Is TDM undervalued based on Boustead Plantation transaction?

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Many people use relative valuation with multiples such as PE or PBV to value companies. In the dotcom days, people extended the relative valuation concept to use price per eyeball. Even today we have the price per subscriber based for social media companies. And for plantation companies, you can think of valuing the shares based on the value of the plantation land.

Along this line the recent Boustead Plantation sale of RM 1.55 per share can be translated into about RM 48,000 per planted ha of palm oil land. Imagine using this as benchmark for other plantation companies such as TDM.

TDM has both plantation and healthcare divisions. Using the Boustead Plantation price, the value of TDM plantation works out to RM 0.79 per TDM share compared to its 0.17 per share price. And we have yet to account for the value of the healthcare division.

Is this a realistic basis? Using multiples can provide a misleading picture. For example, the plantation lands are in different locations and different maturity.
At the same time, the returns from the two companies are different. Boustead had an average ROE of the past 3 years of 5 % (excluding the sale of land). TDM total ROE (including healthcare but excluding the disposal of the Indonesian ops) was 4%.

You can see why I prefer to use the DCF method as no 2 companies are the same. I then use base rates based on industry performance as a sanity check. For details of the Bursa plantation sector, refer to “How the Malaysian plantation sector performed over the past 10 years”
 

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TDM is a Bursa company in the plantation and healthcare sectors.

If you compare TDM market price over the past 10 years with that of its ROE, you can see a great disconnect as illustrated in the chart



The share price had declined to its low in 2019. Over the past 5 years it has not really gotten out of the low. While the ROE had improved since the 2019 low, the market price did not seem to reflect this.

But its financial performance as measured by the ROE has been volatile compared to the market price. 

Does it mean that there is an investment opportunity? From a fundamental perspective I would still compare its intrinsic value with the market price before deciding whether to invest.

Both the plantation and healthcare are not sunset sectors.

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Professor Bruce Greenwald opined that you can get strategic insights by comparing the asset value (AV) with the earnings power value (EPV) of a company.

In a very competitive environment would have the AV = EPV ie the assets have been well deployed to generate profits. If a company has a strong economic moat, you would expect EPV to be much greater than the AV. If you have a case of the EPV being much smaller than the AV, you have under-utilized assets.

In the case of TDM, a Bursa Plantation company, the AV is RM 0.40 per share. But its average earnings over the past decade was negative. The EPV can be thought of as zero.

This is clearly as case of under-utilised assets. Many would hold the Board and management accountable. Maybe the company should take a leaf from the sale of Boustead Plantation where the Revised Asset Value is about double the Book Value. But was sold at a price that is a bit higher than the Book Value.

So isn’t it better for the shareholders of TDM if its assets were sold and monies returned to shareholders. Why work hard for 10 years to have negative average earnings? Maybe then the shareholders could reinvest in other better plantation companies.

Of course, you could argue that looking at historical earnings is not a good reflection of the future. And it is not the full story and TDM has a healthcare arm in addition to its plantation arm.

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I originally viewed TDM as a plantation Group with a healthcare arm. About 17 years ago, the healthcare segment only accounted for about 16% of the Group revenue. The Group plantation operations then was mainly in Malaysia and this accounted for a large part of the Group’s revenue.

The Group decided to expand it plantations segment by venturing to Indonesia. It took several years to get this going such that the maiden revenue from the Indonesian plantation was only in 2013. By then  the Group had “..earmarked that the growth of the plantation operations will be in Kalimantan.”

But things began to go wrong with the Indonesian operations soon after. The losses and impairments got so bad that the Group announced its plans to sell the Indonesian assets in 2019.  By 2023 it was still trying to complete the sale of its Indonesian assets.

If not for the healthcare segment, which had grown to account for 56 % of the Group’s revenue in 2023, TDM would be in a worse shape.

Moral of the story? Beware of companies announcing expanding into foreign countries as the Malaysian experience may not always be transferable.

Given the poor plantation segment performance, the market took a dim view of the company despite a growing healthcare segment. I guess the market is still waiting for TDM to prove that it can recover from the Indonesian lesson.

Refer to “Is TDM a value trap?” if you want to bet on its turnaround.

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TDM – bigger does not mean better

TDM has 2 business segments – Plantation and Healthcare. In 2007, TDM expanded its plantation business to Kalimantan Barat, Indonesia and touted “…that the growth of the plantation operations will be in Kalimantan.”

By 2016, the Group’s Indonesian assets amounted to RM 532 million. But then things began to go wrong with the company having to incurr impairments from 2016. It got so bad that the Group decided to sell of the Indonesia assets in 2019. By this time, after all the write downs, its Indonesia assets was reported to be RM 106 million.

Without the Indonesian operations, the Plantation segment is a profitable one. The Healthcare segment, although a small player in the Malaysian healtcare sector, has always been profitable. Let us hope that maybe the company will start making money by just running its operation better rather than try to be bigger