regional industry focus plantation companies - dbs bank industry focus plantation companies page 3...

ed-TH / sa- YM

El Nino aftermath

CY15 El Nino to wipe out 2.2m MT of potential palm oil output this year; tilting the balance to deficit. CY14 dry weather, skip in fertiliser may compound the impact

CY16F-18F palm oil prices raised by 12-16%; plantation counters’ TPs raised up to 38%

Upside risks: La Nina, crude oil price recovery. Downside risks: low biodiesel blend, jump in oilseed crushing, steep devaluations in CNY, IDR, MYR, ARS and BRL

We believe upside risks still outweigh downside risks. Top picks: Wilmar, Bumitama, TSH, IndoAgri

Expect faster drop in inventory. Discussions with planters suggest that severe CY15 dry weather lasting for three consecutive months or more should show lagged adverse impact from Feb-16 due to tree stress. This would be followed by reduced fruit formation in CY17F. Reportedly lower fertiliser application in 2H15 may further trim Fresh Fruit Bunch (FFB) yield for some independent smallholders in Indonesia in CY17F. We cut global CPO output estimates by 2.2m MT and 2.6m MT in CY16F and CY17F respectively to reflect these impacts. CY16F-17F CPO price raised by 12-16%. With the gap between CPO and international diesel prices widening above US$300/MT, we believe Indonesian CPO fund may – at most – absorb c.2.5m kl of biodiesel this year – notably below the government's target of 3.2m kl. Yet as El Nino's impact and this biodiesel mandate kick in, we expect global palm oil stock/ usage ratio to recede to 15.7% by end-CY16F from 19.9% (est.) at end-CY15. Further deterioration in CY17F FFB yield and steady demand are expected to trim stock/usage ratio further to 13.3% by end-CY17F. Our CY16F-17F CPO prices (US$/MT, FOB Pasir Gudang) are accordingly raised by 12-16%; while TPs of counters under our coverage are raised by up to 38% (base year rolled forward to FY17F). While we continue to monitor release of Argentine soybean stockpile; we understand there is limited crushing capacity (58.9m MT p.a. vs. forecast crush of 44.8m MT) to substitute c.2m MT deficit palm oil supply. But beware of maturing estates. Following anticipated FFB yield setback in CY16F-17F, palm oil output is due to recover in CY18F. This would be driven by (1) large maturing estates in CY16F-17F (i.e. c.1.6m ha in Indonesia and c.0.5m ha in Malaysia), and (2) rebound in FFB yield as El Nino's impact fades. Concurrently, we expect CY18 palm oil price to drop 9% y-o-y to US$588/MT (FOB Pasir Gudang). In our estimation, the sharp drop in new planting since CY14 would only decelerate supply growth from CY20F. Accumulate WIL, BAL, TSH, IFAR for 14-23% upside. Our valuations imply FY17F PE of between mean and +1SD; justified by CPO price upcycle over the next two years. Despite a relative pricing limitation (i.e. from soybean and Brent), select counters remain attractive at current levels. We like WIL (BUY), BAL (upgraded to BUY), IFAR (upgraded to BUY) and TSH (upgraded to BUY).

JCI : 4,778.79 KLCI : 1,680.02 STI : 2,657.57 Analyst Ben Santoso +65 6682 3707 [email protected] Marvin KHOR +603 2604 3911 [email protected] Stock coverage

Source: DBS Bank, DBS Vickers, Alliance DBS *prices as at 18 Feb16 closing CPO, soybean, soybean oil price revisions Source: DBS Bank estimates

DBS Group Research . Equity 22 Feb 2016

Regional Industry Focus

Plantation Companies

Refer to important disclosures at the end of this report

Price Mkt Cap Target Price

Performance (%)

LCY US$m LCY 3 mth 12 mth Rating

Rp Astra Agro Lestari 17,725 2,073 17,200 (2.7) (29.6) HOLD Eagle High Plantations 227 529 190 26.0 (39.1) FV London Sumatra 1,485 752 1,360 16.4 (23.2) HOLD Sampoerna Agro 1,800 253 1,880 36.8 (7.0) HOLD RM Felda Global Ventures 1.66 1,410 1.55 (11.4) (42.2) HOLD Genting Plantations 11.20 2,043 10.85 8.8 10.1 HOLD IJM Plantation 3.75 771 3.55 4.2 (0.3) HOLD IOI Corporation 4.90 7,321 3.70 16.1 0.9 FV KL Kepong 24.16 6,061 23.85 7.0 7.9 HOLD Sime Darby 8.00 12,003 7.60 (0.4) (15.7) HOLD TSH Resources 2.00 643 2.30 (1.5) (11.4) BUY S$ Bumitama Agri 0.79 968 0.95 4.0 (26.2) BUY First Resources 2.00 2,251 1.90 3.1 5.3 HOLD Golden Agri Resources 0.37 3,308 0.40 1.4 (14.1) NR Indofood Agri Resources 0.485 484 0.54 (11.3) (33.8) BUY Wilmar International 3.11 14,010 3.85 7.5 (4.0) BUY

15 16F 17F 18F 19F 20F 21FCPO price (RM/MT FOB P.Gudang) 2,168 2,600 2,810 2,540 2,580 2,660 2,760CPO price (US$/MT FOB P.Gudang) 560 600 649 588 598 616 639Prev. CPO price (RM/MT FOB P.Gudang) 2,200 2,340 2,450 2,610 2,740 2,880 3,010Prev. CPO price (US$/MT FOB P.Gudang) 546 537 561 596 627 659 690

Soybean price (US$/MT FOB Chicago) 346 315 336 314 321 333 347Soybean oil price (US$/MT FOB Chicago) 667 634 691 676 701 727 757Previous SB price (US$/MT FOB Chicago) 334 322 318 321 335 350 363Previous SBO price (US$/MT FOB Chicago) 639 655 681 717 748 780 810

TSR20 price (US$/MT) 1,337 1,186 1,344 1,428 1,464 1,500 1,537Prev. TSR20 px (US$/MT) 1,408 1,460 1,502 1,527 1,552 1,578 1,606

Sugar price (US$/MT) 300 310 310 320 330 340 348Prev. sugar px (US$/MT) 300 310 310 320 330 340 348

1

Industry Focus


Peer comparison

Source: Companies, Bloomberg Finance LP, DBS Bank, DBS Vickers, AllianceDBS Research

Regional Industry Focus


Es t. la nd ba nk

15F own ma t.

15F own

p la nte dSha re pric e Ma rke t c a p

Adjuste d 15F

EV/p la nte d

Adjuste d 15F

EV/ma ture

15F-18F own FFB vo l

CAGR

15F-18F EPS

CAGR Re cTa rge t pric e Ba s i s

(ha .) (ha .) (ha .) 2-18-2016 (m) (own) (own) 15F 16F 15F 16F 15F 16F 15F 16F 15F 16F % %

Indone s ia

Astra Agro L. n/a 196,177 236,311 17,725Rp 2,069US$ 10,059US$ 12,116US$ 47.2 15.5 4.0 1.0 -76.4 204.8 45.6 32.2 17.3 8.7 3.6 47.3 H 17,200Rp DCF

Eagle High P. 419,006 101,241 139,606 227Rp 530US$ 7,626US$ 10,516US$ neg NM 0.0 0.0 NM NM 104.6 95.3 17.9 10.2 15.6 NM FV 190Rp DCF

London Sum.* 215,917 79,976 93,135 1,485Rp 751US$ 6,967US$ 8,113US$ 17.5 14.9 3.7 2.3 -36.8 17.6 NC NC 12.4 10.2 3.1 4.1 H 1,360Rp DCF

Sampoerna A. 246,873 56,823 79,141 1,800Rp 252US$ 4,613US$ 6,425US$ 13.9 11.6 2.5 1.8 -28.2 19.5 53.9 50.0 6.7 5.8 7.0 (6.4) H 1,880Rp DCF

Simple a vg 3,603US$ 7 ,316US$ 9 ,293US$ 26.2 14.0 13.6 8.7

Ma la ys ia

Felda Global V. 355,864 272,805 329,683 1.66RM 1,452US$ 7,185US$ 8,683US$ -56.5 27.2 1.3 2.0 NM NM 18.7 30.5 13.1 9.4 0.7 NM H 1.55RM DCF

Genting Plant. 150,912 92,457 126,251 11.20RM 2,102US$ 20,649US$ 28,197US$ 53.2 29.9 0.4 0.7 -57.0 77.7 NC 2.8 34.6 22.0 9.1 27.6 H 10.85RM SOP

IJM Plant. 78,484 44,340 58,389 3.75RM 791US$ 14,298US$ 18,828US$ 30.9 19.4 1.4 1.7 -6.8 24.5 21.2 24.2 19.3 15.4 9.2 28.0 H 3.55RM DCF

IOI Corp** 220,593 149,568 178,765 4.90RM 7,400US$ 13,026US$ 15,568US$ 62.0 29.8 1.8 1.3 -95.0 400.6 92.6 98.2 38.0 21.3 -0.4 95.6 FV 3.70RM DCF

KL Kepong 245,905 173,313 209,249 24.16RM 6,167US$ 11,444US$ 13,817US$ 24.2 16.6 2.0 3.8 -12.3 90.0 24.8 11.6 17.6 13.9 3.9 13.2 H 23.85RM DCF

Sime Darby 647,373 526,052 595,139 8.00RM 12,132US$ 7,169US$ 8,110US$ 22.2 20.3 2.3 2.2 -32.6 -6.3 46.4 43.2 14.7 13.4 1.5 5.6 H 7.60RM SOP

TSH Res. 82,841 26,960 42,816 2.00RM 650US$ 12,069US$ 19,167US$ 27.0 20.2 0.9 1.2 -19.5 33.9 77.6 76.9 19.4 15.8 12.2 19.0 B 2.30RM DCF

Simple a vg 30,695US$ 12,263US$ 16,053US$ 23.3 23.3 22.4 15.9

Singa pore

Bumitama A. 191,561 91,731 116,413 0.79S$ 982US$ 11,346US$ 14,398US$ 16.8 12.9 1.6 1.1 -30.3 29.9 58.6 56.0 12.1 8.5 12.9 31.6 B 0.95S$ DCF

First Resources 312,488 122,918 176,858 2.00S$ 2,254US$ 14,351US$ 20,648US$ 19.8 14.5 1.7 1.5 -33.4 36.8 8.6 0.4 10.9 7.8 6.9 32.5 H 1.90S$ DCF

Golden Agri R. 558,000 356,115 372,951 0.37S$ 3,359US$ 16,169US$ 16,934US$ 19.8 12.6 0.6 2.0 44.8 57.1 26.6 61.3 11.5 7.8 2.2 53.1 NR 0.40S$ DCF

Indofood Agri* 541,224 199,187 247,483 0.49S$ 483US$ 4,820US$ 5,989US$ NM 13.0 0.0 0.0 -77.6 205.8 27.2 34.0 12.2 7.3 5.1 132.8 B 0.54S$ DCF

Wilmar Int'l 573,401 211,414 240,956 3.11S$ 14,010US$ 2,997US$ 3,415US$ 13.6 12.9 2.7 2.7 -8.7 5.5 75.6 80.0 12.2 11.2 0.8 6.2 B 3.85S$ DCF

Simple a vg 21,088US$ 11,672US$ 14,492US$ 17.5 13.2 11.8 8.5* Including rubber and other crops** Excluding effective stake in associates land bank

CY PER, x

FY Div. yie ld ,

%

EPS growth (inc . BA

ga ins ), %

FY Ne t ge a ring,

%FY EV/

EB ITDA, x

2

Industry Focus


Analyst Ben Santoso +65 6682 3707 [email protected] Marvin KHOR +603 2604 3911 [email protected]

Table of contents Peer comparison 2 Strategy and stock picks 4

Our key message 4

Our BUY recommendations – large caps 4

Our BUY recommendations – small caps 4

Our HOLD/FULLY VALUED recommendations 5

Bucking the underperformance? 5

SGX-listed planters offer best value 6

Changes to our key assumptions 7

4QCY15 earnings: squeezed by lower prices, lower yields 8

Spotlight on Pertamina 10

Another bout of refining woes this year 10

Key risks to our call 12

The next leg up in palm oil prices 13 Taking it slow 13

Lower crude oil prices set the tone 13

El Nino removed 2.2m MT of potential palm oil output 13

CY16F prices to remain range bound from current level 13

Historical impacts of El Nino 15

But beware of expected supply recovery in CY18F-19F 15

Appendix 17 3QCY15 results review and changes in forecasts 17

Company Guide 21

Astra Agro Lestari 22

Bumitama Agri 29

Eagle High Plantations 36

Felda Global Ventures 43

First Resources 50

Genting Plantations 57

IJM Plantations 64

Indofood Agri Resources 71

IOI Corporation 78

KL Kepong 85

London Sumatra Indonesia 92

Sampoerna Agro 99

Sime Darby 106

TSH Resources 113

Wilmar International 120

Disclaimer 127

3

Industry Focus


Strategy and stock picks Our key message

1. Palm oil market is moving towards a deficit. Palm oil demand will outstrip supply this year and the next due to El Nino and skips in fertiliser application on some smallholder estates in Indonesia last year. But global palm oil demand should pick up sizeably – as Indonesia blends more biodiesel. From supply-demand perspective, palm oil stockpile is expected to shrink over the next two years. We understand there is limited spare crushing capacity in Argentina (58.9m MT vs. 44.8m MT forecast crushing) to substitute c.2m MT palm oil deficit – despite the huge soybean inventory.

Pertamina biodiesel offtake

Source: Kontan newspaper

2. Plantation counters still lag behind CPO futures. We

expect palm oil stock/usage ratio to drop from 19.9% at the end of CY15 to 15.7% at end of this year and to 13.3% by end of CY17F. Spot palm oil prices and some plantation counters have only partly reflected this prospective drop. We expect the gap between futures-and spot prices to narrow further as: Malaysian palm oil stock/usage ratio continues to drop

over the next few months Pertamina’s initial 1.8m kl biodiesel procurement in

Nov-15 is followed through by more allocation before Apr-16

We believe weak energy prices should only partly dampen otherwise bullish prospects.

3. Focus on earnings. Despite what we believe is a two-year up-cycle for the palm oil prices, select plantation counters still trade below fair values. While planters’ share prices have historically moved parallel to CPO prices; we caution that age profiles (e.g. El Nino affects prime-aged yields more than younger trees), changes in export/import

tax policies, currency movements, and rising share in downstream businesses now have different impacts on earnings. With these considerations in mind, we recommend investors to accumulate Wilmar, Bumitama, IndofoodAgri and TSH as our top picks.

Our BUY recommendations – large caps

Wilmar International (WIL SP) We reiterate our BUY call for Wilmar; as despite headwinds in palm oil refining margins YTD, we believe concerns on China economic slowdown’s impact on the group’s operations are exaggerated. While any steep CNY devaluation could adversely impact Wilmar’s revenues from China in USD terms, it is unlikely to translate into significantly weaker earnings: 1 Any significant CNY depreciation would be managed in

two ways: readjustment of local Consumer segment prices (with some lag) when cost-cutting efforts have already been exhausted. With significant economies of scale; it is unlikely that Wilmar would see market share losses.

2 Ignoring domestic price adjustments, translation of weaker CNY revenues is unavoidable. However, Wilmar’s earnings are not entirely dependent on China. In our estimates, FY15 EBIT contribution from China is c.49%. This year, we anticipate higher contribution from its Plantations segment – thanks to higher CPO price expectations

3 We believe demand for soybean meal should continue to ramp up – now that soybean prices have dropped – as swine population expands and DDGS imports are restricted

4 The group’s intercompany loans are hedged; and the group is winding down exposure to its structured products

5 If the concerns were on contagion impact to regional currencies (hence impacting Wilmar’s earnings in other countries), we should note that its products are USD based and its costs are partly in local currencies

Our BUY recommendations – small caps

Bumitama Agri (BAL SP) We upgraded our rating on BAL to BUY from Hold for 23% upside to our revised TP of S$0.95. The group had reported 4QCY15 CPO output slightly better than our expectations; although we suspect its CPO ASP (FOB; net of export taxes) had also seen an adverse impact from CPO export levy. Driven by progressively higher yields and c.10.6k ha of new maturity this year, BAL is a beneficiary of higher CPO prices over the next two years – reflected 22% and 52% revisions in FY16F and FY17F earnings. Please note that we had imputed higher beta to reflect limited trading liquidity.

Appointed directly by Minis try of Energy (Nov15 - Apr16)

Date Allocation (kl) Formula Appointees Vol. (kl)

Nov-15 1,859,087 PT Wilmar Nabati Indonesia 547,407

PT Wilmar Bioenergi Indonesia 388,304

PT Musim Mas 338,982

PT Cemerlang Energi Perkasa 140,016

PT Dharmex Biofuels 133,744

PT Pelita Agung Agri Resources 90,552

PT Ciliandra Perkasa 73,078

PT Anugerahinti Gemanusa 49,362

PT Primanusa Palma Energi 44,189

PT Bioenergi Pratama Jaya 33,375

PT Energi Baharu Lestari 20,078

α = CPO price (KPB) + Conversion Cost (US$125/MT) + Logistic cost

Pertamina will absorb 1.84m kl; AKR Corporindo will absorb 18,470 kl

MOPS - α

4

Industry Focus


Indofood Agri Resources (IFAR SP) In this report we raised IndoAgri to BUY from HOLD. Since our downgrade on 27-Jan-15, the counter’s price had fallen by 42%. We believe IndoAgri’s share price has overshot on the downside. Aside from forecast flat sugar prices, the group remains a beneficiary of higher expected CPO price forecasts (net of lower expected FFB yields). Please note that we had imputed higher beta to arrive at our TP to reflect underperformance relative to consensus expectations since 2013. TSH Resources (TSH MK) We upgraded our call on TSH to BUY from Hold for 14% upside to revised TP of RM2.30, plus 1% forward yield. We expect internal FFB growth from rising maturities in Indonesia to overcome reduced yields. Higher forecast CPO prices should further boost the group’s long-term earnings and valuation. Our HOLD/FULLY VALUED recommendations

Reflecting the positive impact from higher CPO price expectations, we have HOLD calls on 1. Astra Agro Lestari (AALI IJ) – upgraded from Fully Valued 2. Felda Global V. (FGV MK) – upgraded from Fully Valued 3. First Resources (FR SP) – maintained 4. Genting Plantations (GENP MK) – maintained 5. IJM Plantations (IJMP MK) – maintained 6. KL Kepong (KLK MK) – maintained 7. London Sumatra (LSIP IJ) – upgraded from Fully Valued; 8. Sime Darby (SIME MK) - maintained

Given significant downside risks to our revised TPs, our Fully Valued calls are maintained for 1. IOI Corporation (IOI MK) 2. Eagle High Plantations (BWPT IJ) Bucking the underperformance?

Since CY08 global financial crisis, plantation counters have mostly underperformed their relative indices. We attribute this to: 1. Palm oil’s poor price performance between CY08 and

CY15 – which translated to underachievement in earnings relative to expectations

2. Accelerating labour-cost hikes 3. Scale-back in expansion plans (given increased pressures

on sustainability) – which resulted in valuations being cut 4. Price wars between Indonesia and Malaysia, which usually

end up in higher export taxes While we believe these issues will remain relevant in the foreseeable future; we see palm oil price weakness/labour cost pressure to abate as: 1. Palm oil balance moves to deficit over the next two years 2. Planters work to reduce man-hours through efficiency and

mechanisation Hence, we anticipate the sector to outperform over the next two years; although we also believe investors should impute cyclicality in the sector performance; as we foresee palm oil supply recoveries in CY18 and CY19.

Plantation sector historical performance relative to indices Source: Bloomberg Finance LP, DBS Bank

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

01/0

1/20

08

01/0

3/20

08

01/0

5/20

08

01/0

7/20

08

01/0

9/20

08

01/1

1/20

08

01/0

1/20

09

01/0

3/20

09

01/0

5/20

09

01/0

7/20

09

01/0

9/20

09

01/1

1/20

09

01/0

1/20

10

01/0

3/20

10

01/0

5/20

10

01/0

7/20

10

01/0

9/20

10

01/1

1/20

10

01/0

1/20

11

01/0

3/20

11

01/0

5/20

11

01/0

7/20

11

01/0

9/20

11

01/1

1/20

11

01/0

1/20

12

01/0

3/20

12

01/0

5/20

12

01/0

7/20

12

01/0

9/20

12

01/1

1/20

12

01/0

1/20

13

01/0

3/20

13

01/0

5/20

13

01/0

7/20

13

01/0

9/20

13

01/1

1/20

13

01/0

1/20

14

01/0

3/20

14

01/0

5/20

14

01/0

7/20

14

01/0

9/20

14

01/1

1/20

14

01/0

1/20

15

01/0

3/20

15

01/0

5/20

15

01/0

7/20

15

01/0

9/20

15

01/1

1/20

15

01/0

1/20

16

SGX-listed planters

KLCI-listed planters

IDX-listed planters

5

Industry Focus


SGX-listed planters offer best value

YTD, plantation counters in SGX have indeed outperformed the STI, largely in reaction to CPO price strength (somewhat offset by weaker crude oil prices) despite weaker demand from China. We expect this trend to continue; as we believe its largest component, Wilmar International, had unjustifiably traded below book value over the last two years. Bursa-listed planters have also outperformed YTD; even though we believe current valuations have already reflected

much of favourable outlook. Relative to regional peers, Bursa-listed planters now trade on the high side of the spectrum. Forward PE ratios of IDX-listed planters also moved higher – in line with higher palm oil prices but still below average PE of 16x. However stripping out the spike in 2015 (due to drop in CPO prices and imposition of export levies), Indonesia is now trading at average PE of 14.3x. Hence, we believe there is limited upside given recent IDR strength and export levies.

SGX listed planters’ share prices still lag regional peers Source: Bloomberg Finance LP, DBS Bank estimates

5

7

9

11

13

15

17

19

21

23

25

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16

Regional 1-year forward PE

+1sd: 19.3x

Avg: 16x

-1sd: 12.8x

-2sd: 9.5x

10

12

14

16

18

20

22

24

26

28

30

Jan

-07

Jul-0

7

Jan

-08

Jul-0

8

Jan

-09

Jul-0

9

Jan

-10

Jul-1

0

Jan

-11

Jul-1

1

Jan

-12

Jul-1

2

Jan

-13

Jul-1

3

Jan

-14

Jul-1

4

Jan

-15

Jul-1

5

Jan

-16

Malaysia 1-year Forward PE

+1sd: 22.3x

Avg: 18.4x

-1sd: 14.5x

-2sd: 10.6x

-

5

10

15

20

25

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Singapore 1-year Forward PE

+1sd: 17.2x

Avg: 14.3x

+2sd: 20.1x

-1sd: 11.4x

-2sd: 8.5x

-

5

10

15

20

25

30

35

40

45

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16

Indonesia 1-year Forward PE

+1sd: 22.2x

Avg: 16x

+2sd: 28.4x

-1sd: 9.8x

-2sd: 3.5x

6

Industry Focus


Singapore’s P/BV valuation is the cheapest regionally, as GGR, IFAR and WIL are trading below book Source: Bloomberg Finance LP, DBS Bank estimates Changes to our key assumptions

We adjusted FY16F/17F/18F CPO price expectations (US$, FOB) by +12%/+16%/-1%; as growing deficit over the next two years looks unavoidable. No changes to our sugar, cocoa and coffee price forecasts, which are based on World Bank Commodity Outlook. We cut CY15F and CY16F Brent prices to US$38/bbl and US$50/bbl (from US$54 and US$59 respectively), as we employ recent forecasts published by US EIA (Energy Information Administration) Short Term Energy Outlook. Cuts in Brent price forecasts have had corresponding negative revisions to 16F/17F rubber (STR20, FOB) prices – which we have lowered to US$1,186/MT and US$1,344/MT, from US$1,460/MT and US$1,502/MT respectively in this report. In line with in-house currency forecasts, we also adjusted our SGD, MYR and IDR FX rates in favour of weaker USD

(summarised overleaf). Hence the net increase of our palm oil price forecasts are more subdued in Ringgit and Rupiah terms (net of export taxes/levies). This also affects our target prices for some SGX-listed counters (having mostly Rupiah as their functional currency). Likewise, FX translation losses included in our earnings forecasts are reduced as a result (subject to changes in USD debt structure). We assume no change in the prevailing export tax/levy structure – although this may change over the course of the year through possible policy synchronisation recommended by Council of Palm Oil Producing Countries (CPOPC). We have also rolled forward our valuation base year to FY17; as our TPs are for 12-month view. Changes to our price assumptions are summarised below:

0.5

1.0

1.5

2.0

2.5

3.0

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Regional 1-year Forward PBV

Avg: 1.7x

+1sd: 2.1x

+2sd: 2.4x

-1sd: 1.4x

(X)

-2sd: 1.1x

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Malaysia 1-year Forward PB(X)

-2sd: 1.7x

-1sd: 2x

+2sd: 3x

+1sd: 2.7x

Avg: 2.4x

0.5

1.0

1.5

2.0

2.5

3.0

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Singapore 1-year Forward PB(X)

+1sd: 2x

-2sd: 0.5x

Avg: 1.5x

+2sd: 2.5x

-1sd: 1x

0.5

1.5

2.5

3.5

4.5

5.5

6.5

7.5

8.5

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Indonesia 1-year Forward PB

-2sd: 1x

Avg: 3.3x

+2sd: 5.5x

+1sd: 4.4x

-1sd: 2.1x

7

Industry Focus


Summary of CPO, soybean, and soybean oil price revisions Source: Bloomberg Finance LP, Datastream, DBS Bank estimates Revisions to our currency exchange rates Source: Bloomberg Finance LP, Datastream, DBS Bank estimates 4QCY15 earnings: squeezed by lower prices, lower yields

Based on actual prices (FOB Pasir Gudang) and Astra Agro Lestari’s monthly bulletin, 4QCY15 CPO ASP averaged RM2,160/MT (+7% q-o-q; -2% y-o-y) and Rp6,005/kg (-8% q-o-q; -21% y-o-y) respectively. Translated into USD terms, they equal US$510/MT (+2% q-o-q; -22% y-o-y) in Malaysia and US$436/MT (-8% q-o-q; -30% y-o-y) in Indonesia – bringing CY15 CPO spot ASP (net of export taxes) at RM2,151/MT (US$557/MT) and Rp6,969/kg (US$523/MT) respectively. ASP in Indonesia is lower due to export levies – which commenced on 16-Jul-15 to fund the government’s biodiesel programme. In addition to lower ASP, reported production numbers have also shown steeper-than-normal seasonal decline – reflecting early stages of CY15 El Nino impact. We anticipate this drop to accelerate in 1QCY16.

Weaker net ASP and FFB yields in 4QCY15 would have had put pressure on planters’ earnings. We believe some planters had to take on additional debts to cover for short-term cash shortfall and expanded their net gearing ratios. Yet, those taking on additional USD debts should see translation gains for the quarter – offsetting part of 9MCY15 translation losses. Distressed private planters in Indonesia may continue to be offered for sale in CY16; although we believe most are priced for perfection. Pressures to undertake green initiatives, such as High Conservation Value (HCS); High Carbon Stock (HCS) and peat conservation could also incentivise further divestments. Below is a summary of quarterly production numbers:

FX ra te s (YE) 15 16F 17F 18F 19F 20F 21FUSD/MYR 4.29 4.39 4.32 4.32 4.32 4.32 4.32USD/IDR 13,795 13,703 13,703 13,703 13,703 13,703 13,703USD/SGD 1.42 1.43 1.43 1.43 1.43 1.43 1.43USD/THB 36.0 36.40 36.40 36.40 36.40 36.40 36.40

Pre vious FX ra te s (YE) 15 16F 17F 18F 19F 20F 21FUSD/MYR 3.48 4.34 4.37 4.37 4.37 4.37 4.37USD/IDR 12,440 14,470 14,640 14,460 14,460 14,460 14,460USD/SGD 1.32 1.42 1.46 1.45 1.45 1.45 1.45USD/THB 32.94 36.0 37.3 36.9 36.90 36.90 36.90

% stre ngthe n (we a ke n) 15 16F 17F 18F 19F 20F 21FUSD/MYR -19% -1% 1% 1% 1% 1% 1%USD/IDR -10% 6% 7% 6% 6% 6% 6%USD/SGD -7% -1% 2% 1% 1% 1% 1%USD/THB -9% -1% 2% 1% 1% 1% 1%

15 16F 17F 18F 19F 20F 21FCPO price (RM/MT FOB P.Gudang) 2,168 2,600 2,810 2,540 2,580 2,660 2,760CPO price (US$/MT FOB P.Gudang) 560 600 649 588 598 616 639Prev. CPO price (RM/MT FOB P.Gudang) 2,200 2,340 2,450 2,610 2,740 2,880 3,010Prev. CPO price (US$/MT FOB P.Gudang) 546 537 561 596 627 659 690

Soybean price (US$/MT FOB Chicago) 346 315 336 314 321 333 347Soybean oil price (US$/MT FOB Chicago) 667 634 691 676 701 727 757Previous SB price (US$/MT FOB Chicago) 334 322 318 321 335 350 363Previous SBO price (US$/MT FOB Chicago) 639 655 681 717 748 780 810

TSR20 price (US$/MT) 1,337 1,186 1,344 1,428 1,464 1,500 1,537Prev. TSR20 px (US$/MT) 1,408 1,460 1,502 1,527 1,552 1,578 1,606

Sugar price (US$/MT) 300 310 310 320 330 340 348Prev. sugar px (US$/MT) 300 310 310 320 330 340 348

8

Industry Focus


Announced quarterly production numbers Source: Companies Summary of EPS and TP revisions Source: DBS Bank, AllianceDBS Research estimates

Company 1QCY14 2QCY14 3QCY14 4QCY14 1QCY15 2QCY15 3QCY15 4QCY15

% chg

q-o-q

Astra Agro L.* Own FFB output 1,288,612 1,451,360 1,439,780 1,382,700 1,191,884 1,478,347 1,478,487 1,453,288 -1.7%FFB yield 5.2 5.8 5.7 5.3 4.7 5.8 5.7 5.5 -4.2%

Eagle High P. Own FFB output 301,650 344,517 304,524 304,938 265,044 313,399 267,503 415,913 55.5%FFB yield 3.7 3.9 6.3 3.1 2.6 3.1 2.3 n.a

London Sumatra I. Own FFB output 308,406 342,691 359,324 330,818 260,600 318,714 381,944FFB yield 4.1 4.5 4.7 4.3 3.3 4.1 4.9

Sampoerna Agro Own FFB output 163,676 219,353 222,174 180,154 172,008 258,110 261,275

Felda Global V.* Own FFB output 1,159,113 1,212,721 1,340,298 1,200,425 930,018 1,222,735 1,306,435 1,172,027 -10.3%Genting Plant. Own FFB output 376,933 374,477 431,207 473,942 353,078 405,228 468,727 500,108 6.7%IJM Plantation Own FFB output 191,374 216,275 244,754 236,637 164,790 227,728 235,166 233,825 -0.6%IOI Corp Own FFB output 781,504 827,036 967,203 1,002,804 683,718 888,497 967,406 934,811 -3.4%KL Kepong Own FFB output 842,337 873,104 1,013,980 954,709 825,549 981,809 1,043,973 1,055,550 1.1%Sime Darby** Own FFB output 2,468,476 2,570,803 2,095,708 2,285,013 2,524,437 2,193,539 2,022,264 2,897,307 43.3%TSH Resources Own FFB output 156,742 162,675 163,646 157,321 143,258 153,963 152,768

Bumitama Agri Own FFB output 307,822 372,248 333,399 387,571 340,760 355,395 383,348 499,312 30.3%FFB yield 4.0 4.8 4.3 5.0 3.9 4.0 4.4 5.1 17.1%

First Resources Own FFB output 446,451 476,659 695,089 593,807 519,250 571,381 771,344 668,382 -13.3%FFB yield 3.8 4.0 5.9 5.0 4.0 4.4 5.5 5.1 -7.3%

Golden Agri R. Own FFB output 1,784,000 1,930,000 1,969,000 1,887,000 1,665,000 1,863,000 2,064,000FFB yield 4.8 5.6 5.6 5.6 4.3 5.6 5.6

Indofood Agri Own FFB output 252,000 274,000 298,000 288,000 239,000 329,000 344,000FFB yield 3.9 4.3 5.0 4.6 3.5 4.6 5.0

Wilmar Int'l Own FFB output 1,057,172 1,124,793 1,059,500 1,082,495 960,319 1,155,431 1,129,946 1,235,326 9.3%FFB yield 4.9 5.3 4.9 5.2 4.5 5.5 5.4 5.9 9.6%

Subtotal Own FFB output 11,886,268 12,772,712 12,937,586 12,748,334 11,238,713 12,716,276 13,278,586growth 7.5% 1.3% -1.5% -11.8% 13.1% 4.4%*incl. plasma/settlers

**incl. NBPOL

R

Pre v. CY15

F EPS

Pre v. CY16

F EPS

Ne w CY15

F EPS

Ne w CY16

F EPS

CY15F

EPS re v.

CY16F

EPS re v.

