Recommendation: HOLD
12-Month Target Price: MYR4.50
Date: July 31, 2008
Market Value - Total: MYR1,274.8 mln
Analyst: Siti Rudziah Salikin
Summary: Tradewinds is one of the larger plantation groups in the country with 150,000 ha of plantation land in Peninsular Malaysia, Sabah and Sarawak. Tradewinds is also one of the dominant players in the local sugar industry. It owns two sugar refineries with a combined melting capacity of 2,300 tons per day.
Highlights
The plantation operations, which are undertaken primarily by its 69.8%-owned Tradewinds Plantation (TWPlant) (TWPB MK, MYR3.42, Not Ranked), will be the main earnings driver for the group. Tradewinds has 82,830 ha of relatively young oil palm estates in Peninsular Malaysia, Sabah and Sarawak and plans to develop 39,000 ha of its unplanted land over 2008-2011.
Its young palm oil estates (42.5% of the palms are at the prime age of 9-18 years and 48.4% are less than 9 years old) will support a steady improvement in FFB yield and a growth in production over the next two to three years.
The outlook for the sugar refining business is more challenging, due to the volatility of raw sugar prices and the price control of sugar in the domestic market but it provides steady cashflow for the group.
We project a 34.7% YoY growth in Tradewinds’ net profit for 2008 to MYR198.8 mln with the plantation operations contributing 80% to the profit. Due to a lower CPO price assumption, we forecast a lower net profit of MYR183.9 mln for 2009.
Investment Risks
Risks to our recommendation and target price include a continued downtrend in palm oil prices and fluctuations in world prices of sugar.
Recommendation
We initiate coverage on Tradewinds with Hold recommendation and a 12-month target price of MYR4.50, which offers a potential upside of only 4.7%.
Concerns over a downward cycle in palm oil prices are likely to put pressure on plantation stocks in the near term. However, we believe the downside risks to earnings are reflected in its single-digit 2009 PER of 6.9x and that of its subsidiary, TWPlant’s 9.2x.
Our target price is based on a sum-of-parts valuation method. We assigned a 20% discount to the current market price of TWPlant to value Tradewinds’ stake in the company. The discount reflects Tradewinds’ holding company status. We value its other operations at 2009 PER of 7x, which is in line with single-digit forward multiples for food-based stocks.
Tradewinds will be a net borrower (at the group level) for the next three to four years, given the large capex needs - for developing its oil palm and rubber estates and construction of palm oil mills - but net gearing should stay at a comfortable level of less than 50%. We also expect Tradewinds to be able to maintain its dividend of 23 sen per share in 2008, offering a decent yield of 5.3%.
The group is committed toward good Corporate Social Responsibility and has continued to contribute to various education, social and welfare programs for members of the community.
Key Stock Statistics
Per Share Data
Background
Tradewinds is an investment holding company. Through its subsidiaries, Tradewinds is involved in oil palm plantation and sugar refining businesses.
Organization structure
60% Retus Plantation Sdn Bhd
100% Central Sugar Refinery Sdn Bhd
69.8% Tradewinds Plantation Berhad(Plantation subsidiaries)
100% Gula Padang Terap Sdn Bhd
Note: Not all subsidiaries and associates are shown
Tradewinds is one of the larger plantation groups in the country…
The plantation operations are undertaken by 69.8%-owned TWPlant and 60%-owned Retus Plantation Sdn Bhd. TWPlant is one of the larger plantation groups in the country with over 140,000 ha of plantation land. It is the holding company for the merged plantation businesses of Tradewinds and Johor Tenggara Oil Palm Berhad (JTOP). The merger was completed in February 2006 and TWPlant, which took over JTOP’s listing status, was listed in March 2007. Altogether, Tradewinds has over 150,000 ha of plantation land in Johor, Terengganu, Kelantan, Kedah, Sabah and Sarawak. Its oil palm plantations in Indonesia (about 4,031 ha) were sold in June 2007.
