HOLD,
Price: MYR3.60
12-Month Target Price: MYR3.80
Market Value - Total: MYR1,067.3 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.
Results Review & Earnings Outlook
Tradewinds 1H08 results fell behind expectations. Net profit jumped 2.5x YoY to MYR80.8 mln due to increased palm production and higher palm oil prices. However, the profit only accounted for 40.6% of our original full-year forecast.
The variance was due to higher-than-expected production costs on 2Q08 margins for 69.8%-owned Tradewinds Plantation (TWPlant) (TWPB MK, MYR2.70, Not Ranked). TWPlant’s net profit was marginally lower sequentially versus our expectations (and its peers’ showing) of a better QoQ performance, given the stronger palm oil prices during the period. YTD net profit for TWPlant was 10.5x higher YoY at MYR87.2 mln.
Operating profit for the manufacturing and trading division declined 11.3% YoY in 1H to MYR31.4 mln as wider white sugar premium was offset by lower export sales.
Looking to 2H, we expect a lower palm oil selling price to be partly made up by seasonally stronger crop production. Meanwhile, the sugar refining and trading business will be affected by a narrower white sugar premium and higher freight charges.
We cut our net profit for 2008 by 19.3% and for 2009 by 15.4%. Consequently, we now project a single-digit net profit growth of 8.7% YoY in 2008 (versus 34.7% YoY increase, previously).
Recommendation & Investment Risks
In spite of the disappointing results, we maintain our Hold recommendation on the stock given the recent sharp correction in the share price. The stock also offers a decent dividend yield.
However, we lower our 12-month target price to MYR3.80 (from MYR4.50) following to the earnings revision. The target price is based on a sum-of-parts valuation method. We assign a 10% 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.
Given the large capex needs for developing its oil palm and rubber estates and construction of palm oil mills, we expect Tradewinds to be a net borrower (at the group level) for the next three to four years. However, Tradewinds should be able to maintain its dividend of 23 sen per share in 2008, offering a yield of 6.4%.
Risks to our recommendation and target price include a continued downtrend in palm oil prices and fluctuations in world prices of sugar.
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