Pre v. TP

Ne w TP

TP re v. Comme nts

Indone s ia (EPS/TP)Astra Agro Lestari (Rp) H 553 1,065 375 1,144 -32% 7% 15,800 17,200 9% Raised CPO/PK ASP, cut FFB yields, cut USD/IDR, roll-forward DCFEagle High Plant. (Rp) FV -1 1 -3 5 NM 288% 180 190 6% Raised CPO/PK ASP, cut FFB yields, cut USD/IDR, roll-forward DCFLondon Sumatra (Rp) H 89 85 85 100 -5% 18% 1,260 1,360 8% Raised CPO/PK ASP, cut FFB yields, cut USD/IDR, roll-forward DCFSampoerna Agro (Rp) H 149 125 129 155 -13% 24% 1,760 1,880 7% Raised CPO/PK ASP, cut FFB yields, cut USD/IDR, roll-forward DCF

Ma la ys ia (EPS/TP)Felda Global V. (sen/RM) H -2.9 5.6 -2.9 6.1 NM 9% 1.50 1.55 3% Raised CPO/PK ASP, cut FFB yields, roll-forward DCFGenting Plant. (sen/RM) H 22.7 27.5 21.1 37.4 -7% 36% 9.60 10.85 13% Raised CPO/PK ASP, cut FFB yields, roll-forward DCFIJM Plantations (sen/RM) H 12.2 17.1 12.2 19.4 -1% 13% 3.25 3.55 9% Raised CPO/PK ASP, cut FFB yields, roll-forward DCFIOI Corporation (sen/RM) FV 6.9 14.7 7.9 16.4 14% 12% 3.40 3.70 9% Raised CPO/PK ASP, cut FFB yields, roll-forward DCFKL Kepong (sen/RM) H 84.8 99.9 99.8 145.7 18% 46% 20.00 23.85 19% Raised CPO/PK ASP, cut FFB yields, roll-forward DCFSime Darby (sen/RM) H 37.2 41.9 36.1 39.4 -3% -6% 7.60 7.60 0% Raised CPO/PK ASP, cut FFB yields, roll-forward DCF, cut IndustrialTSH Resources (sen/RM) B 7.4 8.8 7.4 9.9 0% 13% 1.90 2.30 21% Raised CPO/PK ASP, cut FFB yields, roll-forward DCF

Singa pore (EPS/TP)Bumitama Agri (Rp/S$) B 484 485 457 594 -6% 22% 0.86 0.95 10% Raised CPO/PK ASP, cut FFB yields, cut USD/IDR, roll-forward DCFFirst Resources (US¢/S$) H 7.6 8.1 7.3 10.0 -4% 23% 1.85 1.90 3% Raised CPO/PK ASP, cut FFB yields, roll-forward DCFGolden Agri R. (US¢/S$) NR 0.8 1.0 1.4 2.1 78% 108% 0.29 0.40 38% Raised CPO/PK ASP, cut FFB yields, roll-forward DCFIndofood Agri (Rp/S$) B 95 313 119 365 26% 16% 0.52 0.54 4% Raised CPO/PK ASP, cut FFB yields, cut USD/IDR, roll-forward DCFWilmar Int'l (US¢/S$)* B 16.0 17.0 16.5 17.4 3% 2% 3.70 3.85 4% Raised CPO/PK ASP, cut FFB yields, roll-forward DCF

*actual CY15

9

Industry Focus


Spotlight on Pertamina

Weakening petroleum diesel prices and rising palm oil prices have now widened their spread to above US$300/MT. Relative to how much Indonesia’s CPO fund (BPDP) can collect (i.e. from export levies of palm oil and its derivatives), we estimate biodiesel absorption (including US$125/MT margin) of roughly 2.5m kl (ex. any government subsidies, replanting/ research expenditure and delays) – far lower than our previous estimate of 3.9m kl and government revised target of 3.2m kl. For our demand forecast, we conservatively expect Indonesia’s biodiesel production to reach 2.5m kl this year (all domestic) – implying overall blend of only 9.5% (vs. B20 mandate per Energy & Mineral Resources regulation no. 12/2015). Our CY17F biodiesel blend also assumes the same blending rate of 9.5% to arrive at biodiesel production of 2.6m kl (flat y-o-y). The issue that will arise from the rising spread between petroleum diesel price and CPO price (+US$125/MT) in Indonesia’s biodiesel programme is the reported-but-not-yet-regulated Rp6,000/litre penalty for failure to blend. In our view, lack of regulatory apparatus and clear audit procedures would prove a disincentive for compliance in the private sector. Hence, we believe Pertamina is a sole bearer of the government’s biodiesel programme. Assuming the 1.84m kl biodiesel quota announced on 4-Nov-15 was distributed evenly through Apr-16, our 2.5m kl estimate for CY16 would thus necessitate the Indonesian government to call for an additional 1.3m kl quota (between now and Apr-16) for rest of the year. We believe our forecast is achievable. Notwithstanding the chronic under-achievement, we believe there is ammunition (i.e. cash from export levies)

and legal framework for the programme to be implemented unlike previous years. Another bout of refining woes this year

The CPO price and its derivatives have not moved in parallel in recent times. While CPO has reacted positively to lower prospective FFB yields, RBD Olein, RBD Stearin and PFAD have not (at least not in the same scale). Consequently palm oil refining margins have narrowed significantly, and are estimated to register losses in Jan-16. Interestingly, Indonesian refining margins have also tumbled in tandem with Malaysian refining margins – despite having a favourable duty structure imposed through export levies since Sep-11. Yet, the revision in export tax rates from percentage to absolute numbers since Jul-15 has made export taxes too expensive at lower prices. There are two consequences to this: 1. As refining margins collapse, processors will push further

downstream – chasing higher-margin products (i.e. oleochemicals, specialty fats)

2. Export demand will need to switch from CPO to refined products, which should favour Indonesian processors. But this will prompt Indian processors to push for import tax hike on refined products.

We believe there is a cap to how much CPO prices can rise – unless refined product prices play catch up. Provided overleaf is our summary of the refining margins:

Indonesia biodiesel demand projections Sources: USDA, Handbook of Energy & Economic Statistics of Indonesia, Oil World, Pertamina, Kontan newspaper, DBS Bank estimates Biodiesel pricing formula: CPO price + US$125/MT

2012 2013 2014 2015 2016F 2017F 2018FDiesel consumption (m litres) 25,040 25,254 24,223 24,739 25,322 26,011 26,718 growth 56% 1% -4% 2% 2% 3% 3% Biodiesel exports (m litres) 1,515 1,800 1,700 150 - - - Domestic biodiesel PSO (m litres) 637 996 1,520 1,378 2,406 2,471 2,538 implied blend 2.5% 3.9% 6.3% 5.6% 9.5% 9.5% 9.5% Domestic biodiesel non subsidised (m litres) 33 52 80 72 74 76 78 implied blend 0.2% 0.3% 0.3% 0.3% 0.3% 0.3%Total biodiese l produced (m lit res) 2,200 2,800 3,300 1,600 2,479 2,547 2,616 growth 22% 27% 18% -52% 55% 3% 3%Nameplate capacity (m litres) 4,881 5,670 5,670 6,750 7,000 7,000 7,000 utilisation rate 45% 49% 58% 24% 35% 36% 37%Indonesia palm oil production (MT) 26,900,000 28,720,000 31,400,000 33,400,000 33,602,930 35,483,853 38,366,909 growth 11% 7% 9% 6% 1% 6% 8%Palm oil required for biodiesel production (MT) 2,129,600 2,711,076 3,195,197 1,549,187 2,400,554 2,465,835 2,532,891Non biodiesel palm oil consumption (MT) 4,998,400 5,371,924 5,558,803 5,760,204 5,996,730 6,280,850 6,578,431Tota l domest ic palm o il consumpt ion (MT) 7,128,000 8,083,000 8,754,000 7,309,391 8,397,283 8,746,684 9,111,322 growth 13% 13% 8% -17% 15% 4% 4%Indonesia palm oil available for exports (MT) 19,772,000 20,637,000 22,646,000 26,090,609 25,205,646 26,737,169 29,255,587 growth 10% 4% 10% 15% -3% 6% 9%

10

Industry Focus


Malaysia biodiesel demand projections Sources: USDA, MPOB, DBS Bank estimates Biodiesel pricing formula: RBD Palm Oil price + RM515/MT Palm oil refining margins: Dissipating impact to Indonesia’s export taxes Source: Companies, DBS Bank estimates, AllianceDBS Research estimates Quarterly palm oil refining margin (in US$/MT - calculated based on spot CPO, RBD Olein, RBD Stearin, PFAD prices) Source: Bloomberg finance LP, SEA of India, MPOB, DBS Bank estimates

2012 2013 2014 2015 2016F 2017F 2018FDiesel consumption (m litres) 5,035 5,159 5,286 5,416 5,544 5,793 6,054 growth 2% 2% 2% 2% 2% 5% 5% Biodiesel exports (m litres) 32 190 95 153 147 147 147 Domestic on-road biodiesel (m litres) 132 171 264 380 554 579 605 implied blend 3% 3% 5% 7% 10% 10% 10% Domestic biodiesel non subsidised (m litres) - - - - - - - implied blend 0% 0% 0% 0% 0% 0% 0%Total biodiesel produced (m lit res) 152 358 359 537 700 726 752 growth 174% 135% 0% 50% 30% 4% 4%Nameplate capacity (m litres) 2,747 2,747 2,747 2,747 2,747 2,747 2,747 utilisation rate 6% 13% 13% 20% 25% 26% 27%Malaysia palm oil production (MT) 18,785,139 19,216,459 19,666,993 19,961,581 19,549,026 19,757,675 20,740,220 growth -1% 2% 2% 1% -2% 1% 5%Palm oil required for biodiesel production (MT) 147,310 346,623 347,614 519,996 678,105 703,192 728,433Non biodiesel domestic palm oil consumption (MT 1,935,834 1,968,370 2,429,685 2,548,739 2,676,176 2,809,985 2,950,484Total domest ic palm o il consumpt ion (MT) 2,083,144 2,314,993 2,777,299 3,068,735 3,354,282 3,513,177 3,678,917 growth 16% 11% 20% 10% 9% 5% 5%Malaysia palm oil available for exports (MT) 16,701,995 16,901,466 16,889,694 16,892,846 16,194,745 16,244,498 17,061,303 growth -2% 1% 0% 0% -4% 0% 5%

-50

0

50

100

150

200

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun

-10

Jul-1

0A

ug-1

0Se

p-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun

-11

Jul-1

1A

ug-1

1Se

p-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun

-12

Jul-1

2A

ug-1

2Se

p-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun

-13

Jul-1

3A

ug-1

3Se

p-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

Mar

-14

Apr

-14

May

-14

Jun

-14

Jul-1

4A

ug-1

4Se

p-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15Fe

b-15

Mar

-15

Apr

-15

May

-15

Jun

-15

Jul-1

5A

ug-1

5Se

p-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Indonesia refining margin (US$/MT)

Malaysia refining margin (US$/MT)

Change in Indonesian export tax rates effective 15

Sep11

India RBD Olein import duty

(US$/MT)

India unfreezed the import base prices

for refined oils Jul12

Malaysia applied new CPO export

tax structure Jan13

Indonesia imposed export tax levies to support B15

programme on 16 Jul15

India raised import duty rates on crude and refined edible oils by 5% each on 18 Sep15

3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15Indonesia 77.0 55.2 74.7 42.0 23.0 40.7 24.7 15.6 3.1 8.1 -5.4 -12.0 20.5 16.8 gross refining margin 9% 7% 10% 5% 3% 5% 3% 2% 0% 1% -1% -2% 4% 3%Malaysia 13.2 33.2 17.6 32.1 35.6 30.9 36.8 45.0 46.4 -6.9 -5.5 -1.8 3.6 -8.2 gross refining margin 1% 4% 2% 4% 5% 4% 4% 5% 6% -1% -1% 0% 1% -2%

11

Industry Focus


Key risks to our call

Risks to our view are summarised below: 1. Energy price volatility. In our forecasts, we employed

long-term Brent crude oil prices based on EIA and World Bank forecasts. Energy price volatility would impact demand for palm and soybean oil for energy use, subject to biodiesel subsidies. Any strong recovery in crude oil price has historically lifted soybean/palm oil prices in tandem.

2. USD strength. In our forecasts, we assume a strong USD.

A reversal of this trend would have an adverse impact on soybean and crude oil prices in USD terms as well as CPO prices in Ringgit and Rupiah terms. Conversely, a weak USD may boost crude oil prices. A strong USD would also make planting soybeans in South America more profitable, given the drop in crude oil prices.

3. Weather anomalies. Dry weather in 1Q15 and 3Q15 may

disrupt supply in the affected estates with a time lag (typically two years thereafter) and influence palm oil prices. Dryness/flooding in soybean growing regions would likewise influence the price of soybean oil. Further CPO price upside is possible if La Nina (a weather event that causes drought in North/South Americas which typically ensues strong El Nino) occurs in CY16F-17F. In CY07-08, a moderate La Nina caused Brazil and Argentine soybean harvests to drop 17% y-o-y and boosted both soybean CPO prices as a consequence.

4. China’s economic growth. We imputed demand growth

for both soybean and palm oil based on Jul-15 IMF global GDP growth forecasts. Weaker-than-expected economic growth forecasts globally would have adverse consequences on our price forecasts. In this sector, Chinese economic growth is an important demand proxy. China occupies 14% and 47% shares of global palm oil and soybean oil (implied) imports respectively. Any steep

depreciation in CNY could also work to reduce processors’ margins

5. Change in export/import tax structure. Changes in Indian soybean and palm oil import taxes would have implications on Indian demand. India accounts for 19% of both palm oil and soybean oil imports globally.

6. The pace of South American soybean sales may also

have some bearing on palm oil price direction. USD strength may lead to an increase in soybean exports and result in further price pressures. We continue to expect release of Argentine soybean stockpile this year, on the back of reduced export tax and steep currency devaluation (c.33%). Recent steep depreciation in Brazilian Real could also prompt increased planting – similar to CY02. Based on our revised forecasts, we expect soybean prices to average below US$9.00/bu in CY16F.

7. Shift in seasonal planting patterns. The price

divergence in soybean and corn prices may shift farmers’ planting to corn for the 2015/16 marketing year.

8. Changes in import/export taxes. Any move by the

Indian Government to raise refined edible oil import taxes would have adverse consequences to Malaysian refiners' margins, and any hike in export taxes in response would have a negative impact on Malaysian planters.

9. Faster-than-expected rise in production cost. The unit

cost of producing one MT of CPO in Indonesia is rising faster than inflation. Recent increases in workers' wages have all taken a toll on cost and may further erode margins. Likewise, labour shortages in Malaysia would continue to affect productivity and palm oil unit cost over the long term.

12

Industry Focus


The next leg up in palm oil prices Taking it slow

While global soybean prices remained under pressure, reserved selling by Argentine soybean farmers to date had prevented soybean prices from collapsing – contrary to what we had initially anticipated. The newly elected Argentine President’s policies of cutting soybean export taxes by 5% per year from 35% and devaluing the Peso by over 45% since Dec-15 have so far failed to discharge c.12-18m MT of old crop hoard on expectations of further Peso depreciation. In an effort to encourage more farmer selling, Oil World recently highlighted that the Argentine government had also scrapped tariffs on imported soybeans (from Paraguay and Bolivia) for processing – as crushers’ inventories had run low. Assuming Argentine processors have an extra 1.5m MT of crushing capacity per month and China remains well-stocked, current expectations are hence for Argentine soybean hoard

to be released only gradually throughout the year (i.e. gradual downside in the horizon, barring any weather/logistics constraints). Lower crude oil prices set the tone

Based on Oil World data, CY16F soybean ending stock estimates are cut by c.1m MT; as global demand is forecast to grow faster – due in part to lower palm oil output. Soybean prices are revised down nevertheless; given its historically high correlation to crude oil prices – which we assume to average US$38/bbl this year (i.e. -23% y-o-y; based on EIA short-term forecast). Our revised soybean supply and demand projection is summarised below:

Soybean supply and demand forecast Source: USDA, Oil World, EIA short-term outlook (Jan15), Bloomberg Finance LP, DBS Bank estimates

El Nino removed c.2.2m MT of potential palm oil output

Factoring in the delayed adverse impact of El Nino (occurring since May-15) and dry weather in early CY14, we conservatively imputed a 3% cut in CY16F FFB yields and a further 2% in CY17F for both Indonesia and Malaysia. While yield deterioration 24 months following severe dry weather is never uniform, we also expect a compounding adverse impact from dry weather in mid-CY14 as well as a drop in fertiliser application in 2HCY15 by some independent smallholders in Indonesia. As we impute lower assumed yields, global palm oil production is expected to reach 62.3m MT in CY16F – down from 62.8m MT in CY15 (est.) and from our previous forecast of 64.5m MT. CY17F output is likewise lowered to 64.8m MT – or 2.6m MT lower than our previous forecast of 67.4m MT.

Included in the revised global palm oil output is Malaysia’s CY16F production of 19.5m MT and Indonesia’s 33.6m MT (revised from 35.5m MT). CY16F prices to remain range-bound from current level

Notwithstanding the prospective supply constraints, we expect global CY16 palm oil demand to expand significantly – thanks in part to Indonesia’s biodiesel mandate. In this report, we impute palm oil demand of 64.4m MT (unchanged from previous forecast), rising significantly from 60.2m MT in CY15 (est.). CY17 demand is forecast to rise towards 66.2m MT – cut from previous estimate of 67.4m MT – partly reflecting supply constraints due to CY15 El Nino. Our palm oil supply and demand forecasts are summarised below:

Price of soybeans (US$/MT)

(FOB)

Ending Stocks (k MT)

Global demand (k MT)

Global supply (k MT)

Stock/ usage

rat io (%)

Crude o il price

(US$/bbl)

Price of soybeans (US$/MT)

(FOB)

Ending Stocks (k MT)


Global supply (k MT)

Stock/ usage

rat io (%)

Crude o il price

(US$/bbl)

PSB K QD QS K CRUD PSB K QD QS K CRUD2015 346 87,110 297,840 320,200 29.2% 52.3 2015F 334 87,240 295,210 318,560 29.6% 54.12016F 315 88,220 315,970 317,080 27.9% 37.5 2016F 322 89,220 313,800 315,780 28.4% 58.62017F 336 86,131 327,314 325,225 26.3% 50.0 2017F 318 94,800 327,954 333,534 28.9% 63.72018F 314 82,585 338,895 335,349 24.4% 57.9 2018F 321 91,793 339,792 336,785 27.0% 66.32019F 321 82,353 350,600 350,369 23.5% 61.5 2019F 335 92,683 351,935 352,826 26.3% 69.12020F 333 79,935 362,215 359,797 22.1% 65.3 2020F 350 91,114 364,242 362,672 25.0% 71.9

New forecasts - Soybeans Prev. forecasts - Soybeans

13

Industry Focus


Palm oil supply and demand forecast Source: USDA, Oil World, DBS Bank estimates Malaysian palm oil stockpile Malaysian palm oil stock/usage ratio Source: MPOB, DBS Bank estimates With lower production outlook, we expect palm oil demand to exceed supply this year. Based on our revised estimation, Malaysian palm oil inventory is due to bottom at 2.170m MT by end-Dec-16 and peak at 2.323m MT by end-May-16. Unlike movements in CY15, the flatter outlook to Malaysian palm oil inventory thus suggests similar price trend for the remainder of the year. This will remain subject to: 1. Relative pricing of competing vegetable oils. 2. Actual FFB yields vs. our expectations. 3. Indonesia implementing its B20 mandate in full force. We believe the odds of further upside from (2) and (3) are greater than nil. Hence CPO prices should maintain their momentum this year (even in the typically bearish 2H). We also expect a more gradual soybean price decline (given reserved Argentine farmer selling and limited spare crushing capacity – outside of China) We believe the gap between palm oil futures and spot markets should narrow in the near term (i.e. led by improvement in spot prices). Palm oil price’s forecast strength

this year should hence reduce soybean oil’s price premium to just 5% this year from 17% in CY15. Soybean oil price premium

Source: Datastream, Bloomberg Finance LP, DBS Bank

-100.0%

-80.0%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

0

200

400

600

800

1,000

1,200

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

Soybean oil price premium (%)

(RHS)

CPO price (US$/MT, FOB)

LHS

Soybean oil price (US$/MT), FOB)

LHS

CPO price

(US$/MT) FOB

Ending Stocks (k

MT)


Global supply (k

MT)

Stock/ usage

rat io (%)

Soybean o il price (US$/MT)

FOB

CPO price

(US$/MT) FOB

Ending Stocks (k

MT)


Global supply (k

MT)

Stock/ usage

rat io (%)

Soybean o il price (US$/MT)

FOB2015 560 12,180 61,173 62,487 19.9% 667 2015 546 11,673 60,248 61,462 19.4% 6392016 600 10,126 64,358 62,304 15.7% 634 2016 537 11,740 64,465 64,532 18.2% 6552017 649 8,771 66,173 64,818 13.3% 691 2017 561 11,778 67,358 67,396 17.5% 6812018 588 8,817 68,963 69,009 12.8% 676 2018 596 12,107 70,203 70,532 17.2% 7172019 598 9,726 71,933 72,843 13.5% 701 2019 627 12,587 72,959 73,440 17.3% 7482020 616 10,737 74,068 75,079 14.5% 727 2020 659 12,874 75,603 75,891 17.0% 780

New forecasts - Palm Oil Prev. forecasts - Palm Oil

1,100,000

1,300,000

1,500,000

1,700,000

1,900,000

2,100,000

2,300,000

2,500,000

2,700,000

2,900,000

Jan

Feb

Mar

Apr

May Jun Jul

Aug Se

p

Oct

Nov

Dec

MT

2016

2015

2012

2013

2014

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

Jan

Feb

Mar

Apr

May Jun Jul

Aug Se

p

Oct

Nov

Dec

2012

2013

2016

2015

2014

14

Industry Focus


Historical impacts of El Nino

El Nino has historically caused FFB yields to drop with an 11-12 month lag (shown below). The CY15 El Nino was the strongest since 1997-1998 and was preceded by brief episodes of dry

weather in Peninsular Malaysia and parts of Kalimantan. We expect weather conditions to result in a steeper-than-usual drop in FFB yields from Feb-16 onwards.

Malaysian FFB yield growth is due to drop significantly from Feb-16

Source: BOM Australia, MPOB, DBS Bank But beware of expected supply recovery in CY18F-19F

Notwithstanding potential disappearance of c.2.9m MT of palm oil supply between CY16F and CY17F, we expect palm oil production to rebound strongly in CY18F, as adverse impact from CY15 El Nino dissipates, and newly matured estates progressively increase yields. We expect this supply expansion to continue into CY19F – following which output is expected to

decelerate again as steep drop in new planting – since CY14 – start to take a toll on palm oil supply expansion. This is an irreversible slowdown, as suitable land bank (i.e. free of peat soil, forest and legal encumbrances) has dwindled significantly in both Malaysia and Indonesia. Any aggressive planting elsewhere is not expected to make any significant impact for some time, in our view.

Palm oil hectarage forecasts

Source: Oil World, MPOB, Ministry of Agriculture of Indonesia, DBS Bank estimates

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

-40

-30

-20

-10

0

10

20

30

40

Jan

-04

Ap

r-0

4

Jul-0

4

Oct

-04

Jan

-05

Ap

r-0

5

Jul-0

5

Oct

-05

Jan

-06

Ap

r-0

6

Jul-0

6

Oct

-06

Jan

-07

Ap

r-0

7

Jul-0

7

Oct

-07

Jan

-08

Ap

r-0

8

Jul-0

8

Oct

-08

Jan

-09

Ap

r-0

9

Jul-0

9

Oct

-09

Jan

-10

Ap

r-1

0

Jul-1

0

Oct

-10

Jan

-11

Ap

r-1

1

Jul-1

1

Oct

-11

Jan

-12

Ap

r-1

2

Jul-1

2

Oct

-12

Jan

-13

Ap

r-1

3

Jul-1

3

Oct

-13

Jan

-14

Ap

r-1

4

Jul-1

4

Oct

-14

Jan

-15

Ap

r-1

5

Jul-1

5

Oct

-15

Jan

-16

Ap

r-1

6

11 months lag

11 months lag12 months lag

11 months lag

11 months lag

La

Nin

a

El N

ino

Southern Oscillation Index (LHS)

Malaysia FFB yield Y-o-Y growth (RHS)

Strong El Nino

Moderate El Nino

Moderate El Nino

Dry weather

Dry weather

Strong El Nino

Oi l palm planted area ('000 hectares )2012 2013 2014 2015E 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F

Mature 4,352.9 4,526.1 4,689.3 4,783.4 4,880.1 5,020.3 5,139.4 5,211.7 5,253.8 5,277.5 5,290.5 5,296.8 Immature 724.1 703.7 702.9 714.4 686.5 590.8 500.8 447.3 417.5 401.8 393.9 391.0 New planting+replanting 165.7 242.6 259.1 207.2 173.8 153.5 142.7 137.0 133.9 132.4 132.0 132.4Malaysia 5,076.9 5,229.7 5,392.2 5,497.9 5,566.5 5,611.1 5,640.1 5,659.0 5,671.3 5,679.2 5,684.4 5,687.8

Mature 6,989.7 7,197.4 7,401.6 7,956.7 8,656.8 9,270.6 9,591.5 9,768.5 9,821.3 9,843.4 9,835.2 9,835.0 Immature 2,583.1 3,267.6 3,554.7 3,318.8 2,826.3 2,347.3 2,114.2 1,994.2 1,978.3 1,980.3 2,004.2 2,014.6 New planting+replanting 688.7 1,007.7 614.1 447.5 347.5 328.1 297.7 277.5 322.0 314.8 311.4 310.1Indonesia 9,572.7 10,465.0 10,956.2 11,275.5 11,483.1 11,618.0 11,705.6 11,762.6 11,799.7 11,823.8 11,839.4 11,849.6

Mature 11,342.5 11,723.5 12,090.9 12,740.2 13,536.8 14,291.0 14,730.8 14,980.2 15,075.1 15,120.9 15,125.7 15,131.8 Immature 3,307.1 3,971.2 4,257.6 4,033.2 3,512.8 2,938.1 2,615.0 2,441.4 2,395.8 2,382.1 2,398.1 2,405.6 New planting+replanting 854.4 1,250.3 873.2 654.7 521.3 481.6 440.4 414.5 455.8 447.2 443.5 442.6Total 14,649.6 15,694.8 16,348.5 16,773.4 17,049.6 17,229.1 17,345.8 17,421.6 17,470.9 17,503.0 17,523.8 17,537.3 % growth 4.7 7.1 4.2 2.6 1.6 1.1 0.7 0.4 0.3 0.2 0.1 0.1

15

Industry Focus


Palm oil supply forecasts

Source: Oil World, MPOB, Ministry of Agriculture of Indonesia, DBS Bank estimates

CPO product ion (m MT)2012 2013 2014 2015E 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F

Malaysia 18.785 19.216 19.667 19.962 19.549 19.758 20.740 21.691 22.314 22.812 23.261 23.617 vol. growth -0.1 0.4 0.5 0.3 -0.4 0.2 1.0 1.0 0.6 0.5 0.4 0.4 % growth -0.7 2.3 2.3 1.5 -2.1 1.1 5.0 4.6 2.9 2.2 2.0 1.5Indonesia 26.900 28.720 31.400 33.400 33.603 35.484 38.367 41.011 42.379 43.573 44.613 45.241 vol. growth 2.6 1.8 2.7 2.0 0.2 1.9 2.9 2.6 1.4 1.2 1.0 0.6 % growth 10.7 6.8 9.3 6.4 0.6 5.6 8.1 6.9 3.3 2.8 2.4 1.4Others 8.198 8.378 8.624 9.125 9.152 9.576 9.902 10.140 10.386 10.581 10.740 10.816 vol. growth 0.6 0.2 0.2 0.5 0.0 0.4 0.3 0.2 0.2 0.2 0.2 0.1 % growth 8.1 2.2 2.9 5.8 0.3 4.6 3.4 2.4 2.4 1.9 1.5 0.7Total 53.883 56.314 59.691 62.487 62.304 64.818 69.009 72.843 75.079 76.966 78.614 79.674 vol. growth 3.1 2.4 3.4 2.8 -0.2 2.5 4.2 3.8 2.2 1.9 1.6 1.1 % growth 6.1 4.5 6.0 4.7 -0.3 4.0 6.5 5.6 3.1 2.5 2.1 1.3

16

Industry Focus


Appendix

3QCY15 results review and remarks/changes to forecasts

Company Results vs forecasts

Latest results highlights Realised FFB yield

Realised CPO ASP

Realised CPO Cost

Remarks/changes in forecasts

Astra Agro Lestari Below AALI booked 3Q15 net loss of

Rp299bn - lower than Rp60bn loss expected – bringing 9M15 net profit to Rp145bn (-92% y-o-y) - representing c.16% of our initial full year estimates. Ex. translation FX losses of Rp597bn, AALI’s 3Q15 underlying net profit (incl. deferred tax credit on FX losses) came in at Rp149bn (-74% y-o-y; - 60% q-o-q), also weaker than Rp292bn anticipated. This was principally due to lower top line, offset by lower-than-expected operating expenses and higher tax credit.

c.5.8 MT/ha

c.Rp6,377 /kg

n.a. Having imputed 4QCY15 CPO ASP and announced production/sales volumes, we expect AALI to book 4Q15 earnings of Rp446bn. We have also adjusted the group’s FY16F/17F earnings by 7%/28% to take into account changes in our CPO price and exchange rate forecasts.

Eagle High Plantations

Below EHP reported 3Q15 net loss of Rp94bn. All of the group’s remaining US$85m debt is under subsidiary Green Eagle Holdings Pte Ltd (GEH), whose functional currency is USD – hence the absence of translation FX losses. The poor 3Q15 performance was dragged by 25% q-o-q drop (+11% y-oy) in top line to Rp569bn (vs. expectations of Rp702bn) – reflecting the 22% q-o-q drop in CPO sales volume. But, cost of sales eased by a slower by 11% q-o-q (+19% y-o-y) to Rp461bn.

c.2.3 MT/ha

c.Rp6.797 /kg

n.a. Having imputed 4QCY15 CPO ASP (pegged to Astra Agro Lestari’s) and disclosed output, we expect BWPT to book 4Q15 net loss of Rp9.9bn. We have also adjusted the group’s FY16F/17F earnings by 288%/ 170% to take into account changes in our CPO price and exchange rate forecasts.

London Sumatra Indonesia

Above Lonsum posted better-than-expected 3Q15 earnings of Rp161bn (-29% y-o-y; +3% q-o-q) – taking 9M15 earnings to Rp470bn. While 3Q15 top line was in line, Lonsum had booked lower-than-expected costs, which translated into 30% GPM (vis-à-vis 29% expected and 28% in 2Q15). This was further buoyed by higher operating income, as Lonsum had booked Rp77bn FX gains from its USD cash holdings.

c.4.9 MT/ha

c.Rp6,614 /kg

n.a. Having imputed 4QCY15 CPO ASP (pegged to Astra Agro Lestari’s) and estimated output, we expect LSIP to book 4Q15 earnings of Rp109bn. We have also adjusted the group’s FY16F/17F earnings by 18%/47% to take into account changes in our CPO price and exchange rate forecasts.

Sampoerna Agro

Above SGRO 3Q15 net income of Rp96.5bn (-23% y-o-y; +18% q-o-q) was more than double our Rp43-49bn estimate. This brought 9M15 earnings to Rp195bn – zipping through our initial FY15 estimate of Rp140bn. (vs. 22% expected in FY15).

c.4.8 MT/ha

c.Rp6,943 /kg

n.a. Having imputed 4QCY15 CPO ASP (pegged to Astra Agro Lestari’s) and estimated output, we expect SGRO to book 4Q15 earnings of Rp49bn. We have also adjusted the group’s FY16F/17F earnings by 24%/144% to take into account changes in our CPO price and exchange rate forecasts.

17

Industry Focus




Latest results highlights Realised FFB yield

Realised CPO ASP

Realised CPO Cost


Felda Global Ventures

Below FGV saw RM165m of core net losses in 3Q15, after stripping out LLA losses and impairment reversal gains. 9M15 core loss grew to RM193m, despite 1.3% higher CPO production of 2.34m MT for the same period last year. This was mainly due to the poor margins and translation losses from its newly set up CPO and refined products trading unit.

c. 5.1 MT/ha

c.RM2,191 /MT

n.a. 4Q15 CPO production fell to 757k MT (-19% y-o-y, -4% q-o-q), and FFB to 1.17m MT (-10% y-o-y, -2% q-o-q) due to dry weather. FGV’s profitability will depends on its ability to control costs and stabilise trading margins, and we expect 4Q15 earnings of between RM76-84m, assuming no exceptional trading losses.

Genting Plantations

In line Excluding translation FX losses and gains/ (losses) on disposal, core 3Q15 earnings were RM33.2m (-53% y-o-y; -27% q-o-q). 9M15 reported earnings to RM130.4m, (-46% y-o-y) – representing 74% of our initial FY expectations. 9M15 FFB output of 1,227k MT (+4% y-o-y) represented 69%of our FY target (in line with historical average trend), but 9M15 CPO/PK ASP came in at RM2,142/RM1,542 was slightly below expectations.

c.4.5 MT/ha

RM2,171 /MT

n.a. Having imputed 4QCY15 CPO ASP (based on average spot prices FOB Pasir Gudang and Astra Agro Lestari’s auction prices in Indonesia) and announced output, we expect GENP to book 4Q15 earnings of RM35m. We have also adjusted the group’s FY16F/17F earnings by 38%/47% to take into account changes in our CPO price and exchange rate forecasts.

IJM Plantations In line Excluding RM45.9m of forex

losses, IJMP’s 2QFY16 core earnings were in line at RM41m. CPO production was at 61.5k MT (flat q-o-q, 8% y-o-y), primarily due to lower external FFB (-21% y-o-y). Its own production figures were comparatively stable at 235.2k MT (+3% q-o-q, -4% y-o-y)

c. 4.9 MT/ha

c. RM2,050 /MT

n.a. CPO production was lower in 3QFY16 at 58.k MT (-13% y-o-y, -5% q-o-q) as weather impact was significant on external crop production. FFB from own estates only fell 1% to 233.8m MT. We thus expect lower core earnings of between RM19-21m.

IOI Corporation*

Below Stripping out translation FX gains/fair value gains on derivative instruments, core net profit came in at RM237m (-10% y-o-y) – below expectations. Plantations segment booked 2QFY16 EBIT of RM302m (+14% y-o-y), offset by weaker Manufacturing EBIT of RM111m (-50% y-o-y) due to lower margin in oleochemicals and specialty fats sub-segments.

c.6.0 MT/ha

RM2,119 /MT

n.a. Having imputed changes in our CPO price forecasts and 2QFY16 results, we adjusted IOI’s FY16F/ 17F earnings by 18%/11%. However we remain cautious on the group’s cash flow in the near term.

KL Kepong* Above Ex. RM486m in gains from sale of plantation land and RM8m in net fair value changes in derivative contracts, 1Q16 core earnings came in at RM302m (+41% y-o-y) – slightly ahead of expectations. Results were primarily driven by 282% jump in Manufacturing segment’s EBIT.

n.a. RM2,126 /MT

n.a. Having imputed changes in our CPO price forecasts and 1QFY16 results, we adjusted KLK’s FY16F/ 17F earnings by 1%/2%.