As of end-2007, 82,830 ha of the land have been planted with oil palms. 42.5% of the planted palms were at the prime production age (9-18 years), 30.2% young mature palms (4-8 years) and 18.2% still immature. Only 9.1% of the palms have already past the prime age or are due for replanting. The group plans to develop 39,000 ha of the unplanted areas into oil palm plantations between 2008 and 2011. Replanting of aging palms will also continue to be undertaken to maintain at least 40% of planted palms at the prime age of 9-18 years. The estates produced 1.3 mln tons of FFB in 2007 or an average of 16.64 tons/ha. The yield was low when compared with the average FFB yield of 19 tons/ha for Malaysia but there is room for improvement as a large percentage of the palms are still young. About 85% of the FFB are processed at Tradewinds’ own palm oil mills. Tradewinds has nine palm oil mills with an average processing capacity of 40 tons–60 tons of FFB per hour. It plans to add one more mill in Sarawak to cater for the projected growth in production.
Maturity profile of planted palms (as at Dec. 31, 2007)
The group will continue to scout for plantation land in Malaysia for potential acquisitions. TWPlant has proposed to acquire a 50% stake in Pride Palm Oil Mill Sdn Bhd (PPOM) for MYR50,000 cash. PPOM is a JV vehicle to acquire a 100% stake in Solar Green Sdn Bhd (SG) for MYR10 plus an assumption of SG’s liabilities of up to MYR100 mln. SG owns 5,567 ha of plantation land (4,638 ha are planted with mature oil palms between the ages of 4 and 13 years) and a palm oil mill in Sarawak. CB Industrial Product Holding (CBIP MK, MYR3.76, Not Ranked), which is a manufacturer of palm oil mills, owns the remaining 50% of PPOM. The proposed acquisition is targeted for completion in 4Q08. 查看Cbip和Twsplnt组成50:50 JV
TWPlant is also diversifying into rubber plantations to expand its involvement in the plantation sector. It has 11,404 ha of land at Padang Terap, Kedah (which was acquired in March 2008) that are more suitable for rubber plantations. 264 ha of the land have been planted with oil palms, which will be retained, and about 9,200 ha will be cultivated into rubber plantations. We are less enthusiastic on the rubber venture as rubber plantations require a gestation period of about seven years. The development of the 9,200 ha is expected to take about two to three years, thus meaningful returns from the project can only be expected in 10 years, in our opinion.
… and is also one of the dominant players in the local sugar industry
Tradewinds owns two sugar refineries, namely Central Sugar Refinery Sdn Bhd (CSR) and Gula Padang Terap Sdn Bhd (GPT). CSR’s refinery in Shah Alam has a melting capacity of 1,500 tons of sugar per day. GPT, which is based in Kuala Nerang, Kedah was acquired in November 2006. It has a sugar refining capacity by 800 tons per day. The two refineries produced 671,859 tons of refined sugar in 2007. On average, domestic sales account for 73% of the production.
CSR and GPT are two of the four dominant players in the local sugar industry. The other two players are Malayan Sugar Manufacturing Co Bhd, which is wholly-owned by PPB Group (PEP MK, MYR9.30, Buy) and Kilang Gula Felda Perlis Sdn Bhd, which a 50:50 JV company between PPB Group and FELDA. The four refineries produced about 1.5 mln tons of sugar in 2007 and depend highly on imported raw sugar as raw material. The raw sugar is imported either at a long-term contract price set by the government or through the open market. For Tradewinds, 65% of its purchase is through the open market, thus its profitability is susceptible to the fluctuations of raw sugar prices, in our opinion.
Earnings Outlook
The plantation operations gained from the strength in palm oil prices and contributed 72.9% to group operating profit for 2007. Tradewinds realized an average CPO selling price of MYR2,179/ton in 2007 (versus MYR1,472/ton in 2006). Together with the full-year impact of the merger between Tradewinds’ plantation businesses and JTOP, operating profit for the division jumped 3.4x YoY to MYR216.5 mln. We expect CPO price to average higher in 2008.
