TDM’s 9M15 results disappointed slightly, coming in at 58% of our FY15 forecast. We trim our earnings forecasts and maintain BUY, with a reduced TP of MYR0.64 (from MYR0.68, 4% downside). While we expect 4Q15 to be the best quarter for the company for this FY, we continue to see risks in the form of an exclusion from the Shariah Index in the upcoming November review, while the catalyst in the form of a healthcare IPO could be some time coming.

Below expectations. TDM’s 9M15 core net profit came in at 58% of our FY15 forecast, mainly due to disappointing FFB production which fell 5% YoY during the period, vs our projection of +2.7% YoY. This was caused by extremely wet weather and flooding in the East Coast during the monsoon season in 1Q15.

Core net profit fell 50% YoY on the back of a 6% drop in turnover. This came about as CPO prices fell 13% YoY in 9M15, while FFB production dropped 5%, resulting in its plantation segment’s EBIT margin plunging to 0.2% in 9M15 (from 22% in 9M14). The healthcare division helped to offset this decline, posting a 26% YoY rise in revenue and 25% YoY rise in PBT amid a 23% growth in inpatient admissions and a 23% rise in inpatient days – helped by the strong profit contribution from its newly-expanded Kuantan Medical Centre.

Cutting earnings forecasts. Management has guided for FFB production to be flat YoY in FY15, which we believe is achievable, given October’s MoM increase of 23% (from September). We have, therefore, lowered our FFB growth forecast accordingly, to -0.4% (from +2.7%) for FY15 followed by a 3-5% growth for FY16-17. This has resulted in a 3-5% cut to our FY15-17 earnings forecasts.

Still NEUTRAL. Our SOP-based TP is, therefore, reduced slightly to MYR0.64 (from MYR0.68). We highlight that every MYR100/tonne change in the price of CPO could affect TDM’s earnings by 6-9%. We maintain our NEUTRAL recommendation on the stock, as we believe current valuations are fair. We highlight a potential catalyst in the form of the listing of its healthcare division in 2016/2017, which could unlock value for TDM. However, we also highlight a risk that it may be excluded from the Shariah Index come mid-November, as its FY14 interest income over revenue is above the allowable 5% mark, at 5.8%

Financial Exhibits

SWOT Analysis

TDM runs the risk of being excluded from the Shariah index during the Securities Commission’s Nov 2015 review, as its FY14 net interest over total revenue is above the 5% threshold. Nevertheless, it is taking steps to get an exemption from the Securities Commission, with the help of the Shariah Council

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 Research - 24 Nov 2015