18

Industry Focus




Results highlights Realised FFB yield

Realised CPO ASP

Realised CPO Cost


Sime Darby

Below Excluding one-off gains from disposals, core 1QFY16 earnings are RM315.2m (-27% y-o-y; -63% q-o-q), below at 14% of full year forecasts. All major segments were lower y-o-y on the EBIT level including plantations (-5%), property (-28%), motors (-24%) and industrial (-68%) due to challenging macroeconomic conditions.

c.5.4 MT/ha

RM2,088 /MT

n.a. We cut FY16F/17F earnings by 6%/2% principally due to thinner margins on Industrial; although Plantations EBIT were each revised by -2% and +5%. While the group does not rule out raising more capital to strengthen its balance sheet, we understand it would continue to dispose non-core assets over the next 6-9 months as well to consider issuance of perpetual Sukuk to shore up its capital.

TSH Resources

In line 3Q15 core earnings was RM23m, after stripping out RM71m of unrealised forex losses, bring 9M15 to RM71m. CPO production was 72.1k MT (-18% y-o-y, -2% q-o-q), mainly from weaker external FFB which fell 21% y-o-y. TSH’s own FFB production was152.7k MT (-6.6% y-o-y, +1% q-o-q).

c.5.3 MT/ha

c.RM1,987 /MT

n.a. We expect TSH to achieve 4Q15 core earnings of between RM26-29m, improving on the back sequential recovery in CPO production by 12% to 81k MT, though flat y-o-y. This is due to lower external FFB neutralizing gains from rising maturities in its own Indonesian plantations.

Bumitama Agri A bove 3Q15 net profit of Rp200bn (-30% y-o-y; -8% q-o-q) brought 9M15 earnings to Rp598bn – representing 98% of our initial expectations – as the group had capitalised Rp455bn of translation FX losses, leaving Rp52bn expensed vs. our full-year expectations of Rp647bn. 9M15 oil extraction ratio of 22.9% was below 23.4% we targeted for the year – thus necessitating higher outside FFB. However, this did not prevent CPO output from dropping 17% q-o-q.

c.4.4 MT/ha

Rp6,746 /kg

n.a. Having imputed 4QCY15 CPO ASP (pegged to Astra Agro Lestari’s) and disclosed output, we expect BAL to book 4Q15 earnings of Rp205bn. We have also adjusted the group’s FY16F/17F earnings by 22%/52% to take into account changes in our CPO price and exchange rate forecasts. .

First Resources Above 3Q15 earnings of US$31.7m (-31% y-o-y) was driven by a steep 36% q-o-q drop in cost of sales – against a 9% q-o-q lower revenue, which reflected a 4% q-o-q lower in CPO sales volume, 11% expansion in refined volumes and a 16% q-o-q drop in implied CPO ASP. FR’s refinery was running at only 50% utilisation; which explains the absence of CPO purchases.

c.6.0 MT/ha

US$497 /MT

n.a. Having imputed 4QCY15 CPO ASP (pegged to Astra Agro Lestari’s) and disclosed output, we expect FR to book 4Q15 earnings of US$27.5m. We have also adjusted the group’s FY16F/17F earnings by 23%/31% to take into account changes in our CPO price and exchange rate forecasts.

19

Industry Focus




Results highlights Realised FFB yield

Realised CPO ASP

Realised CPO Cost


Golden Agri Resources

In line 3Q15 earnings of US$16m (-23% y-o-y; -1% q-o-q) were in line with our expectations but below consensus on annualised basis. Performance was dragged by 23% y-o-y drop in CPO ASP (-1% q-o-q) and weaker-than-expected contribution from Oilseeds & Others. For 9M15, Palm & Lauric segment contributed better-than-expected EBITDA. This was offset by weaker-than-expected Plantations contribution; given 1% y-o-y drop in 9M15 FFB output.

c.5.6 MT/ha

US$641 /MT

n.a. Having imputed 4QCY15 CPO ASP and estimated output, we expect GGR to book 4Q15 earnings of US$93m. We have also adjusted the group’s FY16F/17F earnings by 108%/138% to take into account changes in our CPO price and exchange rate forecasts.

Indofood Agri Below 3Q15 net loss of Rp154bn – was below Rp38bn earnings expected. Sugar sales volume was half of our forecast due to timing issues (as at end of Sep-15 the group still had c.27k MT of undelivered inventory). Earnings were also weighed down by 4% y-o-y drop in CPO sales volume, 16% y-o-y lower CPO ASP; Rp322bn in FX losses, and losses from CMAA JV. This brought 9M15 earnings to a Rp117bn net loss. Excluding translation FX losses, IndoAgri booked 3Q15 underlying earnings of Rp129bn (-49% y-o-y) – below Rp215bn expected. But costs were notably lower than expected, helping to raise 3Q15 GPM to 25.1% from 21.8% in 2Q15.

c.5.0 MT/ha

Rp6,655 /kg

n.a. Having imputed 4QCY15 CPO ASP (pegged to Astra Agro Lestari’s) and estimated output, we expect IndoAgri to book 4Q15 earnings of Rp286bn. We have also adjusted the group’s FY16F/17F earnings by 16%/74% to take into account changes in our CPO price and exchange rate forecasts.

Wilmar International*

Above Core 4Q15 earnings of US$350m (-15% y-o-y; -3% q-o-q) were ahead of our US$210m forecast; in line with consensus. Oilseeds & Grains M&P pretax contribution was better than expected due to strong soybean crushing and Consumer Products businesses. However these were offset by softer-than-expected Tropical Oils segment, due to lower palm oil prices, weak demand and lower downstream margins. 4Q15 Sugar pretax of US$80m is also below forecast. Significantly weaker Australian Dollar, weaker Merchandising and Manufacturing margins also dragged overall sugar pretax.

c.5.9 MT/ha

n/a n/a We imputed actual FY15 earnings; and accordingly made changes to our operating assumptions in FY16 and FY17. This includes higher biodiesel volumes and stronger Consumer product margins. We also raised CY16F/17F CPO price forecasts (US$/MT, FOB) by 12%/16% to US$600/US$649 – reflecting lower expected global CPO output and expansion in biodiesel usage in Indonesia – through deployment of CPO fund collected since Jul15. FY16F/17F earnings were tweaked by 0-1%.

*4QCY15 Sources: Companies, DBS Bank estimates

20

Industry Focus


Company Guides

21

ASIAN INSIGHTS VICKERS SECURITIES ed: YM / sa:MA

HOLD (upgraded from FULLY VALUED)

Last Traded Price: Rp17,725 (JCI : 4,778.79) Price Target : Rp17,200 (-3% downside) (Prev Rp15,800) Where we differ: Higher than consensus FY17F earnings estimate on higher CPO price expectations Analyst Ben Santoso +65 6682 3707 [email protected]

What’s New FY15/16F/17F EPS adjusted by -32%/+7%/ +28%

on changes in our key assumptions Reported 4Q15 production in line; but ASP was

below expectations TP raised to Rp17,200 (based on DCF); rating

upgraded to HOLD

Price Relative

Forecasts and Valuation FY Dec (Rp m) 2014A 2015F 2016F 2017F Revenue 16,306 12,901 14,944 16,787 EBITDA 4,539 1,936 3,744 4,637 Pre-tax Profit 3,690 859 2,617 3,443 Net Profit 2,504 591 1,801 2,369 Net Pft (Pre Ex.) 2,504 591 1,801 2,369 Net Pft Gth (Pre-ex) (%) 39.0 (76.4) 204.8 31.5 EPS (Rp) 1,590 375 1,144 1,504 EPS Pre Ex. (Rp) 1,590 375 1,144 1,504 EPS Gth Pre Ex (%) 39 (76) 205 32 Diluted EPS (Rp) 1,590 375 1,144 1,504 Net DPS (Rp) 599 716 169 515 BV Per Share (Rp) 7,252 6,911 7,886 8,875 PE (X) 11.1 47.2 15.5 11.8 PE Pre Ex. (X) 11.1 47.2 15.5 11.8 P/Cash Flow (X) 10.2 14.1 9.0 7.4 EV/EBITDA (X) 7.1 17.3 8.7 6.7 Net Div Yield (%) 3.4 4.0 1.0 2.9 P/Book Value (X) 2.4 2.6 2.2 2.0 Net Debt/Equity (X) 0.3 0.5 0.3 0.2 ROAE (%) 23.5 5.3 15.5 18.0 Earnings Rev (%): (32) 7 28 Consensus EPS (Rp): 724 1,169 1,354 Other Broker Recs: B: 14 S: 3 H: 6

Source of all data: Company, DBS Bank, Bloomberg Finance L.P

Strong earnings recovery priced in Expect significant earnings gains this year. Hikes in our CPO price forecasts should more than offset expectations of stronger Rupiah over the next two years. Changes in our forecasts point to 40% EBITDA CAGR over the same period. We believe consensus is too pessimistic in FY17F earnings, as we understand the group intends to undertake cost reductions through lower purchases of outside FFB/CPO amidst jump in new maturities. CY15 El Nino to impact FFB yields. Lower rainfall last year should affect AALI’s FFB yields with some lag time. Historically, a severe El Nino could cause FFB yields to drop by up to 20% and likewise, CPO prices to jump by c.20%. We assume AALI to see 2% decline in FFB yield this year and another 1% drop in FY17F as we imputed dry weather across its geographical locations. However, relative to independent smallholders in general, we believe the group should produce better yields over the next two years. The big picture. Persistent weakness in crude oil prices and China’s decelerating GDP remain the 2 biggest challenges. However, we believe Indonesia’s biodiesel programme – even on conservative volume of 2.6m kl – should drive palm oil into deficit over the next two years. At the same time, we understand there is limited crushing capacity in Argentina to substitute declining palm oil supply, despite huge soybean inventory. Valuation: We employed DCF methodology (FY17F base year) to arrive at AALI’s fair value of Rp17,200/share (WACC 12.6%, Rf 8.8%, Rm 15.7% β 0.9x, TG 3%). At current level, we believe the stock has already priced in significant earnings recovery over the next two years despite expectations of poor 4Q15 earnings. Hence, any near-term correction should be seen as an opportunity to accumulate. Key Risks to Our View: There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take failed to live up to our expectations (2.5m kl) this year. AALI’s output could also fall below our expectations if there were significant hit to its FFB yield in the aftermath of CY15 El Nino (vice versa). Changes in fund flows towards or out of emerging markets/ commodities would also affect valuations of plantation counters. At A Glance Issued Capital (m shrs) 1,575 Mkt. Cap (Rpbn/US$m) 27,912 / 2,073 Major Shareholders (%) PT Astra International Tbk 79.7

Free Float (%) 20.3 3m Avg. Daily Val (US$m) 2.0 ICB Industry : Consumer Goods / Food Producers


Indonesia Company Guide

Astra Agro Lestari Version 4 | Bloomberg: AALI IJ | Reuters: AALI.JK Refer to important disclosures at the end of this report

48

68

88

108

128

148

168

188

208

11,970.0

16,970.0

21,970.0

26,970.0

31,970.0

Feb-12 Feb-13 Feb-14 Feb-15 Feb-16

Relative IndexRp

Astra Agro Lestari (LHS) Relative JCI INDEX (RHS)

22

ASIAN INSIGHTS VICKERS SECURITIES

Company Guide

Astra Agro Lestari

WHAT’S NEW

Forecasts, TP and rating adjustments We adjusted AALI’s earnings to reflect changes in our key assumptions. We imputed realised CPO and PK sales/ production volumes, realised CPO ASP and exchange rates in FY15 together with revisions in our FY16 and FY17 CPO price outlook and FFB yields. Changes in our forecasts are summarised below: We imputed a 32% lower FY15F earnings (vs. previous

forecast) as 4Q15 CPO ASP came in lower than previously anticipated. We attribute this to stronger Rupiah and declining refining margins, which may have reduced demand for CPO during the quarter. However, stronger-than-expected year-end Rupiah exchange rate also helped to offset this through translation FX gains.

We also raised CY16F/17F CPO price forecasts (US$/MT, FOB) by 12%/16% to US$600/US$649 – reflecting lower expected global CPO output and expansion in biodiesel usage in Indonesia – through deployment of CPO fund collected since Jul15. FY16F/17F earnings were revised by +7%/+28% as a result. We have also imputed slightly slower labour cost escalation; as we understand the

group’s wages are already above minimum; and that mechanization process will be expanded further. At the same time, operating expenses would be reigned in for more cost savings.

Revisions in exchange rates in favour of stronger IDR also had impacted our estimates for the group’s USD debt service costs and translation FX losses. While AALI should book translation FX gains in 4Q15 – the group should still book net loss for the year. However this should reverse into translation FX gains in FY16F and FY17F – based on our revised forecasts. Whereas previously we had anticipated weak ASP to tighten cash flow – we now expect AALI to have more than sufficient funds beyond 4Q15 and 1Q16 for capex, and debt servicing.

We raised our rating on the stock to HOLD from Fully Valued – as the stock’s YTD rally has moved ahead of its earnings potential.

Our earnings expectations are higher than consensus; as we believe CPO prices should maintain its current trajectory on limited substitution from soybean oil due to limited spare crushing capacity in Argentina

23


Company Guide

Astra Agro Lestari

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

CPO price. As a commodity producer, AALI is a price-taker. Movements in international CPO prices would directly impact group’s profitability. We currently expect CPO prices (FOB Pasir Gudang) to average US$600/MT (+7% y-o-y) in CY16 and US$649/MT in CY17 (+8% y-o-y). Volume output. Extreme changes in weather patterns would have a meaningful impact on AALI’s productivity with some lag time. It takes 5-6 months from flowering to the harvesting of ripe fruits. So, a sustained water deficit would not have an immediate impact on yields, but would impact fruit formation through abortion of female flowers, delayed ripening, reduced fruit weight, as well as fruit abortion. Palm oil is a thirsty crop, requiring a minimum of 1,600mm rainfall per annum, and is typically grown in areas with 2,000-2,500mm of annual rainfall. Oil palm trees are best grown within a 10-degree latitude on either side of the equator. A drop in rainfall to below 100mm per month for three consecutive months would result in so called “tree-stress”, causing a drop in productivity (i.e. Fresh Fruit Bunch yield) within 12 and 24 months thereafter. Regulations. Tariff and non-tariff regulations are common practice in agriculture commodities, and palm oil is no exception. Any changes in export/import tariffs, as well as various taxes and levies, would therefore impact trade flows and prices. Biodiesel demand. Driven by high energy prices and climate-change concerns, demand for vegetable oils for energy has multiplied since 2005, mainly supported by mandatory mixing of petroleum fuel with biodiesel. This demand has created a link between vegetable oil and energy prices. Oil World estimates that palm oil used for biodiesel accounts for c.16% of total demand – both mandatory and discretionary (driven by positive spreads between diesel and biodiesel prices). Seasonal demand. As a major vegetable oil with 36% market share globally, palm oil is an important food staple. The other major vegetable oils are soybean oil with 27% market share, followed by rapeseed/canola oil and sunflower oil with 16% and 10% market shares respectively. There is regular demand substitution between the major vegetable oils (high price elasticity of demand), although certain vegetable oils are more suitable than others for certain applications. Relative to other oil crops, palm oil has the highest productivity per hectare (c.5 MT/ha), while it is only 0.5 MT/ha for soybean oil. Demand for palm oil is dominant in Asia, where local festivities typically drive up demand in certain months of the year. For example, the Ramadan month, Chinese New Year, and Divali are high-demand periods in Asia.

CPO price (RM/MT)

Mature oil palm hectareage

CPO sales volume (MT)

Palm kernel sales vol. (MT)

Avg. USD/IDR rate

Source: Company, DBS Bank

2,377 2,413

2,2002,340

2,450

0

300

600

900

1,200

1,500

1,800

2,100

2,400

2013A 2014A 2015F 2016F 2017F

186,874193,708 196,177

205,488212,455

0

43,300

86,600

129,900

173,200

216,500

2013A 2014A 2015F 2016F 2017F

1,577,484

1,374,5361,265,348

1,503,413 1,543,816

0

321,800

643,600

965,400

1,287,200

1,609,000

2013A 2014A 2015F 2016F 2017F

336,414366,288 368,599

419,995 430,439

0

54,300

108,600

162,900

217,200

271,500

325,800

380,100

434,400

2013A 2014A 2015F 2016F 2017F

10,84911,879

13,921

15,08314,490

0

3,000

6,000

9,000

12,000

15,000

2013A 2014A 2015F 2016F 2017F

24


Company Guide

Astra Agro Lestari

Balance Sheet:

Conservative balance sheet. AALI has mostly taken a conservative approach to borrowings. However, the group took on additional leverage over the past three years as it embarked on high capex outlays to fund immature estates, additional mills, as well as to build its refinery. As at end-Sep-15, the group’s net debt-to-total equity ratio was 60% (vs. 32% at end-Dec-14), primarily reflecting the Rupiah’s weakness. Capex spend to be reduced. At end-Sep-15, AALI’s 4-quarter rolling cash conversion cycle stood at 13 days (vs. 7 days at end-Jun-15) – mainly representing lower payable days. We expect the group to spend c.Rp2.2tn (assumed new planting of only 1k ha) on new mills, as well as spending on immature estates. With the assumed debt repayment schedule, AALI’s net debt-to-equity ratio is expected to decline to 46% by end-Dec-15. Share Price Drivers:

Lacking near-term catalysts. The stock is currently trading above its mean forward PE. While we continue to expect double-digit earnings growth from FY16 onwards, we believe this is priced in. Key Risks:

Volatility in CPO prices and USD exchange rates. Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect profitability of planters in general. Setback in expansion plans. Our forecasts are based on assumed hectarage for new planting and replanting. Any setback on these plans would negatively affect our valuation due to slower volume growth. Regulatory changes. Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/ Malaysian export taxes would impact demand for CPO/refined oils. Company Background

AALI is the largest listed plantation company in Indonesia with c.230k ha of planted oil palm estates. Approximately 72% of its revenues are attributable to sales of CPO and PK, while the remaining 27% is from its 600k MT p.a. refining operations. The group also has a 300k MT p.a. refinery under a JV with Kuala Lumpur Kepong. AALI is majority-owned (c.80%) by Astra International, a prominent conglomerate in Indonesia known for its good corporate governance.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.7

0.8

0.8

0.9

0.9

1.0

1.0

0.00

0.10

0.20

0.30

0.40

0.50

0.60

2013A 2014A 2015F 2016F 2017F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

2013A 2014A 2015F 2016F 2017F

Capital Expenditure (-)

Rp

0.0%

5.0%

10.0%

15.0%

20.0%

2013A 2014A 2015F 2016F 2017F

Avg: 20.9x

+1sd: 29.3x

+2sd: 37.6x

‐1sd: 12.6x

‐2sd: 4.3x3.8

8.8

13.8

18.8

23.8

28.8

33.8

38.8

43.8

48.8

Feb-12 Feb-13 Feb-14 Feb-15

(x)

Avg: 3.4x

+1sd: 3.95x

+2sd: 4.49x

‐1sd: 2.85x

‐2sd: 2.31x

1.8

2.3

2.8

3.3

3.8

4.3

4.8


(x)

25


Company Guide

Astra Agro Lestari

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F CPO price (RM/MT) 2,377 2,413 2,168 2,600 2,810 Mature oil palm 186,874 193,708 196,177 205,488 212,455 CPO sales volume (MT) 1,577,484 1,374,536 1,041,895 1,202,986 1,265,312 Palm kernel sales vol. (MT) 336,414 366,288 334,078 377,202 390,498 Avg. USD/IDR rate 10,849 11,879 13,392 13,635 13,703

Segmental Breakdown

FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (Rpbn) CPO 11,495 11,384 7,263 9,030 10,386 PK 1,161 1,866 1,468 1,766 1,980 PKO 26.0 0.0 0.0 0.0 0.0 Refined products 0.0 2,980 4,170 4,148 4,421 Others (8.0) 76.0 0.0 0.0 0.0 Total 12,675 16,306 12,901 14,944 16,787

Income Statement (Rpbn)

FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 12,675 16,306 12,901 14,944 16,787 Cost of Goods Sold (8,593) (11,354) (10,349) (11,090) (12,017) Gross Profit 4,082 4,952 2,552 3,854 4,770 Other Opng (Exp)/Inc (1,077) (1,229) (1,226) (1,330) (1,403) Operating Profit 3,005 3,722 1,327 2,524 3,367 Other Non Opg (Exp)/Inc (345) 41.0 (379) 153 104 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (54.0) (73.0) (90.0) (59.0) (28.0) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 2,605 3,690 859 2,617 3,443 Tax (702) (1,069) (240) (733) (964) Minority Interest (102) (118) (27.0) (83.0) (110) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 1,801 2,504 591 1,801 2,369 Net Profit before Except. 1,801 2,504 591 1,801 2,369 EBITDA 3,258 4,539 1,936 3,744 4,637 Growth Revenue Gth (%) 9.6 28.6 (20.9) 15.8 12.3 EBITDA Gth (%) (19.6) 39.3 (57.4) 93.4 23.9 Opg Profit Gth (%) (13.0) 23.9 (64.4) 90.2 33.4 Net Profit Gth (Pre-ex) (%) (25.3) 39.0 (76.4) 204.8 31.5 Margins & Ratio Gross Margins (%) 32.2 30.4 19.8 25.8 28.4 Opg Profit Margin (%) 23.7 22.8 10.3 16.9 20.1 Net Profit Margin (%) 14.2 15.4 4.6 12.1 14.1 ROAE (%) 19.0 23.5 5.3 15.5 18.0 ROA (%) 13.2 14.9 3.1 9.0 11.2 ROCE (%) 18.2 17.6 5.5 9.8 12.4 Div Payout Ratio (%) 53.8 37.7 190.8 14.8 34.2 Net Interest Cover (x) 55.2 50.9 14.8 42.6 118.6


26


Company Guide

Astra Agro Lestari

Quarterly / Interim Income Statement (Rpbn)

FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 3,752 4,546 3,233 3,996 3,118 Cost of Goods Sold (2,563) (3,277) (2,470) (3,119) (2,471) Gross Profit 1,189 1,269 764 877 647 Other Oper. (Exp)/Inc (316) (345) (312) (322) (294) Operating Profit 873 925 451 555 353 Other Non Opg (Exp)/Inc (54.0) (17.0) (208) (78.0) (595) Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (20.0) (21.0) (19.0) (23.0) (27.0) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 799 886 224 454 (269) Tax (254) (236) (57.0) (144) (8.0) Minority Interest (30.0) (30.0) (12.0) (22.0) (22.0) Net Profit 515 620 156 288 (299) Net profit bef Except. 515 620 156 288 (299) EBITDA 961 1,064 396 638 (73.0) Growth Revenue Gth (%) (12.4) 21.2 (28.9) 23.6 (22.0) EBITDA Gth (%) (6.5) 10.7 (62.8) 61.0 nm Opg Profit Gth (%) (12.2) 5.9 (51.2) 23.0 (36.4) Net Profit Gth (Pre-ex) (%) (11.9) 20.5 (74.8) 84.7 (203.9) Margins Gross Margins (%) 31.7 27.9 23.6 21.9 20.8 Opg Profit Margins (%) 23.3 20.3 14.0 13.9 11.3 Net Profit Margins (%) 13.7 13.6 4.8 7.2 (9.6)

Balance Sheet (Rpbn)

FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 6,494 8,335 9,148 9,573 9,515 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 6,778 7,820 8,103 8,412 8,552 Cash & ST Invts 709 611 663 1,628 2,010 Inventory 803 1,278 939 996 1,069 Debtors 4.00 33.0 15.0 17.0 19.0 Other Current Assets 176 481 257 295 328 Total Assets 14,963 18,558 19,126 20,920 21,492 ST Debt 2,152 2,299 1,457 1,447 1,447 Creditor 720 923 756 818 896 Other Current Liab 888 889 684 792 895 LT Debt 571 2,128 4,373 4,344 3,017 Other LT Liabilities 365 482 527 572 623 Shareholder’s Equity 9,895 11,419 10,883 12,418 13,976 Minority Interests 373 418 445 529 639 Total Cap. & Liab. 14,963 18,558 19,126 20,920 21,492 Non-Cash Wkg. Capital (625) (19.0) (229) (303) (375) Net Cash/(Debt) (2,014) (3,816) (5,167) (4,163) (2,454) Debtors Turn (avg days) 0.6 0.4 0.7 0.4 0.4 Creditors Turn (avg days) 29.3 28.3 32.7 28.7 28.8 Inventory Turn (avg days) 46.8 35.9 43.2 35.2 34.7 Asset Turnover (x) 0.9 1.0 0.7 0.7 0.8 Current Ratio (x) 0.5 0.6 0.6 1.0 1.1 Quick Ratio (x) 0.2 0.2 0.2 0.5 0.6 Net Debt/Equity (X) 0.2 0.3 0.5 0.3 0.2 Net Debt/Equity ex MI (X) 0.2 0.3 0.5 0.3 0.2 Capex to Debt (%) 100.1 84.5 36.9 31.4 27.9 Z-Score (X) 5.3 4.5 3.5 3.7 4.2


27


Company Guide

Astra Agro Lestari

Cash Flow Statement (Rpbn)

FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 2,605 3,690 859 2,617 3,443 Dep. & Amort. 599 776 987 1,068 1,166 Tax Paid 0.0 0.0 0.0 0.0 0.0 Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 399 (645) 368 155 138 Other Operating CF (760) (1,076) (240) (733) (964) Net Operating CF 2,843 2,746 1,973 3,107 3,783 Capital Exp.(net) (2,727) (3,739) (2,153) (1,819) (1,247) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (244) 91.0 (52.0) (52.0) (56.0) Net Investing CF (2,971) (3,648) (2,205) (1,871) (1,303) Div Paid (968) (943) (1,128) (266) (810) Chg in Gross Debt 1,753 1,719 1,347 (39.0) (1,327) Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (176) 28.0 64.0 33.0 40.0 Net Financing CF 609 804 284 (272) (2,097) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 481 (98.0) 52.0 964 382 Opg CFPS (Rp) 1,552 2,153 1,020 1,875 2,315 Free CFPS (Rp) 74.0 (631) (114) 818 1,610


Target Price & Ratings History

Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 26 Feb 15 24950 25200 HOLD

2: 05 Mar 15 26300 25200 HOLD

3: 11 Mar 15 26100 25200 HOLD

4: 06 Apr 15 23525 25200 HOLD

5: 27 Apr 15 20025 25200 HOLD

6: 03 Jun 15 25650 23000 HOLD

7: 10 Jun 15 23925 23000 HOLD

8: 10 Aug 15 19750 17900 FULLY VALUED

9: 17 Sep 15 17975 14900 FULLY VALUED

10: 13 Oct 15 18800 14900 FULLY VALUED

11: 23 Oct 15 20750 14900 FULLY VALUED12: 29 Oct 15 19300 15800 FULLY VALUED13: 11 Nov 15 18000 15800 FULLY VALUED14: 10 Dec 15 16575 15800 FULLY VALUED

Note : Share price and Target price are adjusted for corporate actions. 15: 12 Jan 16 16550 15800 FULLY VALUED16: 10 Feb 16 16525 15800 FULLY VALUED

1

2

34

5

6

7

8

91011

12

13

14

15

16

14060

16060

18060

20060

22060

24060

26060

28060

Feb-15 Jun-15 Oct-15

Rp

28

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: YM

BUY (upgrade from HOLD)

Last Traded Price: S$0.79 (STI : 2,657.57) Price Target : S$0.95 (21% upside) (Prev:S$0.86) Potential Catalyst: Continued strength in CPO prices Where we differ: Higher than consensus FY17F earnings estimate on higher CPO price expectations Analyst Ben Santoso +65 6682 3707 [email protected]

What’s New FY15/16F/17F EPS adjusted by -6%/+22%/+52% on

changes in our key assumptions Reported 4Q15 production in line, but ASP is

below expectations TP raised to S$0.95 – offering 23% upside

potential; upgrade to BUY

Price Relative

Forecasts and Valuation FY Dec (Rpbn) 2014A 2015F 2016F 2017F Revenue 5,757 5,820 6,802 8,045 EBITDA 1,987 1,542 2,140 2,749 Pre-tax Profit 1,805 1,227 1,602 2,145 Net Profit 1,153 804 1,044 1,393 Net Pft (ex. BA gains) 1,182 804 1,044 1,393 Net Pft (Pre Ex.) 1,153 804 1,044 1,393 Net Pft Gth (Pre-ex) (%) 34.8 (30.3) 29.9 33.4 EPS (S cts) 6.85 4.77 6.20 8.27 EPS Pre Ex. (S cts) 6.85 4.77 6.20 8.27 EPS Gth Pre Ex (%) 35 (30) 30 33 Diluted EPS (S cts) 6.85 4.77 6.20 8.27 Net DPS (S cts) 1.25 1.25 0.87 1.14 BV Per Share (S cts) 38.5 42.0 36.7 43.9 PE (X) 11.3 16.2 12.5 9.4 PE Pre Ex. (X) 11.3 16.2 12.5 9.4 P/Cash Flow (X) 6.3 10.5 7.2 5.7 EV/EBITDA (X) 8.9 11.9 8.4 6.3 Net Div Yield (%) 1.6 1.6 1.1 1.5 P/Book Value (X) 2.0 1.8 2.1 1.8 Net Debt/Equity (X) 0.6 0.6 0.6 0.4 ROAE (%) 19.0 11.9 15.7 20.5 Earnings Rev (%): (6) 22 52 Consensus EPS (S cts): 5.85 6.94 8.73 Other Broker Recs: B: 8 S: 0 H: 1 Source of all data: Company, DBS Bank, Bloomberg Finance L.P

An engine of growth Poised for strong earnings rebound. Hikes in our CPO price forecasts should more than offset expectations of stronger Rupiah to drive 34% EBITDA CAGR over the next two years. CPO output is forecast to expand 9% p.a. over the same period on expectations flat FFB yields. Over the years, BAL has instituted a stringent water management system in an effort to minimise water deficiency during severe dry conditions. Drop in planting not impacting volume growth. Aggressive expansion in FY05-FY13 has kept BAL’s tree-age profile younger (5.5 years) relative to peers. This is forecast to deliver 10% CAGR in FFB output (including smallholder estates) between FY15F and FY18F. Balance sheet can withstand downcycle. The group’s net gearing ratio is forecast to settle at 59% by the end of FY15E and 56% at end FY16F (after accounting for one-off adjustment to equity on change in biological asset accounting standard). A stabilising Rupiah should cap BAL’s Sukuk balance (swapped to USD), although the group should still book translation FX losses in FY15E; reversing into translation FX gains in FY16F. In our estimates, BAL’s borrowing costs should continue to remain lower-than-peers. Valuation:

We employed DCF valuation (FY17F base year) to arrive at BAL’s fair value of S$0.95/share (WACC: 12.4%, Rf: 8.8%, Rm: 15.7%, beta: 1.0, TG: 3%). Key Risks to Our View:

There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take failed to live up to our expectations (2.5m kl) this year. BAL’s output could also fall below our expectations if there were significant hit to its FFB yield in the aftermath of CY15 El Nino (vice versa). Changes in fund flows towards or out of emerging markets/ commodities would also affect valuations of plantation counters. At A Glance Issued Capital (m shrs) 1,755 Mkt. Cap (S$bn/US$m) 1.38 / 968 Major Shareholders (%) Fortune Holdings Ltd 51.0 IOI Corp Bhd 31.4



Singapore Company Guide

Bumitama Agri Version 3 | Bloomberg: BAL SP | Reuters: BUMI.SI Refer to important disclosures at the end of this report

85

105

125

145

165

185

205

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

Apr-12 Apr-13 Apr-14 Apr-15

Relative IndexS$

Bumitama Agri (LHS) Relative STI INDEX (RHS)

29


Company Guide

Bumitama Agri

WHAT’S NEW

Adjustments to impute new CPO price forecasts We adjusted BAL’s earnings to reflect changes in our key assumptions. We imputed realised FY15 CPO and PK ASP (pegged to Astra Agro Lestari’s released 4Q15 auction prices) and actual exchange rates, together with revisions in our FY16 and FY17 CPO price outlook and reduced FFB yields. Changes in our forecasts are summarised below: We imputed 6% lower FY15E earnings (vs. previous

forecast) as 4Q15 CPO ASP was lower than previously anticipated. We attribute this to stronger Rupiah and declining refining margins, which may have reduced demand for CPO during the quarter. However, stronger-than-expected year-end Rupiah exchange rate would have also helped to offset this through translation FX gains.

We also raised CY16F/17F CPO price forecasts (US$/MT, FOB) by 12%/16% to US$600/US$649 – reflecting lower expected global CPO output and expansion in biodiesel usage in Indonesia – through deployment of CPO funds collected since Jul15. As we impute this, we raise

FY16F/17F earnings by 22%/52%. We have also imputed slightly slower labour cost escalation, as we understand the group’s wages are already above minimum.

Revisions in exchange rates in favour of stronger IDR also impacted our estimates for the group’s borrowing costs (i.e. lower) and translation FX gains (losses). While BAL should book translation FX gains in 4Q15 – the group should still book a net loss for the year. This should reverse into translation FX gains in FY16F and FY17F – based on our revised forecasts.

We upgraded our rating on the stock to BUY from Hold – as we believe the market has not fully priced in the prospective earnings recovery over the next two years.

Our earnings expectations are higher than consensus, as we believe CPO prices should maintain its current trajectory on limited substitution from soybean oil due to limited spare crushing capacity in Argentina.

30

ASIAN INSIGHTS VICKERS SECURITIES Page 30

Company Guide

Bumitama Agri


Earnings Drivers: CPO price. As a commodity producer, BAL is a price-taker. Movements in international CPO prices would directly impact group profitability. We currently expect CPO prices (FOB Pasir Gudang) to average US$600/MT (+7% y-o-y) in CY16 and US$649/MT in CY17 (+8% y-o-y). Volume output. Changes in weather patterns would have a meaningful impact on BAL’s productivity with some lag time. It takes 5-6 months from flowering to harvesting of ripe fruits. Hence, a sustained water deficit would not have an immediate impact on yields, but would impact fruit formation through abortion of female flowers, delayed ripening, reduced fruit weight, as well as fruit abortion. Palm oil is a thirsty crop, requiring a minimum of 1,600mm of rainfall per annum and is typically grown in areas with 2,000-2,500mm of rainfall per annum. Oil palm trees are best grown within 10 degree latitudes on either side of the equator. A drop in rainfall to below 100mm per month for 3 consecutive months would result in so called “tree-stress”, and a drop in productivity (i.e. Fresh Fruit Bunch yield) would ensue 12 and 24 months thereafter. Regulations. Tariff and non-tariff regulations are common practice in agriculture commodities, and palm oil is no exception. Any changes in export/import tariffs, various taxes and levies would therefore impact trade flows and prices. Biodiesel demand. Driven by high energy prices and climate change concerns, demand for vegetable oils for energy has multiplied since 2005, mainly supported by mandatory mixing of petroleum fuel with biodiesel. This demand has created a link between vegetable oil and energy prices. Oil World estimated that palm oil used for biodiesel accounted for c.16% of total demand – both mandatory and discretionary (driven by positive spread between diesel and biodiesel prices). Demand seasonality. As a major vegetable oil with 36% market share globally, palm oil is an important food staple. The next largest vegetable oil is soybean oil, with 27% market share; followed by rapeseed/canola oils and sunflower oils with 16% and 10% market shares, respectively. There is generally demand substitutability between vegetable oils (high price elasticity of demand), although certain vegetable oils are more suitable than others for certain applications. Relative to other oil crops, palm oil has the highest productivity per hectare (i.e. c.5 MT/ha), while soybean oil’s productivity is typically 0.5 MT/ha. Demand for palm oil is dominant in Asia, where local festivities drive demand higher in certain months of the year. For example, Ramadan month, Chinese New Year, and Divali are typically high demand periods in Asia.

