This article first appeared in The Edge Malaysia Weekly on December 11, 2017 - December 17, 2017

AS TDM Bhd embarks on its five-year plan to become one of the top 100 companies listed on Bursa Malaysia, it intends to invest up to RM1 billion to expand its plantation and healthcare businesses.

Next year is expected to be an exciting one for the Kuala Terengganu-based group, as it takes a majority stake in Ladang Rakyat Trengganu Sdn Bhd (LRT) and commences the operation of its 133-bed Kuala Terengganu Specialist Hospital (KTS).

These are two items on a long list of projects TDM has planned over the next five years to grow revenue to RM1 billion and pre-tax profit to RM200 million by 2022, group managing director Datuk Mohamat Muda tells The Edge in an exclusive interview.

“The idea is to grow our planted areas from 30,000ha to 52,000ha, while our total plantation area will increase to about 100,000ha. For healthcare, currently we have 297 beds [and] in five years’ time, we will have 1,000.

“The aspiration is to be among the top 100 biggest public-listed companies on Bursa Malaysia by 2022, by having a market capitalisation of at least RM2 billion,” says Mohamat, who is the former director-general of the Rubber Industry Smallholder Development Authority.

Besides the targets for revenue, pre-tax profit and market capitalisation, TDM’s five-year transformation plan also entails a dividend payout of RM100 million by 2022. TDM paid out RM7.5 million in dividends in the financial year ended Dec 31, 2016, representing a payout ratio of 35% of its net profit.

Currently, apart from its land in Kalimantan, Indonesia, most of TDM’s plantation land in Terengganu is leased from state agencies. However, the company plans to acquire land from the state government and private owners to expand its plantations in the state.

TDM has taken the first step by acquiring Terengganu Incorporated’s (TI) stake in LRT for RM187 million, increasing the group’s stake in the plantation company to 61.76% from 19.12%.

The remaining shares are held by Ketengah Holdings Sdn Bhd, the commercial entity of Lembaga Kemajuan Terengganu Tengah. While Ketengah currently does not have any plans to sell its stake in LRT, TDM is ready to buy if the agency wants to sell, says Mohamat.

TI is TDM’s largest shareholder with a 61.2% stake.

The purchase consideration for LRT will be partly funded by debt and internally generated funds, TDM’s chief financial officer Amir Mohamad Hafiz Amir Khalid tells The Edge.

“Currently, our gearing level is about 30%. So, we still have some headroom to leverage up for the expansion. By the end of next year, our gearing will still be below 0.5 times, which is manageable.

“Our investment guideline is that it must be earnings accretive. As long as the investment leads into growth in our earnings per share, we will invest. LRT is profitable, with a pre-tax profit of RM18 million last year, which will be positive for our earnings per share,” says Amir.

According to TDM’s announcement on the execution of the heads of agreement with TI, LRT has a total planted area of 11,467ha. The acquisition will increase TDM’s total planted area in Terengganu to 43,315ha. The acquisition will also reduce TDM’s average plantation age profile to 13.9 years from 15.36 years and increase its total mature area in Terengganu by 34%, says Amir.

The younger age profile will help increase TDM’s plantation yield, says Mohamat. The group’s current fresh fruit bunch (FFB) yield of 17 tonnes per hectare is very low compared with the industry average because its oil palms have already passed their peak production period, Amir says.

“The main issue with TDM now is that more than 50% of our oil palms are at more than 20 years. If our average age profile [was] about 13 years, our yield could increase to 20 tonnes to 22 tonnes per hectare,” says Mohamat.

TDM is considering accelerated replanting to further reduce its plantation age profile if its financial standing allows it to do so, he adds. The group aims to see the FFB yield improve to 18.7 tonnes per hectare next year, when the acquisition of LRT is completed.

Currently, TDM’s replanting programme involves 5% of its total plantation area annually.

Not targeting medical tourism

TDM has allocated RM26 million for its healthcare division, for renovations of its facilities and the purchase of equipment. Some RM10 million has been allocated for the renovation of its medical centres in Taman Desa, Kuala Lumpur, and Kelana Jaya, Petaling Jaya.

The opening of KTS next year will bring TDM’s target to have 1,000 beds by 2022 closer, as it will increase the number of beds under the group’s healthcare subsidiary, Kumpulan Medic Iman Sdn Bhd (KMI), to 407.

Growing the healthcare business will continue with investments in the expansion of existing medical centres and acquiring other hospitals that fit the group’s business model, says Amir.

“Last October, we signed a memorandum of understanding with PNB-Commercial, a subsidiary of Permodalan Nasional Bhd, to explore the development of a hospital in Sri Petaling [Kuala Lumpur]. This will mean a potential expansion of 80 to 100 beds.”

KMI was established to bring private healthcare to the local community by operating hospitals in suburban areas and providing medical treatment in a private set-up at an affordable price, says Mohamat.

KMI caters to patients who are willing to pay a little more than what is charged at government hospitals — to avoid the long wait and lack of privacy — yet at the same time, are not willing to go to the city to get treatment at the big private hospitals.

Since KMI is only targeting the local community in nearby neighbourhoods, it is not going to benefit from medical tourism — in which the government wants the country to be a regional leader.

According to reports, Malaysia receives 921,500 medical tourists a year, contributing RM4 billion to RM5 billion to the economy annually. Indonesia, Vietnam, China and India are the core markets for the medical tourism industry.

However, TDM is confident its business model — catering to the local community rather than medical tourists — is sustainable.

“If you build bigger, the acquisition cost of getting patients from all over the country and — in the case of medical tourism from other countries — is higher. We build small hospitals to cater to the local community, which is a captive market,” says Amir.

The group’s healthcare division’s earnings before interest, taxes, depreciation and amortisation dropped 17% year on year in the first nine months to RM17.8 million. The drop was due to higher operating costs compared with the same period last year as the government required private hospitals to increase the number of staff per bed. The group plans to soften the blow by introducing higher value services to increase revenue, while keeping costs in check by implementing centralised procurement for all its hospitals.

On the plan to demerge the group by listing its healthcare business, Mohamat says the division will be spun off within three to four years.

Over the last 12 months, TDM’s share price has been on a downward trend. As at last Thursday’s close of 45.5 sen per share, for a market capitalisation of RM762.6 million, it has lost 26.4% of its market value. The current share price is the lowest it has been since November 2011.

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