CPO price averaged MYR3,500/ton in 1H08 and has since corrected to about MYR3,000/ton. The crude oil price slide, the high inventory of palm oil in Malaysia, the review of the biofuel target by the European Union and the recent decision by Argentina to revoke the variable export tax structure on soybean products are among the bearish factors that have put downward pressure on the price.
However, we still maintain our view that the downside to the CPO price will be supported by the strong underlying demand and the tight global supplies of other edible oils. The latest estimate by Oil World points to a moderate increase in global stocks of seven oilseeds for the season ended September 2009, but the projected stocks/usage ratio of 17.4% is the lowest in five years. The high palm oil inventory could be attributed partly to seasonal factors as it coincides with the peak production period in 3Q and slower exports for the winter period. We expect palm oil inventory to come down as exports traditionally pick up in 4Q and palm oil enters its low production period in 1Q. We forecast an average CPO price of MYR3,200/ton for 2008 and MYR3,000/ton for 2009.
The outlook for the sugar manufacturing and trading division is more challenging, due to volatility of raw sugar prices and the price control of sugar in the domestic market. The division contributed MYR77.6 mln or 26.1% to group operating profit for 2007. Sales volume grew 41.3% YoY to 690,826 tons, helped by the full-year impact of a capacity increase from the acquisition of GPT. Margins increased to 8.1% from 6.8% in 2006 as the sugar premium widened (due to the drop in raw sugar prices from the all-time highs in 2006) and cost efficiency improved. Going forward, we expect earnings to be flat at best. Despite the prevailing record global surplus of sugar (due to record production by the two major sugar producers, Brazil and India), the world price of raw sugar has stayed above 2007’s levels. The current uncertain global economic conditions - which may cap export selling prices - and the high freight rates are likely to put additional pressure on margins for the division.
All in, we project a 34.7% YoY growth in Tradewinds’ net profit for 2008 to MYR198.8 mln with the plantation operations contributing 80% to the profit. Due to a lower CPO price assumption, we forecast a lower net profit of MYR183.9 mln for 2009.
Valuation
We initiate coverage on Tradewinds with Hold recommendation and a 12- month target price of MYR4.50, which offers a potential upside of only 4.7%. Our target price is based on a sum-of-parts valuation method.
We assign a 20% discount to the current market price of TWPlant to value Tradewinds’ stake in the company. The discount reflects Tradewind’s holding company status. We use a PER method to value its other operations and accord a PER of 7x, which is in line with single-digit forward multiples for food-based stocks, to projected earnings for 2009.
We arrive at a 12-month target price of MYR4.50 per share for the stock, offering a potential upside of 4.7%.
We expect the group to be a net borrower for the next three to four years, given the large capex requirements of about MYR200 mln–MYR300 mln p.a. for the development of its oil palm and rubber estates and construction of palm oil mills. Nonetheless, we project net gearing will stay at a comfortable level of less than 50%.
Recent Developments
April 2008: TWPlant proposed to acquire a 50% stake in Pride Palm Oil Mill Sdn Bhd (PPOM) for MYR50,000 cash. PPOM is a JV vehicle to acquire a 100% stake in Solar Green Sdn Bhd, which owns 5,567 ha of plantation land and a palm oil mill in Sarawak.
March 2008: TWPlant subscribed to 100 mln shares (99.9% stake) in Kongsi Meriah Sdn Bhd for MYR268 mln. Kongsi Meriah has 11,404 ha of agriculture land in Kedah that are suitable for rubber cultivation.
January 2008: TWPlant’s wholly-owned subsidiary, Amalan Penaga (M) Sdn Bhd acquired a 70% of Usaha Wawasan Sdn Bhd for MYR15.9 mln cash. Usaha Wawasan will be used as a joint-venture company to develop 2,640 hectares of land in Sarawak into oil palm plantations.
Recommendation and Target Price History
Date Recommendation Target Price
New Hold 4.50
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