CPO price (RM/MT)

Own mature oil palm hectarage



Avg. USD/IDR rate


2,377 2,413

2,168

2,600

2,810

0

400

800

1,200

1,600

2,000

2,400

2,800

2013A 2014A 2015F 2016F 2017F

63,677

77,177

91,731

105,332

115,944

0

23,700

47,400

71,100

94,800

2013A 2014A 2015F 2016F 2017F

522,582

624,025

742,842

809,880

876,873

0

178,900

357,800

536,700

715,600

2013A 2014A 2015F 2016F 2017F

98,354

114,162

141,589154,367

167,136

0

21,100

42,200

63,300

84,400

105,500

126,600

147,700

168,800

2013A 2014A 2015F 2016F 2017F

10,849

11,879

13,392 13,635 13,703

0

2,800

5,600

8,400

11,200

2013A 2014A 2015F 2016F 2017F

31


Company Guide

Bumitama Agri

Balance Sheet: Not scrimping on capex. With free cash flow still growing in excess of 40% p.a. between FY16F and 18F, BAL has more than sufficient cash to fund its capex outlay. This investment is necessary to tap the group’s fast expanding mature estates. BAL’s interest coverage is estimated at a comfortable 7.6x in FY15E and is forecast to average 9.5x in FY16. Share Price Drivers: Steady earnings growth despite macro headwinds. The stock is currently trading 1 SD below its mean forward PE (from 2012), as the sector was progressively de-rated in the past year. We believe BAL’s double-digit earnings growth potential is ignored by the market, and the counter’s low liquidity may have contributed to the discount vs. peers. But, we believe consistent earnings delivery vs. peers should move BAL’s share price closer to its fair value. No urgency to expand downstream. BAL’s mature estates are due to expand by 11k ha in FY16F, followed by 11k ha in FY17F but dropping to 0.5k ha in FY18F (reflecting the lack of new expansion in FY14 as the group embarked to ensure sustainable development). BAL’s milling capacity should nevertheless expand through FY21F, and we should see expansion of its workforce to process the exponential growth in harvested FFB. Until its CPO output reaches critical mass of 1m MT or more, we do not anticipate BAL to expand downstream. BAL’s relatively higher margins (even with export tax policies) – vis-à-vis integrated players – should maximise its shareholders’ return on equity, in our view. Steady expansion ahead. Having committed itself to sustainable development program, the group has slowed its expansion pace since FY14, and is expected to undertake a more sustainable 5k ha p.a. expansion (including smallholder estates) from FY15 onwards. We expect BAL to maintain this planting pace through FY21F (subject to any opportunistic acquisitions). Key Risks: Where we may go wrong Our earnings expectations and valuation are based on several key assumptions. Any setback in FFB yields (due to severe weather) or expansion (i.e. lower than 3k ha p.a.) would adversely impact our valuation. BAL’s share price is also linearly driven by CPO price expectations and partly by Rupiah movements. A drop in CPO prices may drag the share price lower than our fair value, and vice versa. Company Background Fast-growing palm oil producer. BAL was established in 1996 by Harita Group through the acquisition of 17,500 ha of land bank in Central Kalimantan. After aggressive new plantings and a string of subsequent acquisitions, BAL currently controls an aggregate of c.199k ha of land as at end 2014 (including land under the smallholder schemes), of which 158,168 ha is planted as at 30 Sep15. BAL was listed on the Singapore Exchange in April 2012.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.3

0.4

0.4

0.5

0.5

0.6

0.6

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2013A 2014A 2015F 2016F 2017F


0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

2013A 2014A 2015F 2016F 2017F


Rp

0.0%

5.0%

10.0%

15.0%

20.0%

2013A 2014A 2015F 2016F 2017F

Avg: 16.5x

+1sd: 19.3x

+2sd: 22.2x

‐1sd: 13.7x

‐2sd: 10.8x9.6

11.6

13.6

15.6

17.6

19.6

21.6

23.6


(x)

Avg: 2.77x

+1sd: 3.25x

+2sd: 3.72x

‐1sd: 2.3x

‐2sd: 1.83x

1.4

1.9

2.4

2.9

3.4

3.9


(x)

32


Company Guide

Bumitama Agri

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F CPO price (RM/MT) 2,377 2,413 2,168 2,600 2,810 Own mature oil palm 63,677 77,177 91,731 105,332 115,944 CPO sales volume (MT) 522,582 624,025 742,842 809,880 876,873 Palm kernel sales vol. (MT) 98,354 114,162 141,589 154,367 167,136 Avg. USD/IDR rate 10,849 11,879 13,392 13,635 13,703

Segmental Breakdown

FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (Rpbn) CPO 3,747 5,199 5,179 6,079 7,197 PK 316 559 641 723 847 Total 4,063 5,757 5,820 6,802 8,045


FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 4,063 5,757 5,820 6,802 8,045 Cost of Goods Sold (2,463) (3,416) (4,014) (4,665) (5,329) Gross Profit 1,600 2,342 1,806 2,137 2,716 Other Opng (Exp)/Inc (256) (357) (412) (447) (482) Operating Profit 1,344 1,984 1,393 1,690 2,234 Other Non Opg (Exp)/Inc (25.1) (164) (85.9) (3.0) (16.2) Associates & JV Inc (15.8) (17.1) 8.56 8.99 9.44 Net Interest (Exp)/Inc (34.4) 1.29 (89.4) (94.3) (82.2) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 1,268 1,805 1,227 1,602 2,145 Tax (286) (433) (285) (380) (514) Minority Interest (126) (219) (137) (178) (238) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 855 1,153 804 1,044 1,393 Net Profit before Except. 855 1,153 804 1,044 1,393 Net Pft (ex. BA gains) 838 1,182 804 1,044 1,393 EBITDA 1,448 1,987 1,542 2,140 2,749 EBITDA (ex. BA gains) 1,419 2,026 1,542 2,140 2,749 Growth Revenue Gth (%) 15.2 41.7 1.1 16.9 18.3 EBITDA Gth (%) 5.7 37.2 (22.4) 38.7 28.5 Opg Profit Gth (%) 12.7 47.7 (29.8) 21.3 32.2 Net Profit Gth (Pre-ex) (%) 8.6 34.8 (30.3) 29.9 33.4 Margins & Ratio Gross Margins (%) 39.4 40.7 31.0 31.4 33.8 Opg Profit Margin (%) 33.1 34.5 23.9 24.8 27.8 Net Profit Margin (%) 21.1 20.0 13.8 15.3 17.3 ROAE (%) 16.3 19.0 11.9 15.7 20.5 ROA (%) 8.2 9.0 5.6 7.3 9.8 ROCE (%) 10.8 12.9 8.2 9.9 13.3 Div Payout Ratio (%) 19.4 18.3 26.3 14.1 13.7 Net Interest Cover (x) 39.0 NM 15.6 17.9 27.2


33


Company Guide

Bumitama Agri


FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 1,366 1,570 1,334 1,581 1,179 Cost of Goods Sold (756) (1,014) (869) (1,178) (770) Gross Profit 610 555 465 404 409 Other Oper. (Exp)/Inc (102) (75.7) (105) (93.2) (91.8) Operating Profit 508 480 360 310 318 Other Non Opg (Exp)/Inc (36.9) (68.9) (78.3) (3.3) (33.6) Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (16.0) 42.8 (8.5) (1.4) 3.37 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 455 454 274 306 287 Tax (116) (120) (61.6) (65.1) (65.8) Minority Interest (53.6) (67.3) (30.4) (23.6) (21.9) Net Profit 285 266 182 217 200 Net profit bef Except. 285 266 182 217 200 EBITDA 514 472 317 365 335 Growth Revenue Gth (%) (6.7) 14.9 (15.0) 18.5 (25.4) EBITDA Gth (%) 2.4 (8.2) (32.9) 15.4 (8.4) Opg Profit Gth (%) (11.5) (5.6) (24.9) (13.9) 2.3 Net Profit Gth (Pre-ex) (%) (2.7) (6.6) (31.8) 19.6 (8.0) Margins Gross Margins (%) 44.7 35.4 34.9 25.5 34.7 Opg Profit Margins (%) 37.2 30.6 27.0 19.6 26.9 Net Profit Margins (%) 20.9 17.0 13.6 13.7 16.9


FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 2,093 2,866 3,431 3,937 4,370 Invts in Associates & JVs 108 84.3 84.3 84.3 84.3 Other LT Assets 8,341 9,509 10,193 7,868 8,007 Cash & ST Invts 482 311 163 720 1,015 Inventory 379 527 532 618 706 Debtors 102 140 122 143 169 Other Current Assets 340 367 367 367 367 Total Assets 11,844 13,803 14,893 13,738 14,718 ST Debt 559 589 11.6 11.6 11.6 Creditor 604 773 809 940 1,074 Other Current Liab 321 561 357 418 494 LT Debt 3,585 3,691 4,742 4,699 4,003 Other LT Liabilities 635 1,081 1,135 541 568 Shareholder’s Equity 5,630 6,483 7,076 6,187 7,388 Minority Interests 511 625 763 941 1,179 Total Cap. & Liab. 11,844 13,803 14,893 13,738 14,718 Non-Cash Wkg. Capital (104) (300) (145) (230) (326) Net Cash/(Debt) (3,662) (3,969) (4,590) (3,990) (2,999) Debtors Turn (avg days) 6.7 7.7 8.2 7.1 7.1 Creditors Turn (avg days) 90.2 77.7 76.2 75.6 76.4 Inventory Turn (avg days) 55.3 51.1 51.0 49.7 50.3 Asset Turnover (x) 0.4 0.4 0.4 0.5 0.6 Current Ratio (x) 0.9 0.7 1.0 1.3 1.4 Quick Ratio (x) 0.4 0.2 0.2 0.6 0.7 Net Debt/Equity (X) 0.6 0.6 0.6 0.6 0.4 Net Debt/Equity ex MI (X) 0.7 0.6 0.6 0.6 0.4 Capex to Debt (%) 56.6 41.5 36.4 23.1 30.3 Z-Score (X) 2.5 2.4 2.2 2.5 2.7


34


Company Guide

Bumitama Agri


FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 1,268 1,805 1,227 1,602 2,145 Dep. & Amort. 146 186 226 444 522 Tax Paid (286) (433) (285) (380) (514) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 113 48.6 19.5 84.6 96.0 Other Operating CF 7.21 453 53.4 56.1 26.4 Net Operating CF 1,465 2,060 1,241 1,806 2,275 Capital Exp.(net) (2,345) (1,778) (1,732) (1,087) (1,216) Other Invts.(net) (196) (53.2) 0.0 0.0 0.0 Invts in Assoc. & JV (13.7) 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (737) (344) 257 26.4 123 Net Investing CF (3,291) (2,175) (1,476) (1,060) (1,094) Div Paid (166) (211) (211) (147) (191) Chg in Gross Debt 1,561 136 473 (42.5) (697) Capital Issues 0.0 (55.2) 0.0 0.0 0.0 Other Financing CF (21.8) 98.4 (174) 0.65 0.68 Net Financing CF 1,374 (31.9) 87.8 (189) (887) Currency Adjustments 48.7 (24.4) 0.0 0.0 0.0 Chg in Cash (405) (171) (148) 557 294 Opg CFPS (Rp) 8.02 11.9 7.25 10.2 12.9 Free CFPS (Rp) (5.2) 1.67 (2.9) 4.27 6.29

Source: Company, DBS Bank Target Price & Ratings History

Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 25 Feb 15 1.02 1.30 BUY

2: 12 May 15 0.98 1.30 BUY

3: 12 Jun 15 0.99 1.26 BUY

4: 14 Aug 15 0.87 1.17 BUY

5: 17 Sep 15 0.79 0.88 BUY

6: 13 Oct 15 0.84 0.88 BUY

7: 11 Nov 15 0.80 0.88 BUY

8: 12 Nov 15 0.81 0.86 HOLD

9: 10 Dec 15 0.73 0.86 HOLD

10: 12 Jan 16 0.70 0.86 HOLD

11: 10 Feb 16 0.75 0.86 HOLD

Note : Share price and Target price are adjusted for corporate actions.

12

3

4

5

6

7

8

9

1011

0.63

0.68

0.73

0.78

0.83

0.88

0.93

0.98

1.03

1.08

Feb-15 Jun-15 Oct-15 Feb-16

S$

35

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: MA

FULLY VALUED

Last Traded Price: Rp227 (JCI : 4,778.79) Price Target : Rp190 (-16% downside) (Prev Rp180) Potential Catalyst: Disappointing 4Q15 and 1Q16 results Where we differ: Lower than consensus FY15F-17F earnings estimate on lower FFB yields; higher borrowing costs, cost of sales Analyst Ben Santoso +65 6682 3707 [email protected]

What’s New FY16F/17F earnings adjusted by 288%/170% on

changes in our key assumptions Reported 4Q15 production in line, but ASP may be

below initial expectations TP raised to Rp190 from Rp180 (based on updated

FY17F NTA/share)

Price Relative

Forecasts and Valuation FY Dec (Rp m) 2014A 2015F 2016F 2017F Revenue 2,264 2,705 3,341 4,255 EBITDA 595 810 1,368 1,707 Pre-tax Profit 274 (113) 235 483 Net Profit 189 (92.0) 162 345 Net Pft (Pre Ex.) 189 (92.0) 162 345 Net Pft Gth (Pre-ex) (%) nm nm nm 112.9 EPS (Rp) 6.01 (2.9) 5.14 10.9 EPS Pre Ex. (Rp) 6.01 (2.9) 5.14 10.9 EPS Gth Pre Ex (%) nm nm nm 113 Diluted EPS (Rp) 6.01 (2.9) 5.14 10.9 Net DPS (Rp) 0.0 0.0 0.0 0.0 BV Per Share (Rp) 217 214 219 230 PE (X) 37.6 nm 44.0 20.7 PE Pre Ex. (X) 37.6 nm 44.0 20.7 P/Cash Flow (X) 19.3 13.1 8.8 6.7 EV/EBITDA (X) 24.2 17.8 10.2 7.8 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 1.0 1.1 1.0 1.0 Net Debt/Equity (X) 1.0 1.0 1.0 0.8 ROAE (%) 4.3 (1.4) 2.4 4.9 Earnings Rev (%): NM 288 170 Consensus EPS (Rp): 1.32 5.76 11.0 Other Broker Recs: B: 1 S: 2 H: 2


Too many uncertainties Pre-merger profitability not yet in sight. Following its merger exercise at end Dec14, Eagle High Plantations’ (BWPT) performance has deteriorated rapidly. The group’s FFB yields dipped 63% y-o-y in 9M15, even as peers in the same operating areas reported far less dramatic declines. With sizeable debt exposure (part of which is in USD), severe dry weather and CPO export levies, BWPT’s earnings outlook now depends on labour management to boost FFB yields. BWPT is now forecast to book deeper FY15F losses; although we have revised FY16F/17F EBITDA 12%/14% higher on improved CPO price expectations. Still in discussions with Felda Global Ventures. As at end Nov15 FGV was still in discussions with Rajawali Corp for a “possible different mode” of investment in BWPT. Even if this materializes, we believe any deal would not have an immediate impact on BWPT's operations/ earnings/valuation unless its debt burden is significantly reduced and/or productivity improves. Balance sheet needs close monitoring. The group is forecast to assume Rp2.1tr in net additional bank borrowings in FY15 followed by Rp842bn repayment in FY16F. BWPT’s estimated interest cover of 1.3x (FY15E), net gearing ratio of 119% (as at end-Sep-15) and current ratio of 0.7x (by end-FY15F) need close monitoring. The combined group still has c.36k ha of own oil palm estates maturing in FY16F through FY18F – a significant 26% relative to its own planted size (excluding smallholders). This should raise its own FFB output from 1.4m MT in 2014 (pro forma) to 1.7m MT in 2017F. Valuation: We peg BWPT’s TP at Rp190/share, based on FY17F NTA/share. Following expectations of net losses in FY15E, we expect BWPT's earnings to rebound from FY16F, driven by CPO price recovery and volume growth from large maturing estates. Key Risks to Our View: There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take failed to live up to our expectations (2.5m kl) this year. BWPT’s output could also fall below our expectations if there is significant hit to its FFB yield in the aftermath of FY15 El Nino (vice versa). Changes in fund flows towards or out of emerging markets/ commodities would also affect valuations of plantation counters. At A Glance Issued Capital (m shrs) 31,525 Mkt. Cap (Rpbn/US$m) 7,156 / 529 Major Shareholders (%) Rajawali Corp PT 65.5 PTBW Investindo 5.0




Eagle High Plantations Version 4 | Bloomberg: BWPT IJ | Reuters: BWPT.JK Refer to important disclosures at the end of this report

6

56

106

156

206

99.9

299.9

499.9

699.9

899.9

1,099.9

1,299.9

1,499.9

1,699.9

1,899.9


Relative IndexRp

Eagle High Plantations (LHS) Relative JCI INDEX (RHS)

36


Company Guide


WHAT’S NEW

Adjustments to impute new CPO price forecasts We adjusted BWPT’s earnings to reflect changes in our key assumptions. We imputed realised CPO and PK production volumes and exchange rates in FY15; together with revisions in our FY16 and FY17 CPO price outlook and FFB yields. Changes in our forecasts are summarised below: We forecast steeper net loss in FY15E of Rp92bn (vs.

previous forecast of loss of Rp22bn). We peg 4Q15 CPO and PK ASP based on Astra Agro Lestari’s realised auction prices – which were lower than we had previously anticipated. We attribute this to declining refining margins, which may have reduced demand for CPO during the quarter. Based on announcement to IDX, we also imputed higher debt load at the end of FY15E (hence 4Q15 debt servicing costs), as part of the group’s cash flow management and debt refinancing. However, stronger-than-expected year-end Rupiah exchange rate should have helped to offset this through translation FX gains.

We raised CY16F/17F CPO price forecasts (US$/MT, FOB) by 12%/16% to US$600/US$649 – reflecting lower expected global CPO output and expansion in biodiesel

usage in Indonesia – through deployment of CPO funds collected since Jul15. Accordingly, we revised FY16F/17F earnings up by 288%/170% (mostly from BWPT’s high operating leverage as a result of a stronger topline).

Revisions in exchange rates in favour of stronger IDR also impacted our estimates for the group’s USD debt service costs and translation FX losses. While we anticipate BWPT to book translation FX gains in 4Q15 – the group should still book net loss for the year. This should reverse into translation FX gains in FY16F and FY17F. We had previously anticipated weak ASP to tighten cash flow, but now expect BWPT to have sufficient funds beyond 4Q15 and 1Q16 for capex, and debt servicing stemming from an improved CPO price outlook.

Despite improved CPO price outlook, we reiterate our FULLY VALUED rating on the stock; as the group has little cushion from any unforeseen risks of FFB yields faltering and/or expanded debt exposures.

Our earnings expectations are slightly below consensus despite significant earnings upgrades; as we remain conservative in our FFB yield forecasts.

37


Company Guide



Earnings Drivers:

CPO price. As a commodity producer, BWPT is a price-taker. Movements in international CPO prices would directly impact group’s profitability. We currently expect CPO prices (FOB Pasir Gudang) to average US$600/MT (+7% y-o-y) in FY16 and US$649/MT in FY17 (+8% y-o-y). Volume output. Changes in weather patterns would have a meaningful impact on BWPT’s productivity with some lag time. It takes 5-6 months from flowering to harvesting of ripe fruits. Hence, a sustained water deficit would not have an immediate impact on yields, but would impact fruit formation through abortion of female flowers, delayed ripening, reduced fruit weight, as well as fruit abortion. Palm oil is a thirsty crop, requiring a minimum of 1,600mm of rainfall per annum and is typically grown in areas with 2,000-2,500mm of annual rainfall. Oil palm trees are best grown within a 10-degree latitude on either side of the equator. A drop in rainfall to below 100mm per month for three consecutive months would result in so called “tree-stress”, and a drop in productivity (i.e. Fresh Fruit Bunch yield) would ensue 12 and 24 months thereafter. Regulations. Tariff and non-tariff regulations are common practices in agriculture commodities, and palm oil is no exception. Any changes in export/import tariffs, various taxes and levies would therefore impact trade flows and prices. Biodiesel demand. Driven by high energy prices and climate change concerns, demand for vegetable oils for energy has multiplied since 2005, mainly supported by mandatory mixing of petroleum fuel with biodiesel. This demand has created a link between vegetable oil and energy prices. Oil World estimates that palm oil used for biodiesel accounts for c.16% of total demand – both mandatory and discretionary (driven by positive spread between diesel and biodiesel prices). Demand seasonality. As a major vegetable oil with 36% market share globally, palm oil is an important food staple. The next largest is soybean oil, with 27% market share,followed by rapeseed/canola oils and sunflower oils with 16% and 10% market shares respectively. There is generally demand substitutability between vegetable oils (high price elasticity of demand), although certain vegetable oils are more suitable than others for certain applications. Relative to other oil crops, palm oil has the highest productivity per hectare (i.e. c.5 MT/ha), while soybean oil’s productivity is typically 0.5 MT/ha. Demand for palm oil is dominant in Asia, where local festivities drive demand higher in certain months of the year. For example, Ramadan month, Chinese New Year, and Divali are typically high-demand periods in Asia.

CPO price (RM/MT)

Own mat. oil palm (ha)

CPO sales vol. (MT)

PK sales vol. (MT)

Avg. USD/IDR rate


2,377 2,413

2,168

2,600

2,810

0

400

800

1,200

1,600

2,000

2,400

2,800

2013A 2014A 2015F 2016F 2017F

73,943

86,920

99,984

115,231

126,115

0

25,700

51,400

77,100

102,800

128,500

2013A 2014A 2015F 2016F 2017F

337 329351

403

470

0

96

192

287

383

479

2013A 2014A 2015F 2016F 2017F

47,62153,346

60,236

68,154

80,168

0

10,100

20,200

30,300

40,400

50,500

60,600

70,700

80,800

2013A 2014A 2015F 2016F 2017F

10,849

11,879

13,392 13,635 13,703

0

2,800

5,600

8,400

11,200

2013A 2014A 2015F 2016F 2017F

38


Company Guide


Balance Sheet:

Highly geared. BWPT is laden with a 119% net debt-to-total equity ratio (as per end Sep15) and current ratio of 0.8x (forecast by end-FY15). Capex to be reined in. BWPT’s significant level of maturing hectarage requires the group to spend significant capex on additional milling capacity – on top of ongoing upkeep and maintenance of its still vast immature estates. With the CPO export levy of US$50/MT, we assume BWPT to undertake only 2.5k ha of new planting in FY15 (including 500 ha of smallholder estates) and none in FY16F and FY17F to preserve cash. Share Price Drivers:

BWPT needs to prove its FFB output growth over the next few quarters. We expect the group’s FFB yield to remain flat from the dismal drop in FY15. In our view, the merger between Green Eagle Plantations and BW Plantations is still an ongoing process; and following the resignations of the previous BW Plantation’s management, we remain cautious on consolidating distinct corporate cultures onto vast operations on the ground – more so if FGV comes into the picture. Key Risks:

Volatility in CPO prices and USD exchange rates. Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect profitability of planters in general. Setback in expansion plans. Our forecasts are based on assumed hectarage for new planting and replanting. Any setback on these plans would negatively affect our valuation due to slower volume growth. Regulatory changes. Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/ Malaysian export taxes would impact demand for CPO/refined oils. Market sentiment. Changes in fund flows towards or out of emerging markets would affect valuations of plantation counters. Company Background

Eagle High Plantations is among the youngest Indonesian upstream oil palm planters. Following the acquisition of BW Plantations, the combined group was managing c.152k ha of oil palm estates as at 30-Jun-15.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.1

0.2

0.2

0.3

0.3

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2014A 2015F 2016F 2017F


0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

2013A 2014A 2015F 2016F 2017F


Rp

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2014A 2015F 2016F 2017F

Avg: 101.8x

+1sd: 109.8x

+2sd: 117.7x

‐1sd: 93.9x

‐2sd: 86x

80.0

85.0

90.0

95.0

100.0

105.0

110.0

115.0

120.0

125.0

Jan-16 Feb-16

(x)

Avg: 4.96x

+1sd: 10.2x

+2sd: 15.44x

0.0

5.0

10.0

15.0

20.0

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

(x)

39


Company Guide


Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F CPO price (RM/MT) 2,377 2,413 2,168 2,600 2,810 Own mat. oil palm (ha) 73,943 86,920 99,984 115,231 126,115 CPO sales vol. (MT) 337 329 351 403 470 PK sales vol. (MT) 47,621 53,346 60,236 68,154 80,168 Avg. USD/IDR rate 10,849 11,879 13,392 13,635 13,703

Segmental Breakdown

FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (Rpbn) FFB 85.0 164 0.0 0.0 0.0 CPO 1,401 1,578 2,444 3,027 3,855 PK 71.0 155 260 314 400 Others 174 368 0.0 0.0 0.0 Total 1,731 2,264 2,705 3,341 4,255


FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 1,731 2,264 2,705 3,341 4,255 Cost of Goods Sold (1,302) (1,635) (1,959) (2,076) (2,685) Gross Profit 428 629 745 1,265 1,570 Other Opng (Exp)/Inc (272) (275) (387) (432) (485) Operating Profit 156 354 358 834 1,085 Other Non Opg (Exp)/Inc (76.0) 44.0 20.0 19.0 19.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (97.0) (124) (491) (619) (622) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit (17.0) 274 (113) 235 483 Tax (11.0) (80.0) 28.0 (59.0) (121) Minority Interest 11.0 (5.0) (7.0) (14.0) (17.0) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit (17.0) 189 (92.0) 162 345 Net Profit before Except. (17.0) 189 (92.0) 162 345 EBITDA 259 595 810 1,368 1,707 Growth Revenue Gth (%) N/A 30.8 19.4 23.5 27.3 EBITDA Gth (%) nm 129.6 36.1 69.0 24.8 Opg Profit Gth (%) nm 126.7 1.0 133.1 30.1 Net Profit Gth (Pre-ex) (%) nm nm nm nm 112.9 Margins & Ratio Gross Margins (%) 24.7 27.8 27.6 37.9 36.9 Opg Profit Margin (%) 9.0 15.6 13.2 25.0 25.5 Net Profit Margin (%) (1.0) 8.4 (3.4) 4.8 8.1 ROAE (%) N/A 4.3 (1.4) 2.4 4.9 ROA (%) N/A 1.6 (0.5) 0.9 2.0 ROCE (%) N/A 2.4 2.3 3.9 5.2 Div Payout Ratio (%) N/A 0.0 N/A 0.0 0.0 Net Interest Cover (x) 1.6 2.9 0.7 1.3 1.7


40


Company Guide



FY Dec 3Q2014 1Q2015 2Q2015 3Q2015 Revenue 514 735 756 569 Cost of Goods Sold (386) (540) (516) (461) Gross Profit 127 195 239 108 Other Oper. (Exp)/Inc (67.0) (104) (113) (95.0) Operating Profit 61.0 91.0 126 13.0 Other Non Opg (Exp)/Inc 1.00 22.0 (4.0) (32.0) Associates & JV Inc 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (40.0) (103) (119) (93.0) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 Pre-tax Profit 21.0 10.0 2.00 (112) Tax (11.0) (3.0) 3.00 21.0 Minority Interest 26.0 0.0 0.0 (3.0) Net Profit 36.0 7.00 5.00 (94.0) Net profit bef Except. 36.0 7.00 5.00 (94.0) EBITDA 127 145 314 85.0 Growth Revenue Gth (%) (28.9) N/A 2.8 (24.7) EBITDA Gth (%) (41.9) nm 116.6 (72.9) Opg Profit Gth (%) (49.0) nm 38.3 (89.8) Net Profit Gth (Pre-ex) (%) (10.8) nm (29.1) (1,966.3) Margins Gross Margins (%) 24.8 26.5 31.7 19.0 Opg Profit Margins (%) 11.8 12.4 16.7 2.3 Net Profit Margins (%) 7.0 1.0 0.7 (16.6)


FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 1,993 3,636 3,770 3,855 3,996 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 3,778 11,129 11,165 10,909 10,555 Cash & ST Invts 328 179 1,643 1,266 1,441 Inventory 126 304 251 260 327 Debtors 22.0 47.0 40.0 49.0 60.0 Other Current Assets 773 1,086 1,075 1,135 1,428 Total Assets 7,021 16,380 17,944 17,473 17,808 ST Debt 176 1,769 2,580 1,416 1,410 Creditor 251 450 420 445 575 Other Current Liab 825 886 1,039 1,199 1,526 LT Debt 2,525 5,533 6,238 6,560 6,071 Other LT Liabilities 1,013 795 805 816 826 Shareholder’s Equity 2,009 6,828 6,735 6,897 7,242 Minority Interests 224 119 126 140 158 Total Cap. & Liab. 7,021 16,380 17,944 17,473 17,808 Non-Cash Wkg. Capital (154) 100 (92.0) (201) (286) Net Cash/(Debt) (2,372) (7,123) (7,175) (6,709) (6,039) Debtors Turn (avg days) N/A 5.6 5.9 4.9 4.7 Creditors Turn (avg days) N/A 88.9 103.9 101.1 89.4 Inventory Turn (avg days) N/A 54.5 66.3 59.7 51.4 Asset Turnover (x) NM 0.2 0.2 0.2 0.2 Current Ratio (x) 1.0 0.5 0.7 0.9 0.9 Quick Ratio (x) 0.3 0.1 0.4 0.4 0.4 Net Debt/Equity (X) 1.1 1.0 1.0 1.0 0.8 Net Debt/Equity ex MI (X) 1.2 1.0 1.1 1.0 0.8 Capex to Debt (%) 19.1 27.5 6.8 4.2 5.1 Z-Score (X) 1.1 0.5 0.6 0.7 0.8


41


Company Guide



FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit (17.0) 274 (113) 235 483 Dep. & Amort. 179 196 432 514 603 Tax Paid 0.0 0.0 0.0 0.0 0.0 Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (23.0) (294) 192 109 84.0 Other Operating CF 225 192 33.0 (48.0) (110) Net Operating CF 365 369 543 810 1,060 Capital Exp.(net) (517) (2,011) (602) (337) (383) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (630) (1,609) 3.00 (9.0) (10.0) Net Investing CF (1,147) (3,620) (598) (347) (393) Div Paid 0.0 0.0 0.0 0.0 0.0 Chg in Gross Debt 1,083 1,249 1,516 (843) (494) Capital Issues (116) 2,322 0.0 0.0 0.0 Other Financing CF 101 (470) 3.00 3.00 3.00 Net Financing CF 1,068 3,101 1,519 (840) (491) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 286 (150) 1,464 (377) 176 Opg CFPS (Rp) 12.4 21.0 11.1 22.2 30.9 Free CFPS (Rp) (4.9) (52.1) (1.8) 15.0 21.5



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 02 Apr 15 333 475 BUY

2: 04 May 15 245 475 BUY

3: 15 Jun 15 391 415 HOLD

4: 10 Aug 15 367 320 FULLY VALUED

5: 17 Sep 15 258 260 HOLD

6: 13 Oct 15 268 260 HOLD

7: 23 Oct 15 264 260 HOLD

8: 02 Nov 15 233 180 FULLY VALUED


10: 10 Dec 15 111 180 FULLY VALUED

11: 12 Jan 16 133 180 FULLY VALUED12: 10 Feb 16 168 180 FULLY VALUED


1

2

3

4

5

6

78

9

10

11

12

105

155

205

255

305

355

405

455


Rp

42

ASIAN INSIGHTS VICKERS SECURITIES ed: YM / sa:BC

HOLD (upgrade from FULLY VALUED)

Last Traded Price: RM1.66 (KLCI : 1,680.02) Price Target : RM1.55 (-7% downside) (Prev RM1.50) Potential Catalyst: Significant M&A activity Where we differ: Largely in line with consensus Analyst Marvin KHOR +603 2604 3911 [email protected] Ben Santoso +65 6682 3707 [email protected]

What’s New FY16F/17F earnings adjusted by +9%/+10% on

changes in CPO price forecasts

Adjust for lower FFB production on weather impact

TP adjusted to RM1.55, upgrade to Hold on lower downside

Price Relative

Forecasts and Valuation FY Dec (RM m) 2014A 2015F 2016F 2017F Revenue 16,369 15,239 15,993 16,921 EBITDA 1,268 755 1,149 1,273 Pre-tax Profit 829 189 541 601 Net Profit 325 (107) 223 263 Net Pft (Pre Ex.) 176 (107) 223 263 Net Pft Gth (Pre-ex) (%) (74.1) nm nm 18.3 EPS (sen) 8.92 (2.9) 6.10 7.22 EPS Pre Ex. (sen) 4.84 (2.9) 6.10 7.22 EPS Gth Pre Ex (%) (74) nm nm 18 Diluted EPS (sen) 8.92 (2.9) 6.10 7.22 Net DPS (sen) 10.0 2.18 3.33 3.32 BV Per Share (sen) 175 167 170 174 PE (X) 18.3 nm 26.7 22.6 PE Pre Ex. (X) 33.7 nm 26.7 22.6 P/Cash Flow (X) 3.8 11.7 8.1 7.5 EV/EBITDA (X) 7.3 12.9 9.3 8.8 Net Div Yield (%) 6.1 1.3 2.0 2.0 P/Book Value (X) 0.9 1.0 1.0 0.9 Net Debt/Equity (X) 0.1 0.2 0.3 0.4 ROAE (%) 5.0 (1.7) 3.6 4.2 Earnings Rev (%): 0 9 10 Consensus EPS (sen): (0.1) 6.50 9.40 Other Broker Recs: B: 1 S: 15 H: 0

Source of all data: Company, AllianceDBS Research, Bloomberg Finance L.P

Finding respite from higher CPO prices CPO prices to support financials. As we adjust expectations for a rebound in FY16/17F CPO prices to RM2,600/RM2,810, we raise FGV’s earnings forecasts as the higher ASPs may give some respite to their thin operating margins. While we are not overly excited about its growth profile, we view that higher CPO prices will help its chances of returning to the black in FY16 after a likely loss-making FY15. As our revised TP implies downside of <10%, we upgrade FGV to Hold. Earnings outlook still mild. We remain cautious on earnings, as 1) management guides a 3% decline in 2016 FFB production after an expected 2-3% fall in 2015, and 2) escalating labour costs adding to already-high operating cost base. In FY16, management intends to focus on cost controls to manage its lean margins, which will be made easier in the higher CPO price environment. Turnaround profile is long-term. A pertinent issue is FGV’s old average-tree age profile, which it intends to address with a replanting programme of 10-15k ha per year. Its target is an average tree age of c.12 years by 2020, and as such we do not expect strong FFB growth in the near-to-mid-term. M&A activities like the 8.5k ha Golden Land plantation land purchase and the divestment of loss-making Canadian soy and canola crushing plant present only minor boosts in the near term. Valuation:

After imputing earnings adjustments, our DCF-based TP is adjusted to RM1.55. While we upgrade FGV to a Hold due to the lower implied downside, we remain unenthused on the weak profitability of its core operations. Key Risks to Our View:

FGV may still opt for M&A attempts in the near term, while the earlier Eagle High deal may not be completely off the table. A sizeable deal may drastically alter the performance of the firm. At A Glance Issued Capital (m shrs) 3,648 Mkt. Cap (RMm/US$m) 6,056 / 1,410 Major Shareholders (%) Federal Land Development 33.7 Lembaga Tabung Haji 7.8 Koperasi Permodalan Felda 5.8



Malaysia Company Guide

Felda Global Ventures Version 4 | Bloomberg: FGV MK | Reuters: FGVH.KL Refer to important disclosures at the end of this report

24

44

64

84

104

124

144

164

184

204

1.1

1.6

2.1

2.6

3.1

3.6

4.1

4.6

5.1

5.6

6.1

Jun-12 Jun-13 Jun-14 Jun-15

Relative IndexRM

Felda Global Ventures (LHS) Relative KLCI INDEX (RHS)

43


Company Guide


WHAT’S NEW

Adjustments to impute new CPO price forecasts

We adjusted FGV’s earnings to reflect changes in our forecasts; as we impute actual CPO prices and exchange rates in FY15F as well as revisions in our outlook from FY16F onwards. Changes in our forecasts are explained below:

FY16F/17F earnings revised upwards 8.6%/10%. The increase is largely from imputing higher CPO ASPs, but we also trim our yield and production forecasts in view of the expected weather impact. Over the long term, these resulted in our TP adjusted to RM3.55/share (raised from RM3.25) previously.

