes  in  the  emphasis  on implementing  global  biofuel  mandates,  iv)  a  faster-  or  slower-than-expected  global economic recovery, resulting in higher- or lower-than-expected demand for vegetable oils,  and  (v)  unexpectedly  low  patient  numbers,  which  could  be  due  to  slower-than-expected economic recovery and serious disease outbreaks (such as SARS or swine flu)  in  Malaysia  as  well  as  a  turnaround  in  new  hospitals  coming  slower  than anticipated. 
 
Forecasts 
Tweaked slightly. All in, we are tweaking our forecasts slightly: -0.5% for FY14 and +2.3%  for  FY15,  after  taking  into  account  the  changes  in  the  healthcare  division expansion plans.  
 
Valuation and recommendation 
Maintain NEUTRAL. Post-earnings revision,  our SOP-based FV is raised slightly  to MYR1.07  (from  MYR1.05).    We  continue  to  maintain  our  view  that  although  it  has long-term  potential,  TDM’s  valuations  are  a  bit  rich  at  this  juncture,  given  our projection  that  a  big  earnings  jump  would  only  materialise  in  FY16/17  when  its Indonesian plantations start to contribute more significantly. Our valuation targets are unchanged  at  P/Es  of  16x  and  20x  on  its  plantation  and  healthcare  divisions respectively. Maintain NEUTRAL.

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

TDM  has  two  main  divisions  -  palm  oil  plantations  and  healthcare.  It  has a  total  landbank  of  70,000ha  in  Malaysia  and Indonesia,  of which close to 50,000ha has been planted. TDM also operates four medium-sized specialist hospitals in Malaysia.

Recommendation Chart

Source: RHB