TDM’s  9M14  results  were  below  expectations,  with  net  profit comprising  61-62%  of  our  and  consensus’  FY14  projection,  due  to higher  unit  costs  and  higher  effective  tax  rates.  We  maintain  our NEUTRAL recommendation, as valuations remain fair at current levels. Post-earnings revision, we  reduce our SOP-based TP  to MYR0.85 from MYR0.90, implying a downside risk of 5.5%.

Numbers  below  forecast.  TDM’s  9M14  net  profit  was  below  our  and consensus’ forecat, coming in at  61-62% of FY14 projections. This was mainly  due  to  higher-than-expected  unit  production  costs  in  3Q14,bringing profit-befor-tax (PBT)  margins for the plantation division  down to 15.8% in 3Q14 (from 24.6% in 2Q) and higher-than-expected effective tax rate of 49% in 3Q14, bringing 9MFY14 effective tax rate to 32.7% (vsour projected 25%.) This was due to certain under-provision of prior year taxes charged  during the period. We understand taxes will normalise in 4Q14. 

TDM’s  9M14  net  profit  surged  73%,  coming  from  a  low  base  in 9M13. Group revenue rose 5% YoY in 9M14, driven by a 1% YoY rise in plantation  revenue  and  a  14%  increase  in  healthcare  revenue.  The growth in  plantation revenue  was mainly attributed to an  8% increase in CPO  prices,  offset  by  a  1%  drop  in  FFB  production.  The  healthcare division posted no growth in PBT due to pre-operating losses incurred atits  new  Kuantan  Medical  Centre,  which  just  commenced  operations yesterday.

Reducing  earnings  forecasts.  We  are  reducing  our  FY14  and  FY15 earnings  forecasts  by  16%  and  4%  respectively,  after  taking  into account higher effective tax rates  for FY14  and higher  CPO  production cost for FY14 and FY15. We are introducing our FY16 earnings forecast. 

Maintain NEUTRAL.  We revise our SOP-based TP  to MYR0.85  (from MYR0.90)  based  on  an  unchanged  16x  CY15  target  P/E  for  its plantation  division  and  20x  CY15  P/E  for  its  healthcare  division.  We maintain  our  NEUTRAL  recommendation,  as  we  believe  valuations remain  fair  at  current  levels.  We  also  highlight  TDM’s  significant sensitivity to CPO prices, whereby every MYR100/tonne change in CPO prices will affect its earnings by 6-8% per annum.

Source: RHB