We adjusted CY16F/17F CPO price forecasts by 12%/16% to US$600/US$649, translating to RM2,600/RM2,810 per MT. In Ringgit terms this is an increase of 11%/15% over previous forecasts of RM2,340/RM2,450 per MT.

We trim our yield estimates on a per-hectare basis by a by 4%/1% in FY16/17F, to account for the periods of low rainfall observed. Note that management has guided for internal FFB production to fall up to 3% in FY16.

Based on its 4Q15 CPO production of 757.2k MT, we expect core earnings of RM80-84m (had been loss-making in 3Q15/4Q14). We still expect a full-year core net loss in FY15.

44


Company Guide



Earnings Drivers:

Vast, relatively old hectarage. FGV has c.338k ha of oil palm planted land in Peninsular Malaysia, the bulk of which (c.300k ha) is held under the Land Lease Agreement (LLA) it has with the Federal Land Development Authority (FELDA). It also has c.13k ha of plantations in Sabah from its acquisition of Pontian United Plantations in 2013, 13.5k ha in Sarawak from the Asian Plantations Ltd in 2014, and 8.5k ha from Golden Land in 2015. Its overall age profile is old/mature as >50% of trees are 20 years or older. To remedy the age issue, FGV had earlier committed to a replanting scheme of 15k ha per year, though only 10k ha was managed in FY15. FGV has c.7.2k ha of unplanted land left in Malaysia, and c.12.8k ha in Indonesia – though these may not see near-term development as replanting is a higher priority than new plantings. Keeping production figures steady. We expect FGV to process c.15.3m MT of FFB in FY16 from its own plantations, FELDA settlers and third parties. CPO production expectations of >3m MT relies on the sustainability of FFB yields from these sources. We view this as an indicator to focus on as production in early 2016 may be severely impacted by the lack of rainfall in 2015. CPO prices. Over 50% FGV’s top line comes the sale of CPO and RBD (refined, bleached & deodourised) products. Growth in the ASP of CPO and the RBD products will be reflected in its revenue. Sugar arm contributions. FGV has a 51% stake in listed sugar manufacturer MSM Malaysia. Its revenue contribution was 13.9% in FY14, but made up c.51% of its core PBT due to the underperformance of FGV’s other clusters. Our outlook on MSM is neutral, as low global raw sugar prices (key production cost) will be offset by the weakening Ringgit; and its shift to the industrial customer segment (from domestic commercial) lowers blended average selling prices. Rubber plantation exposure. FGV derives c.5% of revenue from the sale of rubber products, comprising latex concentrate, Standard Malaysian Rubber (SMR), Standard Indonesian Rubber (SIR) and Cambodian Standard Rubber (CSR). Over 110k MT of rubber products are processed per year at its seven assets across the region, though management estimates its total capacity at around 258k MT. FGV also owns 12.4k ha of planted rubber land in Malaysia with 3.5k ha unplanted.

CPO price (RM/MT)

Mature palm oil hectarage

CPO produced (k MT)

Sugar revenue (RM m)

Average USD/MYR

Source: Company, AllianceDBS Research

2,377 2,413

2,168

2,6002,810

0

400

800

1,200

1,600

2,000

2,400

2,800

2013A 2014A 2015F 2016F 2017F

261,445 265,366 272,805282,873 285,834

0

58,300

116,600

174,900

233,200

291,500

2013A 2014A 2015F 2016F 2017F

3,2283,106 3,016

3,165 3,190

0

700

1,400

2,100

2,800

2013A 2014A 2015F 2016F 2017F

2,2022,281 2,322 2,365 2,389

0

300

600

900

1,200

1,500

1,800

2,100

2,400

2013A 2014A 2015F 2016F 2017F

3.2 3.31

4.084.34 4.34

0.00

0.88

1.75

2.63

3.50

4.38

2013A 2014A 2015F 2016F 2017F

45


Company Guide


Balance Sheet:

Borrowings manageable for now but cash is depleting. FGV has gross debt-to-equity ratio of about 0.8x and net debt-to-equity of about 0.5x due to a cash pile of c.RM2bn. However given its poor operating profits, we forecast negative net cash flow which will slowly deplete its liquidity. Thus, further deterioration in performance may require more debt to be taken on. Share Price Drivers:

Showing a moderation in expenses. FGV’s share price will be held back by its low profitability from low margins. Management has claimed to be looking into managing its costs, including revising its procurement practices. If those efforts come into fruition, FGV may see re-rating. Key Risks:

Volatility in commodity prices and exchange rates. Continued depressed CPO prices would hurt earnings, especially for primarily upstream planters. Additionally, low crude oil prices may affect CPO demand for biofuel. Finally, CPO prices in Ringgit terms are also directly affected by the currency’s strength relative to the US dollar. Regulatory changes. Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact demand for CPO/refined oils. Extreme changes in the weather. Sudden and significant changes in rainfall and humidity can affect FFB yields in later quarters. Market sentiments. Changes in fund flows towards or out of emerging markets would affect valuations of plantation counters. Weather. Changes in rainfall patterns (caused by either El Nino or La Nina) would affect FFB yields with some lag time. Company Background

FGV is an integrated agri-business player with significant palm oil hectarage in Peninsular Malaysia, involved in upstream and downstream palm oil operations including harvesting, milling, processing, refining and distribution. It also has rubber plantations, and a 49% stake in major sugar manufacturer MSM Malaysia.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.6

0.7

0.7

0.8

0.8

0.9

0.9

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

2013A 2014A 2015F 2016F 2017F


0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

2013A 2014A 2015F 2016F 2017F


RM

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2013A 2014A 2015F 2016F 2017F

Avg: 436.9x+1sd:

8796.9x

+2sd: 17156.8x‐1sd: ‐7923.1x-14654.7

35345.3

85345.3

135345.3

185345.3


(x)

Avg: 1.99x

+1sd: 2.66x

+2sd: 3.33x

‐1sd: 1.33x

‐2sd: 0.66x0.5

1.0

1.5

2.0

2.5

3.0

3.5


(x)

46


Company Guide


Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F CPO price (RM/MT) 2,377 2,413 2,168 2,600 2,810 Mature palm oil hectarage 261,445 265,366 272,805 282,873 285,834 CPO produced (k MT) 3,228 3,106 3,016 3,165 3,190 Sugar revenue (RM m) 2,202 2,281 2,322 2,365 2,389 Average USD/MYR 3.20 3.31 4.08 4.34 4.34

Income Statement (RMm)

FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 12,568 16,369 15,239 15,993 16,921 Cost of Goods Sold (11,690) (14,249) (13,377) (13,865) (14,660) Gross Profit 878 2,120 1,862 2,127 2,261 Other Opng (Exp)/Inc 269 (1,413) (1,592) (1,500) (1,558) Operating Profit 1,147 707 270 628 703 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc (2.2) 30.7 31.3 32.2 33.0 Net Interest (Exp)/Inc 60.7 (57.4) (113) (119) (134) Exceptional Gain/(Loss) 302 149 0.0 0.0 0.0 Pre-tax Profit 1,508 829 189 541 601 Tax (399) (291) (61.4) (151) (170) Minority Interest (126) (213) (234) (167) (168) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 982 325 (107) 223 263 Net Profit before Except. 680 176 (107) 223 263 EBITDA 771 1,268 755 1,149 1,273 Growth Revenue Gth (%) (2.5) 30.2 (6.9) 4.9 5.8 EBITDA Gth (%) (38.4) 64.4 (40.5) 52.2 10.8 Opg Profit Gth (%) 22.9 (38.4) (61.8) 132.5 12.0 Net Profit Gth (Pre-ex) (%) (9.3) (74.1) nm nm 18.3 Margins & Ratio Gross Margins (%) 7.0 13.0 12.2 13.3 13.4 Opg Profit Margin (%) 9.1 4.3 1.8 3.9 4.2 Net Profit Margin (%) 7.8 2.0 (0.7) 1.4 1.6 ROAE (%) 15.5 5.0 (1.7) 3.6 4.2 ROA (%) 5.3 1.6 (0.5) 1.1 1.3 ROCE (%) 5.2 2.5 1.0 2.5 2.8 Div Payout Ratio (%) 59.4 112.1 N/A 54.6 45.9 Net Interest Cover (x) NM 12.3 2.4 5.3 5.2


47


Company Guide


Quarterly / Interim Income Statement (RMm)

FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 3,964 4,300 2,964 4,190 4,510 Cost of Goods Sold (3,441) (3,889) (2,601) (3,635) (4,007) Gross Profit 523 411 363 556 503 Other Oper. (Exp)/Inc (325) (257) (309) (336) (500) Operating Profit 198 154 54.6 220 2.42 Other Non Opg (Exp)/Inc (78.4) (10.7) (1.5) (21.8) 106 Associates & JV Inc (5.6) 10.7 42.9 (0.2) (5.8) Net Interest (Exp)/Inc (24.4) (24.7) (46.3) (28.9) (41.6) Exceptional Gain/(Loss) 11.0 (110) (48.0) (30.0) (131) Pre-tax Profit 101 19.6 1.67 139 (70.1) Tax (60.9) (47.6) (19.3) (65.6) (23.2) Minority Interest (38.4) (61.8) (26.8) (57.1) (71.6) Net Profit 1.67 (89.8) (44.4) 16.1 (165) Net profit bef Except. (9.3) 20.2 3.57 46.1 (33.9) EBITDA 114 154 96.0 198 103 Growth Revenue Gth (%) (2.9) 8.5 (31.1) 41.4 7.6 EBITDA Gth (%) (64.7) 34.9 (37.8) 106.0 (48.1) Opg Profit Gth (%) (41.4) (22.2) (64.6) 302.3 (98.9) Net Profit Gth (Pre-ex) (%) (106.1) (316.6) (82.3) 1,189.2 (173.6) Margins Gross Margins (%) 13.2 9.6 12.3 13.3 11.1 Opg Profit Margins (%) 5.0 3.6 1.8 5.2 0.1 Net Profit Margins (%) 0.0 (2.1) (1.5) 0.4 (3.7)

Balance Sheet (RMm)

FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 5,683 6,349 5,920 6,491 6,697 Invts in Associates & JVs 919 961 986 1,012 1,038 Other LT Assets 5,232 6,170 6,478 6,478 6,478 Cash & ST Invts 5,029 3,673 3,338 2,586 2,190 Inventory 1,740 1,764 1,645 1,705 1,802 Debtors 1,352 1,089 1,136 1,192 1,262 Other Current Assets 768 718 713 739 770 Total Assets 20,722 20,723 20,216 20,203 20,236 ST Debt 1,638 2,066 2,066 2,066 2,066 Creditor 1,349 1,418 1,286 1,333 1,410 Other Current Liab 1,157 888 897 906 916 LT Debt 2,486 2,415 2,415 2,415 2,415 Other LT Liabilities 5,146 5,114 4,771 4,424 4,071 Shareholder’s Equity 6,571 6,376 6,099 6,211 6,342 Minority Interests 2,375 2,448 2,682 2,849 3,017 Total Cap. & Liab. 20,722 20,723 20,216 20,203 20,236 Non-Cash Wkg. Capital 1,354 1,265 1,311 1,397 1,508 Net Cash/(Debt) 905 (807) (1,143) (1,894) (2,291) Debtors Turn (avg days) 30.4 27.2 26.7 26.6 26.5 Creditors Turn (avg days) 26.8 36.6 38.3 35.8 35.5 Inventory Turn (avg days) 36.9 46.3 48.2 45.8 45.4 Asset Turnover (x) 0.7 0.8 0.7 0.8 0.8 Current Ratio (x) 2.1 1.7 1.6 1.4 1.4 Quick Ratio (x) 1.5 1.1 1.1 0.9 0.8 Net Debt/Equity (X) CASH 0.1 0.2 0.3 0.4 Net Debt/Equity ex MI (X) CASH 0.1 0.2 0.3 0.4 Capex to Debt (%) 5.0 18.3 21.9 23.3 16.3 Z-Score (X) 1.6 1.6 1.5 1.5 1.6


48


Company Guide


Cash Flow Statement (RMm)

FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 1,536 859 189 541 601 Dep. & Amort. 98.8 391 428 463 510 Tax Paid (367) (277) (28.8) (118) (137) Assoc. & JV Inc/(loss) 2.23 (30.7) (31.3) (32.2) (33.0) Chg in Wkg.Cap. (769) 382 (16.5) (88.4) (114) Other Operating CF 200 243 (32.6) (32.6) (32.6) Net Operating CF 702 1,566 508 732 795 Capital Exp.(net) (208) (819) (979) (1,044) (729) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 1,799 (11.5) 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (2,751) (716) 677 15.1 16.4 Net Investing CF (1,160) (1,547) (302) (1,029) (712) Div Paid (529) (753) (170) (111) (132) Chg in Gross Debt 1,050 850 0.0 0.0 0.0 Capital Issues (39.9) 18.7 0.0 0.0 0.0 Other Financing CF (702) (1,505) (372) (343) (348) Net Financing CF (221) (1,389) (541) (454) (479) Currency Adjustments 19.7 14.0 0.0 0.0 0.0 Chg in Cash (659) (1,356) (336) (751) (397) Opg CFPS (sen) 40.3 32.5 14.4 22.5 24.9 Free CFPS (sen) 13.5 20.5 (12.9) (8.6) 1.81



Source: AllianceDBS Research

S.No. DateClosing

PriceTarget Price

Rating

1: 25 Feb 15 2.56 2.50 HOLD

2: 27 May 15 1.92 2.00 HOLD

3: 09 Jun 15 1.88 1.90 HOLD

4: 15 Jun 15 1.65 1.90 HOLD

5: 25 Aug 15 1.20 1.20 HOLD

6: 17 Sep 15 1.59 1.05 FULLY VALUED

7: 13 Oct 15 1.67 1.05 FULLY VALUED

8: 23 Oct 15 1.80 1.05 FULLY VALUED

9: 11 Nov 15 1.86 1.05 FULLY VALUED

10: 27 Nov 15 1.79 1.05 FULLY VALUED

11: 01 Dec 15 1.85 1.50 FULLY VALUED12: 10 Dec 15 1.58 1.50 FULLY VALUED13: 12 Jan 16 1.58 1.50 FULLY VALUED14: 02 Feb 16 1.66 1.50 FULLY VALUED

Note : Share price and Target price are adjusted for corporate actions. 15: 10 Feb 16 1.57 1.50 FULLY VALUED

1

2

34

5

6

7

8

9

10

1112

13

14

15

1.13

1.33

1.53

1.73

1.93

2.13

2.33

2.53

2.73

2.93


RM

49


HOLD Last Traded Price: S$2.00 (STI : 2.657.57) Price Target : S$1.90 (5% downside) (Prev: S$1.85) Where we differ: Higher than consensus FY17F earnings estimate on higher CPO price expectations Analyst Ben Santoso +65 6682 3707 [email protected]

What’s New FY15/16F/17F EPS adjusted by -4%/+23%/ +31%

on changes in our key assumptions Disclosed 4Q15 production in line; but ASP is

expected to be below expectations TP raised to S$1.90; HOLD rating maintained

Price Relative

Forecasts and Valuation FY Dec (US$m) 2014A 2015F 2016F 2017F

Turnover 616 438 534 619 EBITDA 302 222 296 355 Pre-tax Profit 252 165 217 278 Net Profit 173 116 158 203 Net Pft (Pre Ex.) 173 116 158 203 Net Pft (ex. BA gains) 172 116 158 203 Net Pft Gth (Pre-ex) (%) (27.2) (33.4) 36.8 28.4 EPS (S cts) 15.4 10.2 14.0 18.0 EPS Pre Ex. (S cts) 15.4 10.2 14.0 18.0 EPS Gth Pre Ex (%) (27) (33) 37 28 Diluted EPS (S cts) 15.4 10.2 14.0 18.0 Net DPS (S cts) 5.1 3.3 3.0 4.0 BV Per Share (S cts) 94.3 101.2 84.3 98.3 PE (X) 13.0 19.5 14.2 11.1 PE Pre Ex. (X) 13.0 19.5 14.2 11.1 P/Cash Flow (X) 9.9 12.2 10.1 8.3 EV/EBITDA (X) 8.4 10.8 7.8 6.2 Net Div Yield (%) 2.5 1.7 1.5 2.0 P/Book Value (X) 2.1 2.0 2.4 2.0 Net Debt/Equity (X) 0.2 0.1 0.0 CASH ROAE (%) 16.9 10.5 15.1 19.7 Earnings Rev (%): (4) 23 31 Consensus EPS (S cts): 11.9 13.9 17.3 Other Broker Recs: B: 17 S: 0 H: 2 Source of all data: Company, DBS Bank, Bloomberg Finance L.P

Improving outlook Raising the bar. To account for the anticipated impact from El Nino in CY15, we assumed 2% lower FFB yields in FY16F and another 1% slice in FY17F – both on its own and smallholder estates. Nevertheless, hikes in our CPO price forecasts point to 26% EBITDA CAGR over the next two years – as new maturities should continue to drive up the group’s total FFB production. Beneficiary of Indonesia’s biodiesel mandate. FR has c.250k MT of biodiesel capacity – currently employed in supplying Pertamina for Indonesia’s mandatory biodiesel programme. The export levies to fund this programme also work to provide a spread for the group’s refining business, which should encourage full utilisation rate. But the recent divergence in CPO and end product prices has caused refining margins to turn negative. We expect FR to reduce its fractionation output in favour of biodiesel production over the next two years. Volume growth to decelerate from 2019. FR’s aggressive planting in East and West Kalimantan between FY12 and FY14 will contribute to the group’s strong volume and earnings growth through FY18F. Subject to any opportunistic acquisitions, we expect FR’s output growth to decelerate from FY19F, as new planting is forecast to moderate from FY15 onwards (excluding new acquisitions). Valuation: We employed DCF methodology (FY17F base year) to arrive at FR’s fair value of S$1.90/share (Rf 8.8%; RM 15.7%; beta 0.9x; WACC 12.3%, TG 3%). At current price, we believe the market has already priced in significant recovery in FR’s earnings over the next two years. Key Risks to Our View: FR’s share price is linearly driven by CPO price expectations and partly by refining/biodiesel margins. There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take failed to live up to our expectations (2.5m kl) this year. FR’s output could also fall below our expectations if there were significant hits to its FFB yield in the aftermath of CY15 El Nino (vice versa). Changes in fund flows towards or out of emerging markets/ commodities would also affect valuations of plantation counters. At A Glance Issued Capital (m shrs) 1,585 Mkt. Cap (S$m/US$m) 3,171 / 2,251 Major Shareholders (%) Eight Capital Inc 63.2 King Fortune International Inc 5.6




First Resources Version 3 | Bloomberg: FR SP | Reuters: FRLD.SI Refer to important disclosures at the end of this report

74

94

114

134

154

174

194

214

1.3

1.5

1.7

1.9

2.1

2.3

2.5

2.7


Relative IndexS$

First Resources (LHS) Relative STI INDEX (RHS)

50


Company Guide

First Resources

WHAT’S NEW

Forecasts and TP adjustments We adjusted FR’s earnings to reflect changes in our key assumptions. We imputed realised CPO and PK production volumes and exchange rates in FY15, together with revisions in our FY16 and FY17 CPO price outlook and FFB yields. Changes in our forecasts are summarised below: We imputed 4% lower FY15E earnings (vs. our previous

forecast). We peg 4Q15 CPO and PK ASP based on Astra Agro Lestari’s realized auction prices – which were lower than we had previously anticipated. We attribute this to declining refining margins, which may have reduced demand for CPO during the quarter.

We also raised CY16F/17F CPO price forecasts (US$/MT, FOB) by 12%/16% to US$600/US$649 – reflecting lower

expected global CPO output and expansion in biodiesel usage in Indonesia – through deployment of CPO funds collected since Jul15. We raised FY16F/17F earnings by 23%/31% as a result.

Revisions in exchange rates in favour of stronger SGD had also adversely impacted our TP

We reiterate our HOLD call on the stock – as the stock’s YTD rally has moved ahead of its earnings potential.

Our FY17F earnings expectations are higher than consensus; as we believe CPO prices should maintain its current trajectory on limited substitution from soybean oil due to limited spare crushing capacity in Argentina.

51


Company Guide

First Resources


Earnings Drivers:

CPO price. As a commodity producer, FR is a price-taker. Movements in international CPO prices would directly impact group’s profitability. We currently expect CPO prices (FOB Pasir Gudang) to average US$600/MT (+7% y-o-y) in FY16 and US$649/MT in FY17 (+8% y-o-y). Volume output. Changes in weather patterns would have a meaningful impact on FR’s productivity with some lag time. It takes 5-6 months from flowering to harvesting of ripe fruits. Hence, a sustained water deficit would not have immediate impact on yields, but would impact fruit formation through abortion of female flowers, delayed ripening, reduced fruit weight, as well as fruit abortion. Palm oil is a thirsty crop, requiring a minimum of 1,600mm per annum and is typically grown in areas with 2,000-2,500mm of rainfall per annum. Oil palm trees are best grown within 10 degree latitudes on either side of the equator. A drop in rainfall to below 100mm per month for 3 consecutive months would result in so called “tree-stress”, and a drop in productivity (i.e. Fresh Fruit Bunch yield) would ensue 12 and 24 months thereafter. Regulations. Tariff and non-tariff regulations are common practices in agriculture commodities, and palm oil is no exception. Any changes in export/import tariffs, as well as various taxes and levies would therefore impact trade flows and prices. Biodiesel demand. Driven by high energy prices and climate change concerns, demand for vegetable oils for energy has multiplied since 2005, mainly supported by mandatory mixing of petroleum fuel with biodiesel. This demand has created a link between vegetable oils and energy prices. Oil World estimates that palm oil used for biodiesel accounts for c.16% of total demand – both mandatory and discretionary (driven by positive spreads between diesel and biodiesel prices). Demand seasonality. As a major vegetable oil with 36% market share globally, palm oil is an important food staple. The other major vegetable oils are soybean oil, with 27% market share, followed by rapeseed/canola oil and sunflower oil with 16% and 10% market shares, respectively. There is generally demand substitutability between vegetable oils (high price elasticity of demand), although certain vegetable oils are more suitable than others for certain applications. Relative to other oil crops, palm oil has the highest productivity per hectare (i.e. c.5 MT/ha), while soybean oil’s productivity is typically 0.5 MT/ha. Demand for palm oil is dominant in Asia, where local festivities drive higher demand during certain months of the year; for example, Ramadan month; Chinese New Year; and Divali are typically high demand periods in Asia.

CPO price (RM/MT)




Avg. USD/IDR rate


2,377 2,413

2,168

2,600

2,810

0

400

800

1,200

1,600

2,000

2,400

2,800

2013A 2014A 2015F 2016F 2017F

104,493114,377

122,918

135,580

149,868

0

30,600

61,200

91,800

122,400

2013A 2014A 2015F 2016F 2017F

625,202 630,988687,248

751,464

818,472

0

167,000

334,000

501,000

668,000

2013A 2014A 2015F 2016F 2017F

136,966145,811

160,021

174,973

190,576

0

24,100

48,200

72,300

96,400

120,500

144,600

168,700

2013A 2014A 2015F 2016F 2017F

10,849

11,879

13,392 13,635 13,703

0

2,800

5,600

8,400

11,200

2013A 2014A 2015F 2016F 2017F

52


Company Guide

First Resources

Balance Sheet:

Low gearing. On our estimates, FR’s debts cost a paltry 3.9% p.a. The low cost comes primarily from Sukuk issuances between 2012 and 2014 – which were subsequently swapped into USD. This translates into a decent 8x interest cover and a conservative 0.4% net gearing ratio in FY16F. At end of Sep15, FR’s 4-quarter rolling cash conversion cycle stood at 95 days (vs. 62 days at end Jun15) – mainly representing higher inventory days. This is not a major concern in our view, as we believe the increase was temporary. Strong free cash flow generation. We expect the group to spend c.US$9.5m on biological assets (c.6.5k ha on new planting and 48k ha immature) in FY16 and US$4.5m in FY17 (33k ha on immature). This would translate into free cash flow generation of US$127m in FY16F and US$178m in FY17F – translating to free cash flow yield of 6-8% relative to its intrinsic value. Share Price Drivers:

Seek lower entry point. The stock is currently trading close to average forward PE. While we expect robust 32% earnings CAGR between FY15F and FY17F, we believe this is already been priced-in. Following CY15 El Nino impact over the next two years, we anticipate supply to surge again in CY18 and CY19. Key Risks:

Volatility in CPO prices and USD exchange rates Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from expansion of US shale gas would have adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect profitability of planters in general. Setback in expansion plans Our forecasts are based on assumed hectarage for new planting and replanting. Any setback on these plans would negatively affect our valuation due to slower volume growth. Regulatory changes Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact demand for CPO/refined oils. Market sentiment Changes in funds flow towards or out of emerging markets would affect valuations for plantation counters. Company Background

FR is a mid-sized planter with a strong balance sheet and decent growth outlook. FR has been aggressively planting since 2004, and is one of a few upstream planters that have successfully expanded downstream – albeit on small scale.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.2

0.2

0.2

0.3

0.3

0.3

0.3

0.3

0.4

0.4

0.4

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2013A 2014A 2015F 2016F 2017F


0.0

50,000.0

100,000.0

150,000.0

200,000.0

250,000.0

300,000.0

2013A 2014A 2015F 2016F 2017F


US$

0.0%

5.0%

10.0%

15.0%

20.0%

2013A 2014A 2015F 2016F 2017F

Avg: 14.4x

+1sd: 18.2x

+2sd: 21.9x

‐1sd: 10.6x

‐2sd: 6.8x6.1

8.1

10.1

12.1

14.1

16.1

18.1

20.1

22.1

24.1


(x)

Avg: 2.3x

+1sd: 2.65x

+2sd: 3x

‐1sd: 1.95x

‐2sd: 1.6x

1.3

1.8

2.3

2.8

3.3


(x)

53


Company Guide

First Resources

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F CPO price (RM/MT) 2,377 2,413 2,168 2,600 2,810 Mature oil palm 104,493 114,377 122,918 135,580 149,868 CPO sales volume (MT) 625,202 630,988 687,248 751,464 818,472 Palm kernel sales vol. (MT) 136,966 145,811 160,021 174,973 190,576 Avg. USD/IDR rate 10,849 11,879 13,392 13,635 13,703

Segmental Breakdown

FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (US$m) CPO 538 432 364 428 506 Palm kernel 45 61 52 61 70 Olein, RBDPO, biodesel 156 265 202 259 280 PKO 21 27 31 31 31 Others (133) (169) (211) (245) (268) Total 626 616 438 534 619

Income Statement (US$m)

FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 626 616 438 534 619 Cost of Goods Sold (245) (292) (196) (224) (251) Gross Profit 382 323 242 309 368 Other Opng (Exp)/Inc (41) (52) (55) (72) (77) Operating Profit 341 271 187 237 291 Other Non Opg (Exp)/Inc (9) (1) (1) (1) (1) Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (18) (18) (21) (20) (12) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 314 252 165 217 278 Tax (67) (71) (45) (52) (67) Minority Interest (8) (7) (5) (7) (9) Preference Dividend 0 0 0 0 0 Net Profit 238 173 116 158 203 Net Profit before Except. 238 173 116 158 203 EBITDA 362 302 222 296 355 Growth Revenue Gth (%) 3.8 (1.8) (28.8) 21.8 16.0 EBITDA Gth (%) (2.6) (16.5) (26.4) 33.2 20.1 Opg Profit Gth (%) 2.2 (20.5) (31.1) 27.1 22.6 Net Profit Gth (%) 0.5 (27.2) (33.4) 36.8 28.4 Margins & Ratio Gross Margins (%) 60.9 52.5 55.2 58.0 59.4 Opg Profit Margin (%) 54.4 44.0 42.6 44.5 47.0 Net Profit Margin (%) 38.0 28.2 26.4 29.6 32.8 ROAE (%) 22.7 16.9 10.5 15.1 19.7 ROA (%) 12.8 9.2 5.7 8.0 11.5 ROCE (%) 15.1 10.7 6.9 9.5 13.0 Div Payout Ratio (%) 21.4 32.9 32.7 21.2 22.1 Net Interest Cover (x) 18.6 15.2 9.0 12.0 24.5


54


Company Guide

First Resources

Quarterly / Interim Income Statement (US$m)

FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 149 177 96 119 108 Cost of Goods Sold (63) (75) (38) (59) (37) Gross Profit 86 102 58 60 70 Other Oper. (Exp)/Inc (13) (12) (14) (15) (19) Operating Profit 73 90 45 45 51 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 1 (1) (1) 1 0 Net Interest (Exp)/Inc (4) (7) (5) (5) (6) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 70 82 39 41 45 Tax (21) (24) (10) (12) (12) Minority Interest (3) (2) (1) (1) (1) Net Profit 46 56 28 29 32 Net profit bef Except. 46 56 28 29 32 EBITDA 73 89 44 46 51 Growth Revenue Gth (%) 32.6 18.8 (45.5) 23.4 (9.3) EBITDA Gth (%) 65.1 21.6 (51.3) 5.4 10.8 Opg Profit Gth (%) 61.6 23.2 (50.5) 1.8 13.2 Net Profit Gth (%) 76.7 21.9 (50.7) 3.5 10.8 Margins Gross Margins (%) 57.6 57.7 60.3 50.5 65.4 Opg Margins (%) 49.0 50.9 46.2 38.1 47.6 Net Profit Margins (%) 31.0 31.8 28.8 24.1 29.5

Balance Sheet (US$m)

FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 303 338 374 415 450 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 1,067 1,185 1,118 707 695 Cash & ST Invts 272 351 510 609 426 Inventory 59 49 36 41 46 Debtors 42 39 29 35 41 Other Current Assets 37 36 25 28 32 Total Assets 1,780 1,998 2,092 1,835 1,689 ST Debt 3 11 0 324 0 Creditor 63 59 41 47 52 Other Current Liab 15 18 12 15 17 LT Debt 487 572 613 289 289 Other LT Liabilities 173 222 228 147 150 Shareholder’s Equity 993 1,063 1,141 950 1,108 Minority Interests 47 53 57 64 73 Total Cap. & Liab. 1,780 1,998 2,092 1,835 1,689 Non-Cash Wkg. Capital 60 47 37 43 49 Net Cash/(Debt) (218) (232) (103) (4) 137 Debtors Turn (avg days) 22.4 24.0 28.3 21.9 22.4 Creditors Turn (avg days) 111.2 85.4 113.9 96.9 97.1 Inventory Turn (avg days) 99.5 75.7 96.7 85.9 86.0 Asset Turnover (x) 0.3 0.3 0.2 0.3 0.4 Current Ratio (x) 5.1 5.4 11.3 1.9 7.9 Quick Ratio (x) 3.9 4.4 10.2 1.7 6.7 Net Debt/Equity (X) 0.2 0.2 0.1 0.0 CASH Net Debt/Equity ex MI (X) 0.2 0.2 0.1 0.0 CASH Capex to Debt (%) 38.7 42.2 3.7 14.6 29.0 Z-Score (X) 3.7 3.2 3.3 2.4 3.7


55


Company Guide

First Resources

Cash Flow Statement (US$m)

FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 314 252 165 217 278 Dep. & Amort. 30 32 36 59 65 Tax Paid (67) (71) (45) (52) (67) Assoc. & JV Inc/(loss) 0 0 0 0 0 Chg in Wkg.Cap. 5 14 10 (7) (6) Other Operating CF (59) 0 18 6 2 Net Operating CF 223 226 185 224 272 Capital Exp.(net) (190) (246) (22) (89) (84) Other Invts.(net) 0 0 0 0 0 Invts in Assoc. & JV (12) (1) 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 203 66 4 (3) (3) Net Investing CF 1 (181) (18) (92) (87) Div Paid (51) (57) (38) (34) (45) Chg in Gross Debt (48) 93 30 0 (324) Capital Issues (302) (47) 0 0 0 Other Financing CF 45 45 1 1 1 Net Financing CF (356) 34 (7) (33) (368) Currency Adjustments 0 0 0 0 0 Chg in Cash (133) 79 159 99 (183) Opg CFPS (US cts.) 14 13 11 15 18 Free CFPS (US cts.) 2 (1) 10 8 12



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 26 Feb 15 1.86 2.01 HOLD

2: 11 May 15 1.81 2.01 HOLD

3: 03 Jun 15 2.00 2.06 HOLD

4: 11 Jun 15 2.03 2.06 HOLD

5: 24 Jun 15 2.04 2.11 HOLD

6: 23 Jul 15 2.19 2.11 HOLD

7: 14 Aug 15 1.83 2.04 BUY

8: 17 Sep 15 1.62 1.69 HOLD

9: 13 Oct 15 1.71 1.69 HOLD

10: 11 Nov 15 1.96 1.69 HOLD

11: 13 Nov 15 1.86 1.85 HOLD12: 10 Dec 15 1.92 1.85 HOLD13: 12 Jan 16 1.82 1.85 HOLD14: 10 Feb 16 1.91 1.85 HOLD


1

23

4

5

6

7

89

10

11

12

13

14

1.39

1.49

1.59

1.69

1.79

1.89

1.99

2.09

2.19

2.29


S$

56

ASIAN INSIGHTS VICKERS SECURITIES ed: YM / sa:BC

HOLD Last Traded Price: RM11.20 (KLCI : 1,680.02) Price Target : RM10.85 (-3% downside) (Prev: RM9.60) Where we differ: Lower than consensus FY15-17F earnings on conservative FFB yields and lower net ASP in Indonesia Analyst Ben Santoso +65 6682 3707 [email protected]

What’s New FY15/16F/17F earnings adjusted by -6%/+38%/

+47% on changes in our key assumptions Reported 4Q15 production in line; but we expect

ASP below initial expectations TP raised to RM10.85 from RM9.60

Price Relative

Forecasts and Valuation FY Dec (RM m) 2014A 2015F 2016F 2017F Revenue 1,643 1,349 1,695 1,936 EBITDA 545 260 417 559 Pre-tax Profit 520 224 397 530 Net Profit 377 165 293 391 Net Pft (Pre Ex.) 377 145 293 391 Net Pft Gth (Pre-ex) (%) 65.6 (61.6) 102.3 33.4 EPS (sen) 49.0 21.1 37.4 49.9 EPS Pre Ex. (sen) 49.0 18.5 37.4 49.9 EPS Gth Pre Ex (%) 63 (62) 102 33 Diluted EPS (sen) 49.0 21.1 37.4 49.9 Net DPS (sen) 10.8 4.63 8.23 11.0 BV Per Share (sen) 506 511 542 583 PE (X) 22.5 52.2 29.4 22.0 PE Pre Ex. (X) 22.5 59.4 29.4 22.0 P/Cash Flow (X) 17.3 31.1 26.0 20.1 EV/EBITDA (X) 15.7 34.0 21.6 16.2 Net Div Yield (%) 1.0 0.4 0.7 1.0 P/Book Value (X) 2.2 2.2 2.0 1.9 Net Debt/Equity (X) CASH CASH 0.0 0.0 ROAE (%) 10.3 4.2 7.1 8.9 Earnings Rev (%): (6) 38 47 Consensus EPS (sen): 27.9 42.2 51.1 Other Broker Recs: B: 9 S: 4 H: 7


The unconventional planter Dragged by dry weather. Sabah – the majority of where GENP Malaysian estates are located – had dry weather last year, and we expect FFB yields to decline by 1% in both FY16 and FY17; on top of 2% drop in FY15. GENP’s CPO output is now forecast to expand 9% CAGR between FY15F and FY18F (cut from 10% previously). With higher expected CPO prices, we expect group earnings to rise by 27% CAGR over the same period – reduced from 29% previously. GENP had also slowed down its expansion in FY15 due to delayed completion of the High Carbon Stock (HCS) study. New planting is expected to have reached 4k ha last year. Securing volume, penetrating genome and venturing downstream. Having expanded aggressively in Indonesia since CY07, Genting Plantations (GENP) has concurrently embarked on improving its planting material through genome filtering and recently moved towards downstream projects through partnerships with Musim Mas Group and Elevance Renewable Sciences for its long-term strategy. Expect lower property contribution. We expect GENP to book property EBIT contribution of RM70m in FY15 and RM52m in FY16, as Industrial land sales dissipate. We have not imputed contribution from the planned construction of its second premium outlet in Genting Highlands (scheduled for completion late CY16F) Valuation: We peg GENP’s TP of RM10.85 based on SOP methodology; with its plantation segment valued using DCF methodology (Rf: 4.3%; Rm: 10.3%; beta: 1.0x; WACC: 8.1%; TG: 3%). Key Risks to Our View: There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take failed to live up to our expectations (2.5m kl) this year. GENP’s output could also fall below our expectations if there were significant hit to its FFB yield in the aftermath of CY15 El Nino (vice versa). Changes in fund flows towards or out of emerging markets/ commodities would likewise affect valuations of plantation counters. At A Glance Issued Capital (m shrs) 783 Mkt. Cap (RMm/US$m) 8,770 / 2,043 Major Shareholders (%) Genting Berhad 52.5 Employees Provident Fund 14.6 Kumpulan Wang Persaraan 5.3




Genting Plantations Version 3 | Bloomberg: GENP MK | Reuters: GENP.KL Refer to important disclosures at the end of this report

72

92

112

132

152

172

192

212

7.3

8.3

9.3

10.3

11.3

12.3


Relative IndexRM

Genting Plantations (LHS) Relative KLCI INDEX (RHS)

57


Company Guide

Genting Plantations

WHAT’S NEW

Forecasts, TP and rating adjustments We adjusted GENP’s earnings to reflect changes in our key assumptions. We imputed realised CPO and PK production volumes and exchange rates in FY15; together with revisions in our FY16 and FY17 CPO price outlook and FFB yields. Changes in our forecasts are summarised below: We imputed 6% lower FY15F earnings (vs. previous

forecast) after imputing realized production numbers and ASP. We peg 4Q15 CPO and PK ASP based on average spot prices with a slight discount – as CPO ASP in Indonesia averaged below our initial expectations.

We raised CY16F/17F CPO price forecasts (US$/MT, FOB) by 12%/16% to US$600/US$649 – reflecting lower expected global CPO output and expansion in biodiesel usage in Indonesia – through deployment of CPO fund collected since Jul15. FY16F/17F earnings were accordingly revised by +38%/+47%.

Revisions in exchange rates in favour of stronger MYR also had adversely impacted our CPO price forecasts and TP.

We reiterated our HOLD call on the stock given limited upside potential to our revised TP.

Our FY17F earnings expectations are higher than consensus as we believe CPO prices should maintain its current trajectory on limited substitution from soybean oil due to limited spare crushing capacity in Argentina

58


Company Guide

Genting Plantations

CRITICAL DATA POINTS TO WATCH Earnings Drivers:

CPO price. As a commodity producer, GENP is a price-taker. Movements in international CPO prices would directly impact group’s profitability. We currently expect CPO prices (FOB Pasir Gudang) to average US$600/MT (+7% y-o-y) in CY16 and US$649/MT in CY17 (+8% y-o-y). Volume output. Approximately 70% of GENP’s planted area in Malaysia is located in Sabah – representing c.35% of its total planted area. The remainder is primarily located in West and Central Kalimantan. The group’s Malaysian estates are 95% mature, but only half of GENP’s Indonesian estates have matured. Given the dry weather in Sabah, GENP’s Malaysian CPO output is forecast to remain flat at 316k MT in FY15 (vis-à-vis 39% y-o-y jump in Indonesian output to 116k MT). GENP has undertaken an aggressive new planting programme in Indonesia since CY07, and the group has started seeing significant increases in its FFB output from Indonesia – although Indonesia is estimated to have contributed only 24% of total FFB output in FY15E. Hence, GENP’s capex outlay in Indonesia would not only focus on new planting, but also adding mills (from 135 MT/hour capacity currently). Beware of export levies in Indonesia. GENP has started supplying biodiesel in Sabah with the roll-out of B7 programme in FY15 from its 300k MT p.a. biodiesel plant. 1Q15 volumes reached 2k MT per month, and it is expected to expand towards 4k MT per month when the roll-out is completed (by end of FY15). While the positive impact of B7 in Malaysia remains insignificant, Indonesia’s B15 programme would do more harm to GENP. The group currently does not have any biodiesel capacity in Indonesia; the US$50/MT CPO export levy works to lower Indonesia’s domestic CPO prices by roughly the same amount. Demand seasonality. As a major vegetable oil with 36% market share globally, palm oil is an important food staple. The other major vegetable oils are soybean oil with 27% market share, followed by rapeseed/canola oil and sunflower oil with 16% and 10% market shares, respectively. There is generally demand substitutability between vegetable oils (high price elasticity of demand), although certain vegetable oils are more suitable than others for certain applications. Relative to other oil crops, palm oil has the highest productivity per hectare (i.e. c.5 MT/ha), while soybean oil’s productivity is typically 0.5 MT/ha. Demand for palm oil is dominant in Asia where local festivities drive higher demand in certain months of the year, for example, Ramadan month; Chinese New Year, and Divali are typically high demand periods in Asia.

CPO price


CPO sales volume

PK sales volume

Average MYR/USD


2,377 2,413

2,2002,340

2,450

0

300

600

900

1,200

1,500

1,800

2,100

2,400

2013A 2014A 2015F 2016F 2017F

74,504

87,75292,457

110,043113,889

0

23,200

46,400

69,600

92,800

116,000

2013A 2014A 2015F 2016F 2017F

370,303399,394

431,782

481,235516,694

0

105,400

210,800

316,200

421,600

527,000

2013A 2014A 2015F 2016F 2017F

85,867 87,97995,362

104,031110,349

0

13,900

27,800

41,700

55,600

69,500

83,400

97,300

111,200

2013A 2014A 2015F 2016F 2017F

3.2 3.31

4.094.36 4.37

0.00

0.88

1.77

2.65

3.53

4.41

2013A 2014A 2015F 2016F 2017F

59


Company Guide

Genting Plantations

Balance Sheet:

Net cash position. With the exception of Mar15 financials, the group has consistently been in net cash position. As at end Sep15, GENP has USD debts amounting to US$328.5m, which represented debts incurred by its Indonesian subsidiaries to fund the ongoing capex programme there (interest expense and FX losses are partly capitalized). The group’s 4-quarter rolling cash conversion cycle has continued to remain negative, suggesting that suppliers are financing its receivable. Negative free cash flow in CY16F. GENP is forecast to temporarily book negative free cash flow of RM78m in FY16, primarily reflecting relatively constant capex outlay. CY17F free cash flow is forecast to rebound to RM39m. GENP’s cash balances should remain sufficient for any opportunistic acquisitions. Share Price Drivers:

Lacking near term catalysts. Among its upstream peers, GENP is trading at a relatively higher forward PE of 29x. We believe the market has incorporated valuation of the group’s property land bank – in addition to its plantation segment’s 27% earnings CAGR (CY15F-18F) potential from strong maturity pipeline in Indonesia and recovering CPO prices. Key Risks:

Volatility in CPO prices and USD exchange rate. Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from expansion of US shale gas would have adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect profitability of planters in general. Setback in expansion plans. Our forecasts are based on assumed hectarage for new planting and replanting. Any setback on these plans would negatively affect our valuation due to slower volume growth. Regulatory changes. Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/ Malaysian export taxes would impact demand for CPO/refined oils. Market sentiment. Changes in funds flow towards or out of emerging markets would affect valuations of plantation counters. Weather. Changes in rainfall pattern (caused by either El Nino or La Nina) would affect FFB yields with some lag time. Company Background

GENP is in the palm oil plantation business with over 220k ha of plantation in Malaysia and Indonesia and 9 palm oil mills currently. Its other/non-core businesses are biotechnology and property development.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.2

0.2

0.2

0.3

0.3

0.3

0.3

0.3

0.4

0.4

0.4

0.00

0.10

0.20

0.30

0.40

0.50

2013A 2014A 2015F 2016F 2017F


360.0

380.0

400.0

420.0

440.0

460.0

480.0

2013A 2014A 2015F 2016F 2017F


RM

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2013A 2014A 2015F 2016F 2017F

Avg: 31.7x

+1sd: 40.3x

+2sd: 48.8x

‐1sd: 23.1x

‐2sd: 14.6x13.1

18.1

23.1

28.1

33.1

38.1

43.1

48.1

53.1


(x)

Avg: 2.09x

+1sd: 2.26x

+2sd: 2.42x

‐1sd: 1.93x

‐2sd: 1.77x

1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9


(x)

60


Company Guide

Genting Plantations

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F CPO price (RM/MT) 2,377 2,413 2,168 2,600 2,810 Mature palm oil hectarage 74,504 87,752 92,457 110,043 113,889 CPO sales volume 370,303 399,394 429,765 484,121 527,458 PK sales volume 85,867 87,979 95,014 104,531 112,223 Average MYR/USD 3.20 3.31 4.08 4.34 4.34

Segmental Breakdown

FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (RMm) Plantation 1,080 1,170 1,163 1,491 1,719 Property 271 372 186 205 217 Others 33.7 101 0.0 0.0 0.0 Total 1,384 1,643 1,349 1,695 1,936 EBIT (RMm)

Plantation 299 393 222 380 502 Property 76.5 155 70.1 55.4 58.9 Others (110) (54.9) (52.2) (49.5) (47.1) Total 265 493 240 386 514 EBIT Margins (%) Plantation 27.6 33.6 19.1 25.5 29.2 Property 28.3 41.7 37.7 27.1 27.2 Total 19.1 30.0 17.8 22.8 26.6


FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 1,384 1,643 1,349 1,695 1,936 Cost of Goods Sold (858) (960) (954) (1,145) (1,232) Gross Profit 526 683 395 550 703 Other Opng (Exp)/Inc (267) (201) (205) (214) (239) Operating Profit 260 481 190 336 464 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 17.9 17.7 19.4 34.3 44.5 Net Interest (Exp)/Inc 22.8 20.7 (5.9) 26.9 21.3 Exceptional Gain/(Loss) 0.0 0.0 20.0 0.0 0.0 Pre-tax Profit 300 520 224 397 530 Tax (80.5) (136) (55.9) (99.3) (132) Minority Interest 7.93 (6.5) (2.8) (5.0) (6.7) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 228 377 165 293 391 Net Profit before Except. 228 377 145 293 391 EBITDA 314 545 260 417 559 Growth Revenue Gth (%) 12.2 18.7 (17.9) 25.7 14.2 EBITDA Gth (%) (22.7) 73.6 (52.3) 60.4 33.9 Opg Profit Gth (%) (28.5) 85.4 (60.5) 77.0 38.1 Net Profit Gth (Pre-ex) (%) (30.4) 65.6 (61.6) 102.3 33.4 Margins & Ratio Gross Margins (%) 38.0 41.6 29.3 32.5 36.3 Opg Profit Margin (%) 18.8 29.3 14.1 19.8 24.0 Net Profit Margin (%) 16.5 23.0 12.2 17.3 20.2 ROAE (%) 6.7 10.3 4.2 7.1 8.9 ROA (%) 4.8 7.2 2.7 4.3 5.4 ROCE (%) 4.2 7.3 2.5 3.9 5.1 Div Payout Ratio (%) 126.2 22.0 22.0 22.0 22.0 Net Interest Cover (x) NM NM 32.4 NM NM


61


Company Guide

Genting Plantations


FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 371 579 324 306 320 Cost of Goods Sold (227) (340) (209) (199) (220) Gross Profit 143 239 115 107 100 Other Oper. (Exp)/Inc (37.9) (49.7) (49.4) (41.2) (36.0) Operating Profit 104 177 65.7 60.2 68.6 Other Non Opg (Exp)/Inc 1.46 12.9 (4.2) 5.31 (4.5) Associates & JV Inc 4.23 4.11 6.02 4.28 5.28 Net Interest (Exp)/Inc (3.4) (3.3) (5.2) (8.9) (18.8) Exceptional Gain/(Loss) (1.5) (12.9) 4.16 (5.3) 4.50 Pre-tax Profit 105 177 66.6 55.6 55.1 Tax (35.5) (38.3) (18.6) (17.5) (16.0) Minority Interest 0.0 (1.4) 4.71 1.94 (1.4) Net Profit 69.3 138 52.7 40.0 37.7 Net profit bef Except. 70.7 151 48.5 45.3 33.2 EBITDA 104 177 65.7 60.2 68.6 Growth Revenue Gth (%) 2.8 56.3 (44.0) (5.8) 4.8 EBITDA Gth (%) 14.5 69.9 (62.8) (8.5) 14.0 Opg Profit Gth (%) 14.5 69.9 (62.8) (8.5) 14.0 Net Profit Gth (Pre-ex) (%) (17.5) 112.8 (67.8) (6.5) (26.8) Margins Gross Margins (%) 38.7 41.3 35.5 34.9 31.2 Opg Profit Margins (%) 28.0 30.5 20.3 19.7 21.4 Net Profit Margins (%) 18.7 23.8 16.2 13.1 11.8

Balance Sheet (RMm)

FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 1,110 1,339 1,587 1,854 2,109 Invts in Associates & JVs 61.9 62.4 81.9 116 161 Other LT Assets 2,348 2,570 2,595 2,693 2,764 Cash & ST Invts 931 1,177 2,050 1,900 1,845 Inventory 89.4 105 96.1 115 123 Debtors 234 265 204 255 290 Other Current Assets 79.8 72.6 71.0 72.1 72.8 Total Assets 4,854 5,590 6,684 7,005 7,365 ST Debt 6.57 27.4 27.4 27.4 27.4 Creditor 311 324 317 382 414 Other Current Liab 11.9 17.2 14.5 17.4 18.7 LT Debt 861 1,000 2,000 2,000 2,000 Other LT Liabilities 59.6 69.1 69.1 69.1 69.1 Shareholder’s Equity 3,426 3,898 3,998 4,246 4,566 Minority Interests 178 255 258 263 270 Total Cap. & Liab. 4,854 5,590 6,684 7,005 7,365 Non-Cash Wkg. Capital 80.0 102 39.6 42.2 53.2 Net Cash/(Debt) 63.0 149 22.3 (127) (182) Debtors Turn (avg days) 52.0 55.4 63.5 49.4 51.3 Creditors Turn (avg days) 129.3 129.3 132.3 119.9 127.6 Inventory Turn (avg days) 49.3 39.6 41.6 36.2 38.1 Asset Turnover (x) 0.3 0.3 0.2 0.2 0.3 Current Ratio (x) 4.0 4.4 6.7 5.5 5.1 Quick Ratio (x) 3.5 3.9 6.3 5.0 4.6 Net Debt/Equity (X) CASH CASH CASH 0.0 0.0 Net Debt/Equity ex MI (X) CASH CASH CASH 0.0 0.0 Capex to Debt (%) 45.3 39.6 20.0 21.5 20.4 Z-Score (X) 5.3 5.0 3.4 3.3 3.3


62


Company Guide

Genting Plantations


FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 300 520 224 397 530 Dep. & Amort. 54.6 64.1 70.1 80.9 94.3 Tax Paid (80.5) (136) (55.9) (99.3) (132) Assoc. & JV Inc/(loss) (17.9) (17.7) (19.4) (34.3) (44.5) Chg in Wkg.Cap. 18.1 (34.5) 63.6 (4.4) (11.6) Other Operating CF 57.6 95.7 (5.1) (8.9) (6.9) Net Operating CF 332 491 277 331 429 Capital Exp.(net) (393) (407) (405) (436) (413) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (7.6) 17.9 0.0 0.0 0.0 Net Investing CF (401) (389) (405) (436) (413) Div Paid (319) (23.1) (70.8) (44.7) (70.9) Chg in Gross Debt 159 138 1,000 0.0 0.0 Capital Issues 134 93.1 6.11 0.15 0.0 Other Financing CF (26.1) (64.7) 65.9 0.0 0.0 Net Financing CF (52.0) 144 1,001 (44.6) (70.9) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (120) 246 873 (149) (55.4) Opg CFPS (sen) 41.4 68.2 27.2 42.9 56.3 Free CFPS (sen) (8.0) 10.9 (16.4) (13.3) 1.99



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 26 Feb 15 10.38 12.50 BUY

2: 09 Mar 15 10.10 12.50 BUY

3: 28 May 15 9.95 12.00 BUY

4: 03 Jun 15 10.06 10.90 HOLD

5: 11 Jun 15 9.90 10.90 HOLD

6: 25 Jun 15 10.00 10.90 HOLD

7: 26 Aug 15 9.24 9.70 HOLD

8: 17 Sep 15 10.16 9.60 HOLD

9: 13 Oct 15 10.38 9.60 HOLD

10: 11 Nov 15 10.22 9.60 HOLD


Note : Share price and Target price are adjusted for corporate actions. 15: 10 Feb 16 10.92 9.60 HOLD

12

3

4

5

6

7

89

10

1112

13

14

15

8.46

8.96

9.46

9.96

10.46

10.96

11.46

11.96


RM

63

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:BC

HOLD Last Traded Price: RM3.75 (KLCI : 1,680.02) Price Target : RM3.55 (-5% downside) (Prev RM3.25) Potential Catalyst: Improvement in yields Where we differ: Higher cost assumptions than consensus Analyst Marvin KHOR +603 2604 3911 [email protected] Ben Santoso +65 6682 3707 [email protected]

What’s New FY16/17F/18F earnings adjusted -1%/+11%/+16%

on changes in CPO price forecasts

Production figures in 3QFY16 lower than expected as weather impact hit crops

TP rises to RM3.55 after the earnings adjustments

Price Relative

Forecasts and Valuation FY Mar (RM m) 2015A 2016F 2017F 2018F Revenue 668 726 868 969 EBITDA 188 240 291 351 Pre-tax Profit 89.4 146 191 246 Net Profit 90.4 113 147 190 Net Pft (Pre Ex.) 133 113 147 190 Net Pft Gth (Pre-ex) (%) 21.4 (15.3) 30.4 29.3 EPS (sen) 10.3 12.8 16.7 21.6 EPS Pre Ex. (sen) 15.1 12.8 16.7 21.6 EPS Gth Pre Ex (%) 11 (15) 30 29 Diluted EPS (sen) 10.3 12.8 16.7 21.6 Net DPS (sen) 5.13 6.39 8.33 10.8 BV Per Share (sen) 183 190 200 214 PE (X) 35.9 28.9 22.1 17.1 PE Pre Ex. (X) 24.5 28.9 22.1 17.1 P/Cash Flow (X) 13.9 24.3 17.2 13.6 EV/EBITDA (X) 19.0 15.2 12.5 10.2 Net Div Yield (%) 1.4 1.7 2.3 2.9 P/Book Value (X) 2.0 1.9 1.8 1.7 Net Debt/Equity (X) 0.2 0.2 0.2 0.2 ROAE (%) 6.0 6.9 8.5 10.4 Earnings Rev (%): (1) 11 16 Consensus EPS (sen): 13.1 18.2 21.0 Other Broker Recs: B: 3 S: 3 H: 7

Source of all data: Company, AllianceDBS Research, Bloomberg Finance L.P

Adequately priced Higher ASPs ahead but keep risks in view. We are now expecting CPO prices to average RM2,600/RM2,810 per MT in CY16/17F, as the supply and demand dynamics turn favourable. Nonetheless we still advise some caution on near- term earnings risks such as 1) more severe production impact, and 2) realising forex losses from some of its expiring US dollar-denominated debt. After revising our earnings, we view that incremental gains from higher CPO price are adequately priced in at current levels; maintain HOLD. Sizeable new maturities, but weather impact is palpable. Owing to aggressive new planting in earlier years, IJMP is expected to increase its Indonesian mature planted area to 33k ha in FY18, from 21k ha in FY15, or a 55% increase. This adds to its 23k ha of mature palms in Malaysia. Nonetheless, severe dryness seen in mid-to-late-2015 (associated with the El Nino) will likely impact production figures in late-2015 to early 2016, thus affecting 2HFY16 earnings. We forecast IJMP’s internal FFB production to see robust 9% CAGR across FY15-18F, led by bumper maturities at its Indonesian hectarage. Long-term growth gated by land bank. IJMP’s remaining unplanted land bank in Indonesia is relatively small at c.5k ha. The group intends to systematically replant old trees at its Sabah estates, where over 80% of its 23k ha planted area is of prime/past-prime age. Yet, not having sufficient economies of scale to move downstream, we believe increasing its land bank may be a next step for IJMP. A weak CPO price environment and relatively low net debt-to-total equity ratio of 0.2x could open doors to opportunistic acquisitions, in our view. Valuation:

Our DCF-based TP is raised to RM3.55, after factoring in CY16/17 CPO price forecasts of RM2,600/RM2,810 per MT. Key Risks to Our View:

IJMP’s share price is driven by CPO price expectations. Hence, a strong recovery in CPO prices (either data or regulatory-driven) could lift the share price above our fair value, and vice versa. A severe El Nino could also affect IJMP’s productivity, cash generation, and ultimately share price performance. At A Glance Issued Capital (m shrs) 881 Mkt. Cap (RMm/US$m) 3,302 / 771 Major Shareholders (%) IJM Corporation Bhd 55.2 Employees Provident Fund 12.1 Desa Plus Sdn Bhd 0.0




IJM Plantations Version 3 | Bloomberg: IJMP MK | Reuters: IJMP.KL Refer to important disclosures at the end of this report

69

89

109

129

149

169

189

209

2.5

2.7

2.9

3.1

3.3

3.5

3.7

3.9

4.1

4.3


Relative IndexRM

IJM Plantations (LHS) Relative KLCI INDEX (RHS)

64


Company Guide

IJM Plantations

WHAT’S NEW


We adjusted IJMP’s earnings to reflect changes in our forecasts; as we impute actual CPO prices and exchange rates in CY15 as well as revisions in our outlook from FY16F onwards. Changes in our forecasts are explained below:

FY16F/17F/18F earnings revised -0.8%/+11.2%/+16.4%. These changes are largely reflective of our revised CPO ASP assumptions, plus our lowering of yield expectations. Over the long term, our DCF-based TP is adjusted to RM3.55/share (raised from RM3.25) previously.

We adjusted CY16F/17F CPO price forecasts by 12%/16% to US$600/US$649, translating to RM2,600/RM2,810 per MT. In ringgit terms, this is an increase of 11%/15% over previous forecasts of RM2,340/RM2,450 per MT.

We trim our yield estimates on a per-hectare basis by a by 2%/1% in FY17/18F, to account for dry weather impact.

Based on 3QFY15 CPO production of 58k MT (-13% y-o-y), we expect earnings to come in at RM19-21m. While this brings 9MFY16 to around 80% of full-year forecasts, we are expecting some realised forex losses to be incurred in 4Q.

65


Company Guide

IJM Plantations


Earnings Drivers:

CPO prices. As a commodity producer, IJMP is a price-taker. Movements in international CPO prices would directly impact the group’s profitability. We recently adjusted our CPO price forecasts to account for the expected fall in Malaysian production due to the bouts of lack of rainfall observed in 2015. We are expecting CPO prices (FOB Pasir Gudang) to average US$600 (RM2,600) in CY16 – representing an increase of 20% y-o-y in ringgit terms from 2015. Growing mature hectarage. IJMP is on course for steady bump-ups in its mature hectarage to c.55.9k ha in FY18 from c.48.2k ha currently, mainly coming from maturities in its Indonesian estates. As at end-2015, its Indonesian plantation had c.24.1k ha of mature palms and c.9.1k immature – which are expected to gradually move into maturity over the next three years. In Malaysia, almost all of its palms (c.23k ha) are mature, with over 80% being in the prime age or older. Production volume. IJMP has four palm oil mills in Malaysia and two in Indonesia, with processing capacities of 180 MT per hour and 120 MT per hour respectively. Right now, a majority (>70% of FFB) processed are from its own plantations. CPO production is weighted more towards the Malaysian operations (c.70%), but we expect the Indonesian operations to gradually catch up as FFB volume picks up – and may even overtake if additional milling capacity is obtained there. Movement of the rupiah. In growing its Indonesian operations, IJMP has become more exposed to fluctuations of the Indonesian rupiah, as the bulk of its borrowings are taken up by subsidiaries there to support the young operations. Before the output follows through upon tree maturity, weakness in the rupiah against the US dollar will negatively impact group earnings. Seasonal demand. As a major vegetable oil with 36% global market share, palm oil is an important food staple. The next largest is soybean oil with 27% market share. These two vegetable oils are direct substitutes (suggesting high price elasticity of demand), although certain vegetable oils are more suitable than others for certain applications. Demand for palm oil is dominant in Asia, where local festivities result in seasonal demand during different months of the year. The Ramadan month, Chinese New Year, and Divali are typically high-demand periods in Asia.

CPO price


CPO sales volume

CPKO sales volume

Average USD/MYR


2,3852,289 2,240

2,5032,584

0

300

600

900

1,200

1,500

1,800

2,100

2,400

2014A 2015A 2016F 2017F 2018F

34,102

44,340

50,32552,883

55,898

0

11,400

22,800

34,200

45,600

57,000

2014A 2015A 2016F 2017F 2018F

225,865237,647

282,324

314,839

344,458

0

70,300

140,600

210,900

281,200

2014A 2015A 2016F 2017F 2018F

19,229

21,999

24,54826,782

28,854

0

3,600

7,200

10,800

14,400

18,000

21,600

25,200

28,800

2014A 2015A 2016F 2017F 2018F

3.243.39

4.23 4.27 4.34

0.00

0.88

1.75

2.63

3.50

4.38

2014A 2015A 2016F 2017F 2018F

66


Company Guide

IJM Plantations

Balance Sheet:

Reasonable gearing, but currency risks present. IJMP’s gross gearing level is manageable at 0.4x, and net gearing at 0.2x. Nonetheless we note that its entire borrowings are USD-denominated, mostly in term loans and c.10% in a short-term advance facility. While the maturity of its long-term debt is spread out relatively evenly over the next five years, we expect some realised forex losses with each maturing tranche if the ringgit does not recover against the USD. As IJMP has not fixed plans for aggressive new planting, we do not expect its financing requirements to increase significantly in the near term. Share Price Drivers:

CPO prices and performance will lead. As a pure upstream player, IJMP’s earnings are highly exposed to CPO price movements. Accordingly, its share price will have a positive correlation with those indicators. Key Risks:

Weak CPO prices. We have a bearish outlook for CPO prices in the near term, which could adversely affect group margins. Setback in expansion plans. Our forecasts are based on assumed hectarage for new planting and replanting. A setback to these plans would slow down volume growth and lower our valuation. Regulatory changes. Another hike in Indian import duty for refined oils or changes in the structure of Indonesian/Malaysian export taxes could hurt demand for CPO/refined oils. Market sentiments. Changes in fund flows towards or out of emerging markets would affect the valuations of plantation counters. Weather. Changes in rainfall pattern (caused by either El Nino or La Nina) would affect FFB yields later. Company Background

IJMP is a mid-cap upstream pure play operating in Sabah, Malaysia and East Kalimantan, Indonesia, with total plantable land bank of about 59,000 hectares.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.2

0.2

0.2

0.3

0.3

0.3

0.3

0.3

0.4

0.4

0.4

0.00

0.10

0.20

0.30

0.40

0.50

2014A 2015A 2016F 2017F 2018F


0.0

50.0

100.0

150.0

200.0

250.0

300.0

2014A 2015A 2016F 2017F 2018F


RM

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2014A 2015A 2016F 2017F 2018F

Avg: 23.5x

+1sd: 25.6x

+2sd: 27.7x

‐1sd: 21.4x

‐2sd: 19.3x

17.3

19.3

21.3

23.3

25.3

27.3

29.3

31.3


(x)

Avg: 1.94x

+1sd: 2.11x

+2sd: 2.28x

‐1sd: 1.77x

‐2sd: 1.6x

1.4

1.6

1.8

2.0

2.2

2.4

2.6


(x)

67


Company Guide

IJM Plantations

Key Assumptions

FY Mar 2014A 2015A 2016F 2017F 2018F CPO price (RM/MT) 2,385 2,289 2,240 2,503 2,584 Mature palm oil hectarage 34,102 44,340 50,325 52,883 55,898 CPO sales volume 225,865 237,647 282,324 314,839 344,458 CPKO sales volume 19,229 21,999 24,548 26,782 28,854 Average USD/MYR 3.24 3.39 4.23 4.27 4.34

Segmental Breakdown

FY Mar 2014A 2015A 2016F 2017F 2018F Revenues (RMm) CPO 547 547 615 755 851 CPKO 67.3 73.4 88.4 91.2 96.0 PK cake 8.89 7.51 15.1 14.6 15.6 Others 23.8 39.4 7.50 6.75 6.08 Total 647 668 726 868 969


FY Mar 2014A 2015A 2016F 2017F 2018F Revenue 647 668 726 868 969 Cost of Goods Sold (425) (428) (484) (571) (606) Gross Profit 222 239 242 297 363 Other Opng (Exp)/Inc (47.7) (98.6) (59.7) (68.3) (78.6) Operating Profit 174 141 182 229 284 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (44.0) (8.8) (35.7) (38.0) (38.0) Exceptional Gain/(Loss) (20.8) (42.5) 0.0 0.0 0.0 Pre-tax Profit 109 89.4 146 191 246 Tax (26.0) (7.1) (36.6) (47.7) (61.6) Minority Interest 5.55 8.13 2.92 3.81 4.93 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 88.6 90.4 113 147 190 Net Profit before Except. 109 133 113 147 190 EBITDA 224 188 240 291 351 Growth Revenue Gth (%) 33.0 3.2 8.7 19.6 11.6 EBITDA Gth (%) 11.4 (15.8) 27.3 21.3 20.7 Opg Profit Gth (%) 9.1 (19.1) 29.4 25.7 24.4 Net Profit Gth (Pre-ex) (%) (8.4) 21.4 (15.3) 30.4 29.3 Margins & Ratio Gross Margins (%) 34.3 35.8 33.3 34.2 37.5 Opg Profit Margin (%) 26.9 21.1 25.1 26.3 29.4 Net Profit Margin (%) 13.7 13.5 15.5 16.9 19.6 ROAE (%) 6.4 6.0 6.9 8.5 10.4 ROA (%) 4.1 3.8 4.3 5.4 6.7 ROCE (%) 6.3 5.6 5.4 6.5 7.9 Div Payout Ratio (%) 64.3 50.0 50.0 50.0 50.0 Net Interest Cover (x) 4.0 16.1 5.1 6.0 7.5


