FOLLOWING a spectacular post-IPO performance that saw its share price surge 88% to a high of RM2.35, Tanah Makmur Bhd’s fortunes have since reversed on the back of softening crude palm oil (CPO) prices and lower fresh fruit bunch (FFB) yields.

Over the past three months, the group’s FFB production has almost halved, to an average of 11,400 tonnes a month compared with over 20,700 tonnes before.

Nonetheless, Tanah Makmur’s (fundamental: 2.25; valuation: 1.2) management is confident that it can weather the weak CPO prices, given its strong balance sheet as well as its diversification into mining and property development, which is expected to see stronger earnings this year.

Already, Tanah Makmur has seen substantial improvement in its fourth quarter earnings with a net profit of RM14.79 million, an increase of 45% from the previous year’s corresponding quarter.

While the profit before tax (PBT) contribution by the plantation arm fell by about 50%, to RM5.15 million, the property development segment more than made up for the drop with a PBT of RM19.54 million for the quarter — a tenfold increase from the previous year.

The group’s bauxite mining operations are included in the property development segment since it is considered a one-off business. The bauxite is being mined on land originally slated for property development after an estimated 1.5 million to 2 million tonnes of bauxite deposits were discovered on the site.  The bauxite, used to produce aluminium, is mainly exported to China.

“Bauxite is relatively low risk and low cost to mine. The deposits are found in table form, just two to three metres below the surface. Once we are done mining, we will rehabilitate the land for property development. We would have had to clear and level the land anyway for property development, so the mining kills two birds with one stone,” explains a company spokesperson.

For the fourth quarter, the group managed to produce 167,355 tonnes of bauxite for a PBT of RM8.9 million.  

It plans to ramp up mining to about 100,000 tonnes a month.

Looking ahead, management points out that bauxite prices are relatively stable at US$45 to US$47 a tonne. Furthermore, Tanah Makmur stands to benefit from the ringgit’s weakness against the US dollar.

Assuming the targeted production can be achieved, one million tonnes of bauxite will contribute about RM160 million in sales, assuming an average price of US$45 per tonne and an exchange rate of RM3.60 to the US dollar. With the 30% margin that the group realised in 2014, that should translate into approximately RM54 million in PBT in 2015.

At this rate, the group should exhaust its bauxite deposits in the next 1½ years, barring the discovery of additional deposits.

Meanwhile, Tanah Makmur plans to develop 774 units of landed property, with an estimated gross development value of RM355 million.

Management believes this ambitious target is attainable, given the encouraging 90% take-up of some 320 residential units launched in December at the group’s KotaSAS township, which is a 20-minute drive from Kuantan town centre.

This translates into RM102 million in sales for the month alone, with some RM56 million in unbilled sales remaining, providing some earnings visibility.

The average selling price of the houses is RM383,000 and they are targeted at the mid-range market.

Looking ahead, a major catalyst for the property arm is the proposed relocation and development of Pusat Pentadbiran Sultan Ahmad Shah (PPSAS), or the new Pahang State Administration Complex, at KotaSAS. Recall that in December last year, Tanah Makmur announced that its subsidiary Kreatif Sinar Gabungan Sdn Bhd, in which it holds a 65% stake, received a non-binding letter of intent (LOI) to develop the complex at KotaSAS. It is to replace Wisma Sri Pahang, which is almost 50 years old, in Kuantan city centre.

The proposed development, which will span 26 acres, has an estimated GDV of RM400 million. The main benefit, however, will be the value it adds to the township as a whole, spurring future development, the management explains, drawing a comparison with Putrajaya.

Gabungan AQRS Bhd has a 30% stake in Kreatif Sinar Gabungan, with the remaining 5% controlled by Sinar Realiti Sdn Bhd, which is in turn 99%-controlled by Tengku Muda Pahang Tengku Abdul Rahman Sultan Ahmad Shah, Companies Commission of Malaysia filings show.

Tengku Abdul Rahman’s older sister, Puteri Seri Lela Manja Pahang Tengku Nong Fatimah Sultan Ahmad Shah, is a director on Kreatif Sinar Gabungan’s board, along with Tanah Makmur managing director Tengku Zubir Tengku Ubaidillah and Gabungan AQRS executive director Datuk Azizan Jaafar.

Note that Tanah Makmur’s largest shareholders include Lembaga Kemajuan Perusahaan Negeri Pahang with a 20% stake, Tengku Abdullah Sultan Ahmad Shah with 13.7% and TAS Industries Sdn Bhd with 12.55%.

Tengku Abdullah has an additional 24.2% stake in TAS Industries while his siblings,  Tengku Abdul Rahman and Tengku Nong Fatimah each have a 10% stake in TAS Industries.

Note that funding for this project comes from the federal and not the state budget.  The final decision on the project is expected around the middle of the year.

As at last Thursday’s close of RM1.51 per share, the group was trading at 10.43 times historical earnings and offered a dividend yield of 4%. However, if the management’s targets are met, the forward PE ratio would be closer to seven or eight times.

On top of that, there is a possibility of management paying out additional dividends since the company is in a strong cash position, with net cash of RM111.2 million.

This article first appeared in The Edge Malaysia Weekly, on March 16 - 22, 2015.

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