TDM Berhad is listed in Bursa Malaysia and has two businesses:
- Palm Oil plantation – cultivate the trees, harvest, mill and sell crude palm oils.
- Healthcare – operate four specialist hospitals.
In FY14-15, about 83-85% of the profit before tax came from plantation business.
Source: TDM’s Annual Report FY15
I first heard of TDM Berhad when visiting Felda plantation during a conference in October 2012. A CIMB analyst joked about TDM having very low P/E of 7-8x, while the rest of Malaysian palm oil players had average P/E of around 18x. I asked him why TDM’s P/E was so low, but he didn’t know why either. After going back office, I checked it out.
TDM had fully planted its Malaysia oil palm plantation land (32.5k ha) since years ago. Its FFB yield was low at around 16.5 – 20mt per ha (productive estate has FFB yield > 20mt/ha), and some old estate had started re-planting. Overall production output would fluctuate based on the yield but would not grow. The production cost was also higher than others.
Source: TDM Annual Report FY12
Besides plantation and healthcare, TDM also had other businesses in the past, such as A&W restaurants, property, poultry, rubber processing, transportation, travel agency, hotel, etc. Being so unfocused, eventually, it closed and sold all those businesses. On top of that, TDM is relatively small, and its shares were less liquid than other BIG name palm oil players. Hence, it’s largely ignored by the market. That explained why the P/E was so low at 7-8x.
Hidden Growth Potential
But, there is a hidden germ. It managed to buy plantation land in Indonesia with the size of 40k ha, which was larger than its current estate of 32.5k ha in Malaysia. It already started planting in Indonesia in 2011 and should see the output from 2015 onwards. That means, when the plantation estate in Indonesia matures 7-10 years later, TDM will start growing again, and eventually more than double its existing production output.
TDM was also investing heavily in its healthcare business by expanding its existing hospital capacity and opening new hospitals. This will take 3-4 years to complete. Again, this investment will grow its healthcare business by more than double in few years time.
I arranged a conference call with the management at TDM. The management explained that the low FFB yield was due the slope of the plantation estate. They had to plant the trees more sparsely than other planters do on a flat land. Therefore, the production per hectare was lower. With lower production, the unit cost of production will be higher. This is a natural disadvantage.
I discussed with my fund manager about TDM’s prospect, and the question was when would be a better time to buy. The result of TDM’s investment in plantation and healthcare would only be realized several years later, but in the mean time, capex would be massive. Being conservative, I valued TDM with lower valuation multiple at that time, and the upside was not huge, so we waited. It’s a mistake.
In mid March 2013, TDM’s share price started rising rapidly from 0.56 to 0.74 (price-adjusted after share split) in one month. My fund manager told me that I used too low multiple in its valuation.TDM’s share price continued rising until mid 2014 while CPO price was falling. We didn’t participate in it unfortunately.
Source: Google Finance
Since then, many things have changed. In 2016, I re-looked at TDM again. Overall revenue and profit in FY15 fell significantly from 2012’s level following the sharp drop in CPO price.
Source: TDM Annual Report FY15
Indonesia plantation estate was making losses as it’s still very young. The newly expanded hospital business was incurring higher pre-operating start-up costs before utilizing its new capacity. Debt rose sharply to fund these investments. TDM also issued new shares for funding purpose.
Overall, I wasn’t comfortable with the debt level, and the ROE was rather low at single digit. I also wasn’t sure whether the hospitals could utilize its new capacity productively. So, I waited, again.
Palm Oil price rallied to RM3000-3200 since Q4 and stays in that range for now. Many palm oil players have seen their share prices rising to the one-year peak. I participated firstly in First Resources and realized 18% return. Next, I switch to Bumitama, and the return was below expectation so far. I’m still waiting to see Bumitama to break higher and give me 20% return.
Seeing that the palm oil price broke even higher and stayed longer than I anticipated, I realized that I invested too safe. Lower quality companies had even higher rallies than First Resources and Bumitama, and I missed them. So, I decided to increase my exposure in palm oil sector and searched for stocks that have not priced in the CPO price rally yet. Yes, I’m chasing the rally now. This becomes speculative.
This time, TDM yelled at me. I bought TDM at 0.685 in early December. Today, I sold it at 0.775. After fees and slight loss in forex, I got around ~10% net return in 1.5 month.
Source: Google Finance
The reason I sold was I have met my investment objective in TDM. This was supposed to be short-term opportunistic trading based on marked-to-market palm oil price. TDM reached its peak of 0.795 (closing price, not intraday price) in March 2016, and current price is just slightly lower at 0.775. Also, I had expected MYR to stabilize after the drop in 2016, but it weakened again in 2017, and I don’t want to be caught at the wrong end of the trade. Therefore, I decided to take profit.
Based on current CPO price of RM3100/mt, the share price of producers should surpass its peak in March-April 2016, but this still has not happened. That means the market is aware that current high CPO price is not sustainable and could fall anytime. Hence, it’s not willing to bid up the share prices of the producers aggressively.
The major risk is the CPO price trend could reverse suddenly, and the share prices of the producers will follow quickly. Thus, this opportunistic trade is speculative. To reduce the risk, I bought only palm oil companies that will grow in the long run. Given TDM’s heavy investment in new estate and hospitals and track record, it has a reasonable chance to realize decent return on the capital invested. That will support me if the CPO price trend reverse suddenly, and my trade fails.
There are other palm oil stocks that I bought for this opportunistic trading. Again, I chose lower risk ones. I’ll be satisfied if they could get me half the return I got from TDM before the CPO price falls back to mid RM 2000 level.