68


Company Guide

IJM Plantations


FY Mar 2Q2015 3Q2015 4Q2015 1Q2016 2Q2016 Revenue 174 183 133 142 145 Cost of Goods Sold (135) (140) (134) (110) (126) Gross Profit 38.9 43.7 (1.2) 31.9 19.4 Other Oper. (Exp)/Inc 5.30 6.20 5.05 2.41 (2.5) Operating Profit 44.2 49.9 3.82 34.3 16.8 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (1.8) (2.1) (3.1) (2.7) (3.2) Exceptional Gain/(Loss) (8.1) (9.1) (15.5) (5.7) (45.9) Pre-tax Profit 34.4 38.7 (14.8) 25.9 (32.3) Tax (8.5) (12.4) 21.4 (3.7) 17.7 Minority Interest 1.22 0.79 3.48 0.64 9.66 Net Profit 27.1 27.1 10.1 22.9 (4.9) Net profit bef Except. 35.2 36.2 25.6 28.6 41.0 EBITDA 44.2 49.9 3.82 34.3 16.8 Growth Revenue Gth (%) (2.3) 5.6 (27.6) 6.8 2.4 EBITDA Gth (%) (26.7) 12.8 (92.3) 797.4 (50.9) Opg Profit Gth (%) (26.7) 12.8 (92.3) 797.4 (50.9) Net Profit Gth (Pre-ex) (%) (19.7) 3.0 (29.4) 11.8 43.2 Margins Gross Margins (%) 22.4 23.8 (0.9) 22.5 13.3 Opg Profit Margins (%) 25.5 27.2 2.9 24.2 11.6 Net Profit Margins (%) 15.6 14.8 7.6 16.1 (3.4)

Balance Sheet (RMm)

FY Mar 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 822 884 1,036 1,097 1,156 Invts in Associates & JVs 0.0 128 128 128 128 Other LT Assets 880 1,052 978 981 983 Cash & ST Invts 344 375 357 358 389 Inventory 79.6 58.3 77.9 91.9 97.5 Debtors 92.9 63.0 84.7 101 113 Other Current Assets 7.22 9.84 9.35 8.88 8.44 Total Assets 2,226 2,570 2,671 2,766 2,874 ST Debt 138 211 224 224 224 Creditor 68.8 90.0 89.7 106 112 Other Current Liab 0.47 0.45 0.52 0.61 0.65 LT Debt 473 504 536 536 534 Other LT Liabilities 163 167 159 151 144 Shareholder’s Equity 1,384 1,608 1,675 1,766 1,882 Minority Interests (2.5) (9.9) (12.9) (16.7) (21.6) Total Cap. & Liab. 2,226 2,570 2,671 2,766 2,874 Non-Cash Wkg. Capital 110 40.8 81.8 95.7 106 Net Cash/(Debt) (267) (339) (403) (402) (368) Debtors Turn (avg days) 46.1 42.6 37.2 39.1 40.4 Creditors Turn (avg days) 69.9 76.1 76.9 70.1 73.8 Inventory Turn (avg days) 87.6 66.1 58.3 61.0 64.1 Asset Turnover (x) 0.3 0.3 0.3 0.3 0.3 Current Ratio (x) 2.5 1.7 1.7 1.7 1.8 Quick Ratio (x) 2.1 1.5 1.4 1.4 1.5 Net Debt/Equity (X) 0.2 0.2 0.2 0.2 0.2 Net Debt/Equity ex MI (X) 0.2 0.2 0.2 0.2 0.2 Capex to Debt (%) 32.2 39.5 18.9 16.6 16.9 Z-Score (X) 3.2 2.9 2.9 2.9 3.0


69


Company Guide

IJM Plantations


FY Mar 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 109 89.4 146 191 246 Dep. & Amort. 49.8 47.7 57.9 62.3 66.7 Tax Paid (26.0) (7.1) (36.6) (47.7) (61.6) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (7.3) 51.3 (34.5) (17.2) (12.9) Other Operating CF (0.3) 52.2 0.56 0.56 0.48 Net Operating CF 125 233 134 189 239 Capital Exp.(net) (197) (282) (144) (126) (128) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.86 (86.5) 2.58 2.58 2.58 Net Investing CF (196) (369) (141) (123) (125) Div Paid (56.3) (57.0) (45.2) (56.3) (73.4) Chg in Gross Debt 98.3 104 45.3 0.0 (2.6) Capital Issues (41.2) 190 0.0 0.0 0.0 Other Financing CF (9.7) (72.0) (8.2) (7.8) (7.4) Net Financing CF (8.8) 164 (8.1) (64.1) (83.4) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (79.4) 28.9 (15.5) 1.08 30.5 Opg CFPS (sen) 16.5 20.7 19.1 23.4 28.6 Free CFPS (sen) (8.9) (5.5) (1.1) 7.11 12.6



Source: AllianceDBS Research

S.No. DateClosing

PriceTarget Price

Rat ing

1: 02 Mar 15 3.70 3.80 HOLD

2: 27 May 15 3.46 3.80 HOLD

3: 01 Jul 15 3.53 3.60 HOLD

4: 26 Aug 15 3.20 3.45 HOLD

5: 17 Sep 15 3.18 3.25 HOLD

6: 13 Oct 15 3.50 3.25 HOLD

7: 30 Oct 15 3.51 3.25 HOLD

8: 11 Nov 15 3.51 3.25 HOLD

9: 25 Nov 15 3.45 3.25 HOLD

10: 10 Dec 15 3.55 3.25 HOLD

11: 12 Jan 16 3.52 3.25 HOLD12: 02 Feb 16 3.60 3.25 HOLD13: 10 Feb 16 3.61 3.25 HOLD


12

3

4

5

6

7

8

9

10

11

12

13

2.85

3.05

3.25

3.45

3.65

3.85


RM

70


BUY (Upgrade from Hold)

Last Traded Price: S$0.485 (STI : 2,657.57) Price Target : S$0.54 (11% upside) (prev: S$0.52) Potential Catalyst: Continued strength in CPO prices Where we differ: Higher than consensus FY17F earnings estimate on higher CPO price expectations Analyst Ben Santoso +65 6682 3707 [email protected]

What’s New FY15/16F/17F earnings adjusted by +26%/+16%/

+74% on changes in our key assumptions Expect higher 4Q15 earnings q-o-q on translation

FX gains, offset by weaker ASP and FFB yields TP raised to S$0.54 – offering 15% upside

potential; upgrade to BUY

Price Relative

Forecasts and Valuation FY Dec (Rpbn) 2014A 2015F 2016F 2017F Revenue 14,963 13,417 15,145 17,224 EBITDA 3,329 1,827 3,125 4,246 Pre-tax Profit 2,007 413 1,197 2,262 Net Profit 759 170 520 921 Net Pft (ex. BA gains) 734 170 520 921 Net Pft (Pre Ex.) 759 170 520 921 Net Pft Gth (Pre-ex) (%) 45.0 (77.6) 205.8 77.2 EPS (S cts) 5.56 1.24 3.81 6.75 EPS Pre Ex. (S cts) 5.56 1.24 3.81 6.75 EPS Gth Pre Ex (%) 45 (78) 206 77 Diluted EPS (S cts) 5.56 1.24 3.81 6.75 Net DPS (S cts) 0.0 0.0 0.0 0.0 BV Per Share (S cts) 107 108 72.0 78.7 PE (X) 8.8 39.1 12.8 7.2 PE Pre Ex. (X) 8.8 39.1 12.8 7.2 P/Cash Flow (X) 3.3 5.3 3.1 2.3 EV/EBITDA (X) 6.6 12.2 7.3 5.3 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 0.5 0.4 0.7 0.6 Net Debt/Equity (X) 0.3 0.3 0.3 0.3 ROAE (%) 5.3 1.2 4.2 9.0 Earnings Rev (%): 26 16 74 Consensus EPS (S cts): 2.39 4.30 6.25 Other Broker Recs: B: 5 S: 3 H: 2 Source of all data: Company, DBS Bank, Bloomberg Finance L.P

Boosted by upstream segment Upstream to drive growth. We expect IndoAgri’s FY16F and FY17F own FFB yields to drop to 16.8MT/ha and 16.6MT/ha, respectively from 17.6 MT/ha in FY15E, as we impute El Nino impact and dilution from significant jump in new maturities over the same period. Lower yields notwithstanding, upgrades in our CPO price forecasts now point to 42% EBITDA CAGR over the next two years, as CPO output continues to expand by 4% CAGR through to FY17F. Diversified and vertically integrated business model. Since its acquisition of London Sumatra (Lonsum) in Nov-07, IndoAgri has been self-sufficient in its CPO requirements, benefitting from higher upstream margins, while still enjoying sizable downstream market share (c.40-45% in branded cooking oil) in Indonesia. IndoAgri ventured into sugarcane in FY08 by acquiring Laju Perdana Indah and in FY13, a 50% stake in CMAA (Brazil) and 10% stake in RHI (Philippines). While this model allows the group to mitigate volatility from each commodity, it requires significant capex outlay to develop capacities and markets over the next several years. Embedding sustainability in internal operations. IndoAgri aims to expand its oil palm estates by 5-10k ha p.a. (dropping from 14-16k ha p.a. in 2010-2013) on c.30-40k ha plantable reserves remaining for oil palm with strict sustainability goals. The group intends to have all of its own estates RSPO-certified by end-FY16, and its smallholder estates under plasma scheme by end-FY19. IndoAgri also targets to have 100% sustainable palm oil sourcing by end-FY20. To achieve these aggressive targets, the group has instituted sustainability programmes in its operations. Valuation: We employed DCF methodology (FY17F base year) to arrive at IndoAgri’s fair value of S$0.54/share (Rf 8.8%, Rm 15.7%, β 1.2x, WACC 12.6%, TG 3%). Key Risks to Our View: IndoAgri’s share price is linearly driven by CPO prices, partly by refining margins, and to a certain extent, sugar prices. There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take failed to live up to our expectations (2.5m kl) this year. IndoAgri’s output could also fall below our expectations if there is a significant hit to its FFB yield in the aftermath of FY15 El Nino (vice versa). Changes in fund flows towards or out of emerging markets/ commodities would also affect valuations of planters. At A Glance Issued Capital (m shrs) 1,396 Mkt. Cap (S$bn/US$m) 0.68 / 484 Major Shareholders (%) PT Indofood Sukses Makmur (direct/indirect) 62.8




Indofood Agri Resources Version 4 | Bloomberg: IFAR SP | Reuters: IFAR.SI Refer to important disclosures at the end of this report

26

46

66

86

106

126

146

166

186

206

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8


Relative IndexS$

Indofood Agri Resources (LHS) Relative STI INDEX (RHS)

71


Company Guide

Indofood Agri Resources

WHAT’S NEW

Adjustments to impute new CPO price forecasts We adjusted IndoAgri’s earnings to reflect changes in our key assumptions. We imputed realised CPO and PK ASP (pegged to Astra Agro Lestari’s released 4Q15 auction prices) and actual exchange rates, together with revisions in our FY16 and FY17 CPO price outlook as well as reduced FFB yields. Changes in our forecasts are summarised below: We imputed 26% higher FY15E earnings (vs. previous

forecast). We peg 4Q15 CPO and PK ASP based on Astra Agro Lestari’s realised auction prices – which were lower than we had previously anticipated. We attribute this to declining refining margins, which may have reduced demand for CPO during the quarter.

We also raised CY16F/17F CPO price forecasts (US$/MT, FOB) by 12%/16% to US$600/US$649 – reflecting lower expected global CPO output and expansion in biodiesel usage in Indonesia – through deployment of CPO funds collected since Jul15. We have raised FY16F/17F earnings

by 16%/74% as a result, mainly reflecting swings in translation FX gains (losses).

Revisions in exchange rates in favour of a stronger IDR also had impacted our estimates for the group’s USD debt service costs and translation FX losses. While IndoAgri should book translation FX gains in 4Q15 – the group should still book a net loss for the year. This is expected to reverse into translation FX gains in FY16F and FY17F – based on stronger Rupiah expectations.

We upgrade our rating on the stock to BUY from Hold, as we believe the market has not fully priced in the prospective earnings recovery over the next two years.

Our FY17F earnings expectations are higher than consensus, as we believe CPO prices should maintain its current trajectory on limited substitution IndoAgriom soybean oil due to limited spare crushing capacity in Argentina

72


Company Guide



CPO price. As a commodity producer, IndoAgri is a price-taker. Movements in international CPO prices would directly impact group’s profitability. We currently expect CPO prices (FOB Pasir Gudang) to average US$600/MT (+7% y-o-y) in CY16 and US$649/MT in CY17 (+8% y-o-y). Flat FFB yields. As at end of FY14, IndoAgri’s oil palm trees (excluding smallholder estates) had an estimated average age of 11 years. Based on its age profile, approximately 40k ha will mature between FY14 and FY17F – representing c.22% of its own mature hectarage at end of FY14. This should keep the average age of its trees at 12.3 years by end-FY17F. Likewise, IndoAgri’s own FFB output is forecast to expand by 7% CAGR over the next three years. Geographically, the group’s Central and North Sumatra estates saw lagged adverse impact on FFB yields from dry weather in 1Q14 and again in 1Q15, while estates in Kalimantan and South Sumatra recorded declining yields in 1H15. On expectations of a pick-up in 4Q15 peak harvesting rounds, FFB yields should therefore average slightly lower in FY15, in our view, given the dilutive impact of maturing estates. Minimal impact from Indonesia’s biodiesel policy. IndoAgri has 1.425m MT of refining capacity – which should benefit from the Indonesian government’s biodiesel programme – against FY15F internal CPO output of 992k MT. Under the programme, Indonesian refiners have differentiated export levies between CPO (US$50/MT) and RBD Olein (US$30/MT). This spread should more than cover the refining cost. However, on a consolidated basis, the group would also suffer from lower domestic CPO selling prices. Because of the larger refining volumes, we estimate that the negative impact from the proposed policy would be insignificant on IndoAgri – unlike other pure upstream planters. But, persistent weakness in crude oil prices would continue to have negative short-term impact on its sugar and rubber ASPs. Demand seasonality. As a major vegetable oil with 36% global market share, palm oil is an important food staple. The other major vegetable oils are soybean oil, with 27% market share, followed by rapeseed/canola oil and sunflower oil with 16% and 10% market shares respectively. There is generally demand substitutability between vegetable oils (high price elasticity of demand), although certain vegetable oils are more suitable than others for certain applications. Relative to other oil crops, palm oil has the highest productivity per hectare (i.e. c.5 MT/ha), while soybean oil’s productivity is typically 0.5 MT/ha. Demand for palm oil is dominant in Asia, where local festivities drive higher demand in certain months of the year, for example, Ramadan month, Chinese New Year and Divali are typically high-demand periods in Asia.

CPO price (RM/MT)



Cooking oil sales vol. (MT)

Avg. USD/IDR rate


2.38 2.41

2.17

2.6

2.81

0.00

0.35

0.71

1.06

1.42

1.77

2.13

2.48

2.84

2013A 2014A 2015F 2016F 2017F

177185

199212

222

0

45

90

136

181

226

2013A 2014A 2015F 2016F 2017F

369

404 408422

440

0

90

179

269

359

448

2013A 2014A 2015F 2016F 2017F

539566

593621

650

0

82

164

246

328

410

493

575

657

2013A 2014A 2015F 2016F 2017F

10.8

11.9

13.4 13.6 13.7

0.0

2.8

5.5

8.3

11.1

13.8

2013A 2014A 2015F 2016F 2017F

73


Company Guide


Balance Sheet: High capex. We expect IndoAgri to incur capex outlay of Rp1.96-2.1tr p.a. over the next three years – principally to maintain its vast immature estates and to expand its palm oil milling capacity – as maturity rates ramp up. Based on our forecast, total interest-bearing debt will reach Rp9,745bn by end-FY15E – of which 29% is USD-denominated. This translates into a net debt-to-total equity ratio of 27%. Blended borrowing cost is estimated at 7.6% and interest cover should be 1.6x in FY15E. At the end of 3Q15, IndoAgri’s 4-quarter rolling cash conversion cycle stood at 40 days (vs. 41 days at end-Jun-15) – representing shorter receivable days. Negative free cash flow in FY15E. Despite drops in CPO, sugar and rubber prices and slightly lower FFB yields, we expect IndoAgri to incur negative free cash flow of Rp212bn in FY15E. This would be followed by a recovery into positive free cash flow of Rp254bn in FY16F – driven by higher sugarcane output, higher CPO prices, as well as sales volumes. Share Price Drivers: Execution is key. Historically, IndoAgri's quarterly results have, more often than not, underperformed consensus forecasts since 2013 (based on Bloomberg data). The counter’s P/BV ratio has likewise been trading below 1.0x since 2013 – thus underperforming its own subsidiary, Lonsum. For this reason, we believe execution is key to its share price performance. Key Risks: Volatility in CPO prices and USD exchange rates. Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from the expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect profitability of planters in general. Setback in expansion plans. Our forecasts are based on assumed hectarage for new planting and replanting. Any setback on these plans would negatively affect our valuation due to slower volume growth. Regulatory changes. Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact demand for CPO/refined oils. Market sentiment. Changes in fund flows in or out of emerging markets would affect valuations of plantation counters. Weather. Changes in rainfall patterns (caused by either El Nino or La Nina) would affect FFB yields with some lag time. Company Background Indofood Agri Resources is an integrated agribusiness company. The company and its subsidiaries are involved in sugarcane and oil palm cultivation and milling, research and development, and seed breeding. Indofood Agri Resources also refines, brands and markets its cooking oil, margarine, shortening and other palm oil products. As at end Sep-15, its planted area in Indonesia stood at 299,418 ha – of which 12,761 ha were sugarcane estates.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.3

0.4

0.4

0.5

0.5

0.6

0.6

0.00

0.10

0.20

0.30

0.40

0.50

2013A 2014A 2015F 2016F 2017F


0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

2013A 2014A 2015F 2016F 2017F


Rp

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2013A 2014A 2015F 2016F 2017F

Avg: 24x

+1sd: 34.1x

+2sd: 44.2x

‐1sd: 14x

‐2sd: 3.9x3.5

13.5

23.5

33.5

43.5

53.5


(x)

Avg: 0.83x

+1sd: 1.05x

+2sd: 1.27x

‐1sd: 0.61x

‐2sd: 0.39x0.3

0.5

0.7

0.9

1.1

1.3

1.5


(x)

74


Company Guide


Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F CPO price (RM/MT) 2.38 2.41 2.17 2.60 2.81 Mature oil palm 177 185 199 212 222 CPO sales volume (MT) 369 404 408 422 440 Cooking oil sales vol. (MT) 539 566 593 621 650 Avg. USD/IDR rate 10.9 11.9 13.4 13.6 13.7

Segmental Breakdown

FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (Rpbn) Plantations 4,850 5,863 5,053 5,576 6,265 Edible Oil & Fats 8,430 9,100 8,364 9,569 10,959 Total 13,280 14,963 13,417 15,145 17,224


FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 13,280 14,963 13,417 15,145 17,224 Cost of Goods Sold (10,076) (10,595) (10,292) (11,494) (12,431) Gross Profit 3,204 4,368 3,125 3,651 4,793 Other Opng (Exp)/Inc (1,506) (1,711) (2,035) (1,794) (1,910) Operating Profit 1,698 2,657 1,090 1,858 2,883 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc (5.9) (121) (105) (64.7) (61.1) Net Interest (Exp)/Inc (354) (529) (573) (596) (559) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 1,338 2,007 413 1,197 2,262 Tax (417) (679) (155) (353) (650) Minority Interest (398) (569) (87.5) (324) (691) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 523 759 170 520 921 Net Profit before Except. 523 759 170 520 921 Net Pft (ex. BA gains) 503 734 170 520 921 EBITDA 2,423 3,329 1,827 3,125 4,246 EBITDA (ex. BA gains) 2,420 3,390 1,931 2,791 3,909 Growth Revenue Gth (%) (4.1) 12.7 (10.3) 12.9 13.7 EBITDA Gth (%) (26.9) 37.4 (45.1) 71.1 35.9 Opg Profit Gth (%) (38.6) 56.5 (59.0) 70.4 55.2 Net Profit Gth (Pre-ex) (%) (51.6) 45.0 (77.6) 205.8 77.2 Margins & Ratio Gross Margins (%) 24.1 29.2 23.3 24.1 27.8 Opg Profit Margin (%) 12.8 17.8 8.1 12.3 16.7 Net Profit Margin (%) 3.9 5.1 1.3 3.4 5.3 ROAE (%) 3.8 5.3 1.2 4.2 9.0 ROA (%) 1.4 1.9 0.4 1.4 2.7 ROCE (%) 3.4 4.8 1.8 3.8 6.5 Div Payout Ratio (%) 0.0 0.0 0.0 0.0 0.0 Net Interest Cover (x) 4.8 5.0 1.9 3.1 5.2


75


Company Guide



FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 3,602 4,192 2,659 4,133 3,268 Cost of Goods Sold (2,685) (2,865) (1,920) (3,233) (2,447) Gross Profit 916 1,327 739 899 821 Other Oper. (Exp)/Inc (493) (487) (486) (608) (785) Operating Profit 424 840 253 292 36.5 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (145) (144) (127) (157) (148) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 279 697 126 135 (112) Tax (71.9) (292) (58.1) (75.7) (26.5) Minority Interest (79.4) (179) (32.9) (56.9) (15.4) Net Profit 127 225 35.0 2.06 (154) Net profit bef Except. 127 225 35.0 2.06 (154) EBITDA 682 1,018 436 550 324 Growth Revenue Gth (%) (9.9) 16.4 (36.6) 55.4 (20.9) EBITDA Gth (%) (25.1) 49.2 (57.2) 26.1 (41.1) Opg Profit Gth (%) (39.3) 98.3 (69.9) 15.5 (87.5) Net Profit Gth (Pre-ex) (%) (43.1) 77.0 (84.5) (94.1) (7,568.5) Margins Gross Margins (%) 25.4 31.7 27.8 21.8 25.1 Opg Profit Margins (%) 11.8 20.0 9.5 7.1 1.1 Net Profit Margins (%) 3.5 5.4 1.3 0.0 (4.7)


FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 9,781 11,027 11,896 12,700 13,426 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 20,986 22,316 22,057 14,595 14,412 Cash & ST Invts 3,803 3,586 3,218 2,734 3,119 Inventory 1,569 1,773 1,623 1,813 1,961 Debtors 1,140 1,056 985 1,111 1,264 Other Current Assets 427 397 387 434 480 Total Assets 37,705 40,155 40,165 33,387 34,662 ST Debt 4,490 4,749 4,622 4,607 4,607 Creditor 1,717 1,854 1,735 1,937 2,095 Other Current Liab 298 348 314 350 379 LT Debt 4,305 5,068 5,123 4,690 4,261 Other LT Liabilities 4,062 4,418 4,397 2,483 2,389 Shareholder’s Equity 13,996 14,629 14,799 9,819 10,740 Minority Interests 8,837 9,088 9,176 9,500 10,191 Total Cap. & Liab. 37,705 40,155 40,165 33,387 34,662 Non-Cash Wkg. Capital 1,121 1,024 946 1,071 1,230 Net Cash/(Debt) (4,992) (6,232) (6,528) (6,563) (5,748) Debtors Turn (avg days) 30.0 26.8 27.8 25.3 25.2 Creditors Turn (avg days) 64.9 66.5 69.3 65.9 66.9 Inventory Turn (avg days) 67.5 62.2 65.6 61.7 62.6 Asset Turnover (x) 0.4 0.4 0.3 0.4 0.5 Current Ratio (x) 1.1 1.0 0.9 0.9 1.0 Quick Ratio (x) 0.8 0.7 0.6 0.6 0.6 Net Debt/Equity (X) 0.2 0.3 0.3 0.3 0.3 Net Debt/Equity ex MI (X) 0.4 0.4 0.4 0.7 0.5 Capex to Debt (%) 37.5 26.3 21.5 22.3 22.1 Z-Score (X) 1.2 1.2 1.0 1.4 1.4


76


Company Guide



FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 1,338 2,007 413 1,197 2,262 Dep. & Amort. 731 792 841 1,332 1,425 Tax Paid (417) (679) (155) (353) (650) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 170 96.5 78.1 (124) (159) Other Operating CF (252) (143) 71.1 75.4 (15.3) Net Operating CF 1,508 2,014 1,247 2,127 2,862 Capital Exp.(net) (3,298) (2,577) (2,090) (2,070) (1,956) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (1,382) (667) 668 22.8 18.1 Net Investing CF (4,680) (3,245) (1,423) (2,047) (1,938) Div Paid 0.0 0.0 0.0 0.0 0.0 Chg in Gross Debt 2,015 1,023 (72.0) (448) (429) Capital Issues (148) 0.0 0.0 0.0 0.0 Other Financing CF 26.2 (9.6) (121) (115) (109) Net Financing CF 1,892 1,013 (193) (563) (539) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (1,279) (217) (368) (484) 385 Opg CFPS (Rp) 9.80 14.1 8.57 16.5 22.1 Free CFPS (Rp) (13.1) (4.1) (6.2) 0.42 6.64

Source: Company, DBS Bank Target Price & Ratings History

Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 02 Mar 15 0.70 0.77 HOLD

2: 30 Apr 15 0.73 0.77 HOLD

3: 10 Jul 15 0.68 0.69 HOLD

4: 10 Aug 15 0.58 0.56 HOLD

5: 17 Sep 15 0.49 0.47 HOLD

6: 13 Oct 15 0.54 0.47 HOLD

7: 27 Oct 15 0.60 0.47 HOLD

8: 30 Oct 15 0.57 0.52 HOLD

9: 11 Nov 15 0.55 0.52 HOLD

10: 10 Dec 15 0.48 0.52 HOLD

11: 12 Jan 16 0.48 0.52 HOLD12: 10 Feb 16 0.44 0.52 HOLD


1

2

3

4

5

6 78

9 10

1112

0.39

0.44

0.49

0.54

0.59

0.64

0.69

0.74

0.79


S$

77


FULLY VALUED

Last Traded Price: RM4.90 (KLCI : 1,680.02) Price Target : RM3.70 (-24% downside) (Prev RM3.40) Potential Catalyst: Weaker-than-expected 2QFY16 earnings Where we differ: Lower than consensus FY16F/17F earnings on conservative manufactruing segment margins Analyst Ben Santoso +65 6682 3707 [email protected]


changes in our key assumptions But cash flow may tighten in the short term due to

maturing debts TP rises to RM3.70 from RM3.40 previously

Price Relative

Forecasts and Valuation FY Jun (RM m) 2014A 2015A 2016F 2017F Revenue 11,911 11,621 14,689 15,061 EBITDA 2,501 958 1,735 2,147 Pre-tax Profit 3,924 457 1,231 1,610 Net Profit 3,373 168 842 1,189 Net Pft (Pre Ex.) 1,486 168 842 1,189 Net Pft Gth (Pre-ex) (%) (31.4) (88.7) 400.6 41.3 EPS (sen) 52.8 2.63 13.2 18.6 EPS Pre Ex. (sen) 23.2 2.63 13.2 18.6 EPS Gth Pre Ex (%) (31) (89) 401 41 Diluted EPS (sen) 22.9 2.59 13.0 18.3 Net DPS (sen) 19.8 8.86 6.54 9.24 BV Per Share (sen) 93.8 78.6 84.0 94.6 PE (X) 9.3 186.3 37.2 26.3 PE Pre Ex. (X) 21.1 186.3 37.2 26.3 P/Cash Flow (X) 9.8 93.2 144.9 24.9 EV/EBITDA (X) 14.0 38.0 21.3 17.1 Net Div Yield (%) 4.0 1.8 1.3 1.9 P/Book Value (X) 5.2 6.2 5.8 5.2 Net Debt/Equity (X) 0.6 0.9 1.0 0.8 ROAE (%) 34.3 3.0 16.1 20.7 Earnings Rev (%): 0 18 11 Consensus EPS (sen): N/A 16.9 19.3 Other Broker Recs: B: 3 S: 12 H: 10


Richly valued Headwinds in manufacturing. Indonesia’s biodiesel programme, together with Malaysia’s zero export tax rate, will continue to depress Malaysia’s refining margins in FY16F, in our view. Therefore contribution from IOI’s manufacturing segment would therefore have to be supported by its specialty fats and oleochemicals units. Exposed to USD strength. The ringgit’s depreciation has negative implications for IOI, given the significant USD borrowing exposure. As at end-Dec 15, IOI had c.US$1,643m of USD-denominated debts (including US$600m guaranteed notes @4.375% due 2022 and US$183m swapped JPY term loan due 2037-2038). Net of FX gains from USD cash and cash equivalents, the group may incur FY16 FX losses of RM284m (realised and unrealised). This translates into FY16F net debt-to-total equity ratio of 98% and debt/EBITDA ratio of 3.9x – higher than peers – despite decent quick ratio of 1.4x. Lacking growth catalysts. Between FY15 and FY18F, we expect IOI to book flat FFB volume growth (including contribution from Indonesian estates) – sub-par relative to average Malaysia peers under our coverage. This makes the group’s earnings contribution from its plantations segment (accounting for c.68% of FY15 EBIT ex. translation FX losses) more exposed to volatility in CPO price movements and weather vagaries – relative to higher-growth peers. Valuation: We employed DCF methodology (FY17F base year; WACC 8.3%, TG 3%) to derive IOI’s target price of RM3.70/share. Our FULLY VALUED rating is maintained. We believe IOI’s earnings in subsequent quarters remain at risk from dry weather and competition from Indonesian refiners. Changes in fund flows towards or out of emerging markets/commodities would affect valuations of plantation counters. Key Risks to Our View IOI’s share price is linearly driven by downstream palm oil margins in addition to CPO price expectations. There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take fails to live up to our expectations (2.5m kl) this year. As IOI is an index component, changes to its weightings would also make it vulnerable to swings significantly above or below our TP. At A Glance Issued Capital (m shrs) 6,301 Mkt. Cap (RMm/US$m) 30,875 / 7,321 Major Shareholders (%) Vertical Capacity Sdn Bhd 46.6 Employees Provident Fund 9.5 First State Investments 0.0




IOI Corporation Version 3 | Bloomberg: IOI MK | Reuters: IOIB.KL Refer to important disclosures at the end of this report

69

89

109

129

149

169

189

209

2.9

3.4

3.9

4.4

4.9

5.4


Relative IndexRM

IOI Corporation (LHS) Relative KLCI INDEX (RHS)

78


Company Guide

IOI Corporation

WHAT’S NEW

Forecasts, TP and rating adjustments We adjusted IOI’s earnings to reflect changes in our key assumptions. We imputed realised CPO and PK production volumes and exchange rates in FY15; together with revisions in our FY16 and FY17 CPO price outlook and FFB yields. Changes in our forecasts are summarised below: We imputed 18% higher FY16F earnings (vs. previous

forecast) after imputing realised 1HFY16 production numbers and ASP.

We raised CY16F/17F CPO price forecasts (US$/MT, FOB) by 12%/16% to US$600/US$649 – reflecting lower expected global CPO output and expansion in biodiesel usage in Indonesia – through deployment of CPO fund collected since Jul15. FY16F/17F earnings were accordingly revised by +18%/11%

We reiterate our Fully Valued call on the stock; as lofty valuation now offer significant downside potential to our revised TP.

Our FY17F earnings expectations are higher than consensus; as we believe CPO prices should maintain its current trajectory on limited substitution from soybean oil due to limited spare crushing capacity in Argentina

Highlights from 2QFY16 results

Underlying 2QFY16 net profit declined 10% y-o-y IOI Corporation (IOI) reported 2QFY16 earnings of RM725m (reversing from 1QFY16 net loss of RM718m). However stripping out translation FX gains of RM227m and fair value gains on derivative financial instruments of RM261m, IOI’s underlying net profit came in at RM237m (-10% y-o-y; -25% q-o-q) – representing c.23% (vs. 25% historical average) of our current FY16 underlying profit forecast of RM1,053m (ex. FX losses) – slightly below on annualised basis. An interim DPS of 3.5 sen was declared (payable18 Mar16). Better-than-expected plantation offset by manufacturing Despite lower FFB output, IOI’s Plantations segment reported 2QFY16 EBIT (excluding associates and fair value gains/losses on derivative financial instruments) of RM302m (+14% y-o-y; +26% q-o-q) – beating our expectations of RM236m. The strong results were driven by improved performance of its Indonesian estates and y-o-y increase in realised PK prices.

Realised CPO ASP for the quarter came in at RM2,128/MT – representing 99% of average spot price; while CPO output eased 3% q-o-q to 209,932 MT. Reflecting the dry weather in Sabah since mid CY15, we estimate IOI’s FFB yield had come off 7% q-o-q to 6.3 MT/ha. The group’s manufacturing segment was less stellar however; with reported EBIT (excluding associates and fair value gains/losses on derivative financial instruments) coming in at RM111m (-50% y-o-y; -36% q-o-q). The poor performance was primarily due to lower margin from oleochemicals and specialty fats sub-segments. 2QFY16 Manufacturing EBIT margin (before changes in fair value on derivative financial instruments) consequently dropped to 3.8% from 5.7% in the preceding quarter. We understand the flood of new oleochemicals capacity built in Indonesia over the last few years had diluted margins globally. Net gearing remained high at 115% At the end of Dec 15, the USD/MYR exchange rate settled at RM4.38, which translated the group’s predominantly USD-denominated debts to RM7.4bn (-3% q-o-q) and net debt/total equity ratio of 115% – down from 140% at the end of Sep15, thanks to the stronger ringgit. We note that the group’s short-term debts had spiked 173% q-o-q to RM2,196m as at 30 Dec15 – on current maturity of some USD term loans. The group’s cash level sequentially increased by 10% to RM1.7bn; while the rolling cash-conversion cycle slightly expanded to 80 days (from 77 days in previous quarter) on longer inventory days. Outlook Beware of tighter cash flow While the group’s cash balance should cover interim dividend payment of c.RM220m and current maturity in 2HFY16, we believe the group may need to roll over some of the existing debts. Facing headwinds in refining With refining margins turning negative in Jan16 (subject to recovery in end-product prices), we expect the group’s manufacturing segment to rely more on oleochemicals and specialty fats to augment profitability for the remainder of the year. We also expect both FX gains and fair value gains in derivative financial instruments in 3QFY16F – given the ringgit’s recovery to date. However, they do not impact the group’s cash flow.

79


Company Guide

IOI Corporation

CRITICAL DATA POINTS TO WATCH Earnings Drivers: CPO price. IOI is a vertically integrated producer, processor and merchandiser of palm oil products. More than half of its EBIT comes from sales of CPO and PK, while a third comes from downstream products. Movements in CPO prices will affect the group’s plantations segment profits more so than its manufacturing segment. With rising contribution from its 31% associate Bumitama Agri, IOI’s earnings are therefore increasingly influenced by CPO price movements. Volume output. We estimate IOI’s trees to have a weighted age of 13 years as at end-FY15. This categorises the group’s age profile as prime. Through consistent replanting in Malaysia and new planting in Indonesia, IOI should see c.25.2k ha maturing in CY16F through CY18F – representing c.13% of the group’s mature hectarage as at end-Jun15. This would also maintain IOI’s weighted age at 12.9 years by end-FY18F. Yet, FFB volume growth is likely to remain flat over the next three years, as rising contribution from Indonesia would be offset by lost output from replanted areas in Malaysia. We have not imputed any impact from El Nino conditions in our forecasts, although East Sabah and Kalimantan could see more dry conditions than other areas. Should a severe rainfall deficit occur in 2HCY15, the impact on FFB yields would only occur 11-12 months thereafter. Manufacturing segment margins. Indonesia’s B15 export tax levy would result in lower CPO ASP relative to its Malaysian counterparts. This means rising contribution from its Indonesian estates would offer less compensation to lower output from replanting in Malaysia. The levy also works to give Indonesian refiners higher margins, due to the differentiated levies between CPO and its downstream products. At RM2,250 or below, Malaysian export tax rates remain at zero. We believe this gives Malaysian refiners such as IOI a disadvantage through higher feedstock costs compared to its Indonesian counterparts. Prospective increase in biodiesel production in Indonesia may also cause oversupply in glycerine (by-product of biodiesel output) and thinner margins in IOI’s Oleochemicals unit. For this reason, IOI’s earnings should be driven by specialty fats units, higher contribution from Bumitama Agri, as well as cost containment. Exposure to developed markets. IOI’s consolidated revenue is globally distributed, with Malaysia contributing only 30% in FY14. Europe accounted for a sizeable 33%, while the US contributed 11% of revenue and the rest of Asia accounted for 23%. While the largest palm oil consumers are in Asia, IOI’s downstream products are less associated with Asia’s demand seasonality compared to other planters. This means prospective economic recoveries in the developed markets should also improve IOI’s earnings outlook. Yet, we should also note that competing processors such as Wilmar, KL Kepong and Emery are also vying for the same markets – which would make the prospective recovery not unique to IOI. We also note that IOI’s USD borrowing exposure would be a burden should USD interest rates rise further.

CPO price (RM/MT)



Oleochem revenue (RMm)

Average MYR/USD


2,621

2,3952,307 2,270

2,395

0

300

600

900

1,200

1,500

1,800

2,100

2,400

2013A 2014A 2015A 2016F 2017F

142,075150,482 149,568 150,389 153,336

0

31,300

62,600

93,900

125,200

2013A 2014A 2015A 2016F 2017F

708,028751,536

781,625 783,104 784,096

0

160,000

320,000

480,000

640,000

2013A 2014A 2015A 2016F 2017F

2,496 2,5492,670 2,693 2,728

0

300

600

900

1,200

1,500

1,800

2,100

2,400

2,700

2013A 2014A 2015A 2016F 2017F

3.093.31

3.62

4.34 4.37

0.00

0.88

1.76

2.65

3.53

4.41

2013A 2014A 2015A 2016F 2017F

80


Company Guide

IOI Corporation

Balance Sheet:

High USD debt exposure. As at end-Dec15, the group had exposure of US$1,543m in USD-denominated debts (ex derivative contracts). Based on our forecast ringgit exchange rate, we expect the group’s net gearing ratio to settle at 93% by end of Jun16, thereafter declining towards 79% by end-Jun17F. The group is forecast to have FY16 debt/EBITDA ratio of 4.1x and quick ratio of 1.5x. Positive free cash flow generation. Notwithstanding this, IOI is expected to generate FY16F-18F ROE in excess of WACC. The group’s free cash flow is in no danger of turning negative either, as the group’s capex is small relative to its size. We expect IOI to undertake c.RM437m capex outlay in FY16F and RM456m in FY17F – primarily on maintenance capex. Share Price Drivers:

Expensive, with no catalysts. The stock is currently trading above +1SD forward PE and over +1SD forward P/BV. While we see earnings recovery in FY16F, we believe this has been more than priced in. Amid global soybean oversupply, persistently weak crude oil prices, potential adverse El Nino impact, and planned export levies, we believe the share price risk remains to the downside. Key Risks:

Volatility in CPO prices and USD exchange rates Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect profitability of planters in general. Setback to expansion plans Our forecasts are based on assumed hectarage for new planting and replanting. Any setback to these plans would negatively affect our valuation due to slower volume growth. Regulatory changes Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact demand for CPO/refined oils. Weather Changes in rainfall pattern (caused by either El Nino or La Nina) would affect FFB yields with some lag time. Company Background

IOI is an integrated plantation company, with one of the highest yields in Malaysia and one of the largest oleochemical manufacturing capacities in the world.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.5

0.6

0.7

0.8

0.9

1.0

1.1

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2013A 2014A 2015A 2016F 2017F


0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

2013A 2014A 2015A 2016F 2017F


RM

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2013A 2014A 2015A 2016F 2017F

Avg: 41.4x

+1sd: 80x

+2sd: 118.5x

‐1sd: 2.8x

-32.2

17.8

67.8

117.8

167.8

217.8


(x)

Avg: 3.51x

+1sd: 5.18x

+2sd: 6.86x

‐1sd: 1.84x

‐2sd: 0.17x0.1

1.1

2.1

3.1

4.1

5.1

6.1

7.1


(x)

81


Company Guide

IOI Corporation

Key Assumptions

FY Jun 2013A 2014A 2015A 2016F 2017F CPO price (RM/MT) 2,621 2,395 2,291 2,384 2,705 Mature palm oil hectarage 142,075 150,482 149,568 150,389 153,336 CPO sales volume (MT) 708,028 751,536 781,625 775,696 768,634 Oleochem revenue (RMm) 2,496 2,549 2,679 2,609 2,620 Average MYR/USD 3.09 3.25 3.62 4.28 4.33

Segmental Breakdown

FY Jun 2013A 2014A 2015A 2016F 2017F Revenues (RMm) Plantation 143 260 186 363 356 Resource-based 11,985 11,585 11,338 14,227 14,603 Others 71.0 65.3 97.4 99.4 101 Total 12,199 11,911 11,621 14,689 15,061 EBIT (RMm)

Plantation 980 1,086 915 1,027 1,103 Resource-based 580 760 398 542 549 Others 985 271 (701) (249) 6.95 Total 2,545 2,117 612 1,320 1,659 EBIT Margins (%) Plantation 48.9 49.3 45.3 46.4 46.4 Resource-based 4.8 6.6 3.5 3.8 3.8 Total 20.9 17.8 5.3 9.0 11.0


FY Jun 2013A 2014A 2015A 2016F 2017F Revenue 12,199 11,911 11,621 14,689 15,061 Cost of Goods Sold (9,988) (9,227) (9,262) (12,559) (12,570) Gross Profit 2,211 2,684 2,359 2,130 2,491 Other Opng (Exp)/Inc (492) (884) (1,012) (810) (832) Operating Profit 2,545 2,117 612 1,320 1,659 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 193 160 113 156 198 Net Interest (Exp)/Inc (227) (240) (268) (244) (246) Exceptional Gain/(Loss) 0.0 1,887 0.0 0.0 0.0 Pre-tax Profit 2,511 3,924 457 1,231 1,610 Tax (320) (534) (285) (379) (409) Minority Interest (24.5) (16.7) (4.3) (10.7) (11.6) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 2,167 3,373 168 842 1,189 Net Profit before Except. 2,167 1,486 168 842 1,189 EBITDA 2,986 2,501 958 1,735 2,147 Growth Revenue Gth (%) (22.0) (2.4) (2.4) 26.4 2.5 EBITDA Gth (%) 7.6 (16.3) (61.7) 81.2 23.7 Opg Profit Gth (%) 7.5 (16.8) (71.1) 115.7 25.7 Net Profit Gth (Pre-ex) (%) 21.1 (31.4) (88.7) 400.6 41.3 Margins & Ratio Gross Margins (%) 18.1 22.5 20.3 14.5 16.5 Opg Profit Margin (%) 20.9 17.8 5.3 9.0 11.0 Net Profit Margin (%) 17.8 28.3 1.4 5.7 7.9 ROAE (%) 16.5 34.3 3.0 16.1 20.7 ROA (%) 9.2 17.2 1.2 6.0 7.9 ROCE (%) 10.2 10.1 1.7 7.1 9.1 Div Payout Ratio (%) 45.7 37.7 339.0 50.0 50.0 Net Interest Cover (x) 11.2 8.8 2.3 5.4 6.7


82


Company Guide

IOI Corporation


FY Jun 2Q2015 3Q2015 4Q2015 1Q2016 2Q2016 Revenue 2,909 2,777 2,942 3,087 2,969 Operating Profit 103 (5.3) 228 (649) 899 Associates & JV Inc 38.9 23.1 29.8 39.6 19.5 Net Interest (Exp)/Inc (47.4) (127) (54.3) (44.8) (41.5) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 94.6 (109) 203 (654) 877 Tax (69.1) (80.3) (47.5) (62.4) (140) Minority Interest (6.0) 1.60 4.00 (2.6) (12.0) Net Profit 19.5 (188) 160 (719) 725 Net profit bef Except. 19.5 (188) 160 (719) 725 EBITDA 202 77.4 314 (560) 1,003 Growth Revenue Gth (%) (2.8) (4.5) 6.0 4.9 (3.8) EBITDA Gth (%) (51.8) (61.7) 305.4 nm nm Opg Profit Gth (%) (69.5) nm nm nm nm Net Profit Gth (Pre-ex) (%) (91.5) (1,064.1) (185.1) (549.7) (200.8) Margins Gross Margins (%) 100.0 100.0 100.0 100.0 100.0 Opg Profit Margins (%) 3.5 (0.2) 7.7 (21.0) 30.3 Net Profit Margins (%) 0.7 (6.8) 5.4 (23.3) 24.4

Balance Sheet (RMm)

FY Jun 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 5,294 6,410 6,650 6,760 6,849 Invts in Associates & JVs 806 920 974 1,132 1,331 Other LT Assets 574 616 684 684 685 Cash & ST Invts 2,969 3,988 1,789 1,675 2,079 Inventory 1,754 2,155 2,083 2,873 2,876 Debtors 1,104 1,102 1,106 1,395 1,431 Other Current Assets 11,406 142 148 150 151 Total Assets 23,907 15,332 13,434 14,669 15,402 ST Debt 219 2,454 813 813 813 Creditor 790 941 925 1,264 1,266 Other Current Liab 1,363 102 128 128 128 LT Debt 7,105 5,069 5,836 6,366 6,396 Other LT Liabilities 499 533 484 494 504 Shareholder’s Equity 13,651 6,037 5,059 5,403 6,084 Minority Interests 280 196 189 200 212 Total Cap. & Liab. 23,907 15,332 13,434 14,669 15,402 Non-Cash Wkg. Capital 12,111 2,356 2,285 3,026 3,064 Net Cash/(Debt) (4,355) (3,536) (4,860) (5,504) (5,130) Debtors Turn (avg days) 41.8 33.8 34.7 31.1 34.2 Creditors Turn (avg days) 35.6 35.1 37.7 32.5 37.6 Inventory Turn (avg days) 79.9 79.2 85.6 73.5 85.4 Asset Turnover (x) 0.5 0.6 0.8 1.0 1.0 Current Ratio (x) 7.3 2.1 2.7 2.8 3.0 Quick Ratio (x) 1.7 1.5 1.6 1.4 1.6 Net Debt/Equity (X) 0.3 0.6 0.9 1.0 0.8 Net Debt/Equity ex MI (X) 0.3 0.6 1.0 1.0 0.8 Capex to Debt (%) 6.2 17.7 6.9 5.2 5.3 Z-Score (X) 3.9 3.9 3.9 3.9 4.0


83


Company Guide

IOI Corporation


FY Jun 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 2,511 3,924 457 1,231 1,610 Dep. & Amort. 248 224 232 260 290 Tax Paid (320) (534) (285) (379) (409) Assoc. & JV Inc/(loss) (193) (160) (113) (156) (198) Chg in Wkg.Cap. 1,022 (248) 50.9 (739) (36.8) Other Operating CF 495 (10.2) (6.2) (1.5) (1.5) Net Operating CF 3,764 3,196 336 216 1,255 Capital Exp.(net) (458) (1,335) (457) (370) (380) Other Invts.(net) 1,319 (1.0) 0.60 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 5,364 (35.8) (70.8) (2.4) (2.5) Net Investing CF 6,226 (1,372) (527) (373) (382) Div Paid (991) (8,615) (1,049) (495) (508) Chg in Gross Debt (797) 199 (875) 531 29.5 Capital Issues 61.7 (2,362) (81.3) (2.5) 0.0 Other Financing CF (9,654) 9,971 (2.7) 9.69 9.88 Net Financing CF (11,380) (806) (2,008) 42.8 (469) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (1,391) 1,018 (2,199) (114) 404 Opg CFPS (sen) 42.9 53.9 4.46 14.9 20.2 Free CFPS (sen) 51.7 29.1 (1.9) (2.4) 13.7



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 16 Feb 15 4.74 4.15 FULLY VALUED

2: 05 Mar 15 4.66 4.15 FULLY VALUED

3: 11 Mar 15 4.54 4.15 FULLY VALUED

4: 06 Apr 15 4.60 4.15 FULLY VALUED

5: 15 May 15 4.25 4.15 FULLY VALUED

6: 03 Jun 15 4.10 3.65 HOLD

7: 10 Aug 15 4.05 3.80 HOLD

8: 25 Aug 15 3.95 3.20 FULLY VALUED

9: 11 Sep 15 4.00 3.20 FULLY VALUED

10: 17 Sep 15 4.12 3.20 FULLY VALUED

11: 13 Oct 15 4.36 3.20 FULLY VALUED12: 11 Nov 15 4.28 3.20 FULLY VALUED13: 17 Nov 15 4.15 3.40 FULLY VALUED14: 10 Dec 15 4.21 3.40 FULLY VALUED

Note : Share price and Target price are adjusted for corporate actions. 15: 12 Jan 16 4.34 3.40 FULLY VALUED16: 02 Feb 16 4.62 3.40 FULLY VALUED17: 10 Feb 16 4.54 3.40 FULLY VALUED

1

2

3

4

56

78

9

10

1112

13

1415

16

17

3.62

3.82

4.02

4.22

4.42

4.62

4.82

5.02


RM

84


HOLD Last Traded Price: RM24.16 (KLCI : 1,680.02) Price Target : RM23.85 (-1% downside) (Prev RM20.00) Where we differ: FY16F and FY17F earnings are above consensus on higher CPO price forecasts Analyst Ben Santoso +65 6682 3707 [email protected]


changes in our key assumptions Amid poor refining margins, Oleochemicals are

expected to support manufacturing margin DCF-based TP raised to RM23.85 as we roll

forward our base year to FY17F

Price Relative

Forecasts and Valuation FY Sep (RM m) 2015A 2016F 2017F 2018F Revenue 13,650 13,941 15,550 15,644 EBITDA 1,638 1,978 2,172 2,162 Pre-tax Profit 1,135 2,012 1,698 1,662 Net Profit 870 1,653 1,295 1,263 Net Pft (Pre Ex.) 870 1,167 1,295 1,263 Net Pft Gth (Pre-ex) (%) (11.8) 34.2 10.9 (2.5) EPS (sen) 81.5 155 121 118 EPS Pre Ex. (sen) 81.5 109 121 118 EPS Gth Pre Ex (%) (12) 34 11 (2) Diluted EPS (sen) 81.5 155 121 118 Net DPS (sen) 48.9 92.9 72.8 71.0 BV Per Share (sen) 906 998 1,033 1,079 PE (X) 29.5 15.5 19.8 20.3 PE Pre Ex. (X) 29.5 22.0 19.8 20.3 P/Cash Flow (X) 54.9 10.4 17.3 14.7 EV/EBITDA (X) 17.5 13.9 12.7 12.6 Net Div Yield (%) 2.0 3.9 3.0 3.0 P/Book Value (X) 2.7 2.4 2.3 2.2 Net Debt/Equity (X) 0.2 0.1 0.1 0.1 ROAE (%) 10.0 16.3 11.9 11.2 Earnings Rev (%): 63 21 3 Consensus EPS (sen): 98.1 110 116 Other Broker Recs: B: 4 S: 5 H: 17


Fairly valued Challenges ahead. Between FY15 and FY18F, we expect Kuala Lumpur Kepong (KLK) to book 2% CAGR in CPO volume – sub-par relative to average Malaysia peers under our coverage. This makes earnings contribution from its plantations segment (accounting for c.63% of FY15 EBIT) more exposed to volatility in CPO price movements and weather vagaries relative to higher-growth peers. While KLK’s manufacturing segment accounted for c.18% of FY15 EBIT, its contribution has been declining since 2013 peak despite capacity expansions and acquisitions. Against the backdrop of persistent weakness in crude oil prices and Indonesia’s biodiesel export levies, we believe it would be tough for KLK to maintain margins at its manufacturing sub-segments. Tied to Asian demand. Persistent weakness in crude oil prices and China’s decelerating GDP remain the biggest challenges. Based on its revenue make-up, KLK sells more of its products to Asia than any other region. Ignoring re-exports, we believe a deceleration of Asia’s economic growth would remain a near-term concern for the group. Established, but lacking growth drivers. KLK is one of the signatories of the Sustainable Palm Oil Manifesto (launched in CY14) – which aims to tackle deforestation by establishing the High Carbon Stock (HCS) threshold. This threshold was established in 11 Dec 15; we expect KLK to resume planting of 3-5k ha p.a. But, given its size (c.209k ha), volume growth is not an earnings driver for the group. Valuation: Our DCF-based TP for the counter is estimated at RM20.00 (WACC 9.5%; TG 3%). Our HOLD rating is maintained for the counter in view of its 2.5% dividend yield. Key Risks to Our View: KLK’s share price is linearly driven by manufacturing margins on top of CPO price expectations. There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take fails to live up to our expectations (2.5m kl) this year. As KLK is an index component, changes to its weightings would also make it vulnerable to swings significantly above or below our TP. At A Glance Issued Capital (m shrs) 1,065 Mkt. Cap (RMm/US$m) 25,730 / 6,061 Major Shareholders (%) Batu Kawan Bhd 46.6 Employees Provident Fund 13.9 Skim Amanah Saham Bumiputera 6.2




KL Kepong Version 3 | Bloomberg: KLK MK | Reuters: KLKK.KL Refer to important disclosures at the end of this report

63

83

103

123

143

163

183

203

17.9

19.9

21.9

23.9

25.9

27.9


Relative IndexRM

KL Kepong (LHS) Relative KLCI INDEX (RHS)

85


Company Guide

KL Kepong

WHAT’S NEW

Forecasts, TP and rating adjustments We adjusted KLK’s earnings to reflect changes in our key assumptions. We imputed realised CPO and PK production volumes and exchange rates in FY15; together with revisions in our FY16 and FY17 CPO price outlook and FFB yields. The changes in our forecasts are summarised below: We imputed 9% higher FY16F earnings (vs. previous

forecast) after imputing realised 1QFY16 production numbers and ASP. We peg 1QFY16 CPO and PK ASP to average spot prices with a slight discount – as CPO ASP in Indonesia averaged below our initial expectations.

We raised CY16F/17F CPO price forecasts (US$/MT, FOB) by 12%/16% to US$600/US$649 – reflecting lower expected global CPO output and expansion in biodiesel usage in Indonesia – through deployment of CPO fund collected since Jul 15. FY16F/17F earnings were accordingly revised by +38%/+47%

We reiterate our HOLD call on the stock given the limited upside potential to our revised TP.

Our FY17F earnings expectations are higher than consensus; as we believe CPO prices should maintain its current trajectory on limited substitution from soybean oil due to limited spare crushing capacity in Argentina

Highlights from 1QFY16 results 1QFY16 underlying earnings jumped 41% KLK reported 1QFY16 net profit of RM795m (+271% y-o-y; +327% q-o-q). Excluding RM486m in gains from sale of plantation land and RM8m in net fair value changes in derivative contracts, 1QFY16 underlying earnings came in at RM302m (+41% y-o-y; +30% q-o-q) – slightly ahead of our expectations, in line with consensus. The strong results were primarily driven by the manufacturing segment’s strong EBIT. Manufacturing boosted by oleochemicals KLK’s 1QFY16 plantations segment’s EBIT increased 10% y-o-y (+40% q-o-q) to RM266m; on seasonally higher FFB and rubber production, and stronger palm kernel and rubber prices – partly offset by 8% drop y-o-y (+1% q-o-q) in CPO prices and higher CPO production cost. There was an unrealised loss of RM2.1m from changes in derivative contracts. Manufacturing segment 1QFY16 EBIT jumped by 282% y-o-y (+201% q-o-q) to RM134m, given strong contribution from the oleochemicals division. This was primarily driven by fair value gains on derivative financial instruments. The property segment’s EBIT, however, only reported a breakeven position (excluding share of JV loss of RM782m) due to the slowdown in the property market. Balance sheet remains strong As at end-Dec 15, KLK’s net debt to total equity was 24% – relatively flat from 25% in Sep 15. Its cash-conversion cycle had expanded slightly to 68 days from 66 days, mainly due to longer inventory days.

86


Company Guide

KL Kepong


Earnings Drivers:

CPO price. KLK is a vertically integrated producer, processor and merchandiser of palm oil products. More than two-thirds of its EBIT comes from sales of CPO, PK and CPO trading, while around 20% comes from downstream products. Given its plantations segment’s dominant contribution, movements in CPO prices would generally affect the group’s profits more so than other integrated players. Volume output. KLK’s trees have a weighted age of 11 years – according to its FY14 Annual Report. This categorises the group’s age profile as prime. Through consistent replanting in Malaysia and past expansions in Indonesia, KLK should see c.15.3k ha maturing in CY16F through CY18F – representing c.9% of the group’s mature hectarage as at end-Sep15. This should maintain KLK’s weighted age at 13 years by end-FY17F. Yet, FFB volume growth is likely to remain flat over the next three years, as rising contribution from maturing estates would be offset by lost output from replanted areas. Apart from replanting in Malaysia (assumed at 3k ha p.a.), new planting in Indonesia is forecast to remain minimal at 3-5k ha p.a. (from CY16F onwards). We have not imputed any impact from El Nino conditions in our forecasts. Downstream margins. A significant share of KLK’s manufacturing segment’s products deal with industrialised oleochemicals, which competes with the now cheaper petrochemicals given the drop in crude oil prices. This, together with slower Chinese economic growth and prospective oversupply in glycerine (due to Indonesia’s B15 programme), may lead to thinner margins in KLK’s oleochemicals unit. At the same time, Indonesia’s B15 export tax levy would result in lower CPO ASP relative to Malaysian counterparts. This means less contribution from its Indonesian estates. The levy also works to give Indonesian refiners higher margins, due to the differentiated levies between CPO and its downstream products. Geographic diversity. KLK’s consolidated revenue is globally distributed, with Malaysia contributing only 14% in FY14. Europe accounted for 23%, while the rest of Asia contributed a sizeable 56% of revenue. This means demand for KLK’s products is driven predominantly by economic growth in the Asian markets, while economic recovery in developed markets such as the US would have a small impact, in our view. We should also note that competing processors such as Wilmar, IOI and Emery are also vying for the same Asian markets – which we believe would make competition more challenging, given aggressive capacity expansions in various sectors of oleochemicals.

CPO price


CPO sales volume

PKO sales volume

Average MYR/USD


2,396

2,106

2,406

2,6282,471

0

300

600

900

1,200

1,500

1,800

2,100

2,400

2014A 2015A 2016F 2017F 2018F

166,781173,313

179,016 178,540189,718

0

38,700

77,400

116,100

154,800

193,500

2014A 2015A 2016F 2017F 2018F

783,029 788,662 800,397 801,516862,192

0

175,900

351,800

527,700

703,600

2014A 2015A 2016F 2017F 2018F

106,771 107,453 108,859 108,820116,856

0

14,800

29,600

44,400

59,200

74,000

88,800

103,600

2014A 2015A 2016F 2017F 2018F

3.28

3.88

4.27 4.34 4.32

0.00

0.88

1.75

2.63

3.50

4.38

2014A 2015A 2016F 2017F 2018F

87


Company Guide

KL Kepong

Balance Sheet:

Relatively low gearing. At the end of Dec15, KLK’s net debt-to-total equity settled at 24% – declining slightly from 25% at end-Sep15 (primarily on higher equity and higher cash). Its cash- conversion cycle was extended to 68 days (from 66 days) on longer inventory days. Strong free cash flow generation. While not as sizeable as its global peers, KLK is forecast to generate steady free cash flow of between RM835m and RM1,216m p.a. between FY16F and FY18F (with capex outlay forecast to be maintained between RM678m and RM845m p.a.), as we expect CPO prices to recover over the same period. The group has historically maintained a positive WACC-ROE spread and is expected to maintain 3-8% spread over the next three years. Share Price Drivers:

Expensive, with no catalysts. At 23x forward PE, the counter is trading at close to +2SD mean PE (calculated from 2007), which we believe is expensive relative to historical data and peers. Key Risks:

Volatility in CPO prices and USD exchange rates Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect profitability of planters in general. Setback in expansion plans Our forecasts are based on assumed hectarage for new planting and replanting. Any setback on these plans would negatively affect our valuation due to slower volume growth. Regulatory changes Any further increase in Indian import duty of palm oil or changes in the structure of Indonesian/Malaysian export taxes would impact demand for CPO/refined oils. Market sentiment Changes in fund flows towards or out of emerging markets would affect valuations of plantation counters. Weather Changes in rainfall pattern (caused by either El Nino or La Nina) would affect FFB yields with some lag time. Company Background

KLK's core business is in plantations, with over 270k ha of palm oil and rubber plantations in Malaysia, Indonesia, and Liberia. Its other businesses are manufacturing (mainly oleochemicals) and property development.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.8

0.8

0.8

0.9

0.9

0.9

0.9

0.9

1.0

1.0

1.0

0.00

0.10

0.20

0.30

0.40

0.50

2014A 2015A 2016F 2017F 2018F


0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

2014A 2015A 2016F 2017F 2018F


RM

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2014A 2015A 2016F 2017F 2018F

Avg: 24.7x

+1sd: 27.2x

+2sd: 29.7x

‐1sd: 22.2x

‐2sd: 19.7x

17.1

19.1

21.1

23.1

25.1

27.1

29.1

31.1


(x)

Avg: 3.06x

+1sd: 3.42x

+2sd: 3.78x

‐1sd: 2.7x

‐2sd: 2.34x

2.0

2.5

3.0

3.5

4.0


(x)

88


Company Guide

KL Kepong

Key Assumptions

FY Sep 2014A 2015A 2016F 2017F 2018F CPO price (RM/MT) 2,396 2,106 2,406 2,628 2,471 Mature palm oil hectarage 166,781 173,313 179,016 178,540 189,718 CPO sales volume 783,029 788,662 800,397 801,516 862,192 PKO sales volume 106,771 107,453 108,859 108,820 116,856 Average MYR/USD 3.28 3.88 4.27 4.34 4.32

Segmental Breakdown

FY Sep 2014A 2015A 2016F 2017F 2018F Revenues (RMm) Plantation 5,235 7,086 5,173 5,599 5,623 Manufacturing 5,634 6,241 8,586 9,756 9,823 Property 117 123 129 136 143 Others 144 199 53.1 59.6 55.2 Total 11,130 13,650 13,941 15,550 15,644 EBIT (RMm)

Plantation 1,006 780 1,078 1,193 1,149 Manufacturing 288 219 420 478 481 Property 45.7 49.5 36.3 38.1 40.0 Others 53.1 193 75.5 76.3 77.0 Total 1,393 1,241 1,610 1,785 1,747 EBIT Margins (%)

Plantation 19.2 11.0 20.8 21.3 20.4 Manufacturing 5.1 3.5 4.9 4.9 4.9 Property 39.0 40.1 28.1 28.1 28.1 Others 37.0 96.8 142.2 127.9 139.6 Total 12.5 9.1 11.6 11.5 11.2


FY Sep 2014A 2015A 2016F 2017F 2018F Revenue 11,130 13,650 13,941 15,550 15,644 Cost of Goods Sold (9,008) (11,684) (11,518) (12,856) (12,979) Gross Profit 2,122 1,966 2,423 2,694 2,665 Other Opng (Exp)/Inc (765) (768) (865) (969) (974) Operating Profit 1,357 1,198 1,557 1,725 1,692 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 5.88 (2.4) (2.4) (2.5) (2.5) Net Interest (Exp)/Inc (51.3) (61.2) (28.4) (24.4) (27.7) Exceptional Gain/(Loss) 5.90 0.0 486 0.0 0.0 Pre-tax Profit 1,318 1,135 2,012 1,698 1,662 Tax (285) (251) (340) (383) (378) Minority Interest (41.0) (14.1) (19.0) (21.2) (20.7) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 992 870 1,653 1,295 1,263 Net Profit before Except. 986 870 1,167 1,295 1,263 EBITDA 1,690 1,638 1,978 2,172 2,162 Growth Revenue Gth (%) 21.7 22.6 2.1 11.5 0.6 EBITDA Gth (%) 12.3 (3.1) 20.7 9.8 (0.5) Opg Profit Gth (%) 12.0 (11.7) 30.0 10.8 (1.9) Net Profit Gth (Pre-ex) (%) 10.6 (11.8) 34.2 10.9 (2.5) Margins & Ratio Gross Margins (%) 19.1 14.4 17.4 17.3 17.0 Opg Profit Margin (%) 12.2 8.8 11.2 11.1 10.8 Net Profit Margin (%) 8.9 6.4 11.9 8.3 8.1 ROAE (%) 13.0 10.0 16.3 11.9 11.2 ROA (%) 8.1 5.8 9.6 7.5 7.1 ROCE (%) 9.4 6.9 8.4 8.6 8.2 Div Payout Ratio (%) 60.0 60.0 60.0 60.0 60.0 Net Interest Cover (x) 26.5 19.6 54.8 70.8 61.1


89


Company Guide

KL Kepong


FY Sep 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016 Revenue 3,114 3,065 3,538 3,932 4,338 Cost of Goods Sold (2,806) (2,751) (3,231) (3,676) (3,891) Gross Profit 308 314 307 256 447 Other Oper. (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Operating Profit 308 314 307 256 447 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 2.29 (5.2) 5.14 (4.6) 0.78 Net Interest (Exp)/Inc (16.3) (12.2) (13.4) (19.3) (22.1) Exceptional Gain/(Loss) 0.0 0.0 12.6 0.0 486 Pre-tax Profit 294 297 311 233 911 Tax (67.0) (69.4) (57.0) (57.2) (80.8) Minority Interest (13.2) (4.6) (7.4) 11.0 (35.1) Net Profit 214 223 247 186 795 Net profit bef Except. 214 223 234 186 310 EBITDA 311 309 312 252 448 Growth Revenue Gth (%) 12.1 (1.6) 15.4 11.1 10.3 EBITDA Gth (%) 23.1 (0.6) 1.1 (19.3) 77.7 Opg Profit Gth (%) 23.9 1.8 (2.2) (16.4) 74.2 Net Profit Gth (Pre-ex) (%) 25.4 3.9 5.3 (20.5) 66.1 Margins Gross Margins (%) 9.9 10.2 8.7 6.5 10.3 Opg Profit Margins (%) 9.9 10.2 8.7 6.5 10.3 Net Profit Margins (%) 6.9 7.3 7.0 4.7 18.3

Balance Sheet (RMm)

FY Sep 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 6,301 7,210 7,441 7,733 7,949 Invts in Associates & JVs 173 299 297 294 292 Other LT Assets 1,903 2,958 2,889 2,822 2,756 Cash & ST Invts 1,296 2,083 2,250 2,083 2,385 Inventory 1,441 1,614 1,506 1,681 1,697 Debtors 1,592 2,651 2,167 2,417 2,431 Other Current Assets 181 444 444 444 444 Total Assets 12,888 17,260 16,994 17,475 17,954 ST Debt 1,094 1,913 1,865 1,818 1,773 Creditor 999 1,418 1,191 1,330 1,343 Other Current Liab 155 392 392 392 392 LT Debt 1,816 2,681 1,681 1,681 1,681 Other LT Liabilities 639 728 728 728 728 Shareholder’s Equity 7,752 9,666 10,656 11,024 11,516 Minority Interests 431 462 481 502 523 Total Cap. & Liab. 12,888 17,260 16,994 17,475 17,954 Non-Cash Wkg. Capital 2,060 2,899 2,533 2,820 2,838 Net Cash/(Debt) (1,615) (2,511) (1,296) (1,416) (1,069) Debtors Turn (avg days) 46.1 56.7 63.1 53.8 56.6 Creditors Turn (avg days) 38.3 39.2 42.9 37.1 39.0 Inventory Turn (avg days) 52.7 49.6 51.3 46.9 49.3 Asset Turnover (x) 0.9 0.9 0.8 0.9 0.9 Current Ratio (x) 2.0 1.8 1.8 1.9 2.0 Quick Ratio (x) 1.3 1.3 1.3 1.3 1.4 Net Debt/Equity (X) 0.2 0.2 0.1 0.1 0.1 Net Debt/Equity ex MI (X) 0.2 0.3 0.1 0.1 0.1 Capex to Debt (%) 37.0 19.3 23.8 20.9 19.6 Z-Score (X) 5.3 3.9 4.5 4.5 4.6


90


Company Guide

KL Kepong


FY Sep 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 1,318 1,135 2,012 1,698 1,662 Dep. & Amort. 333 440 420 447 470 Tax Paid (285) (251) (340) (383) (378) Assoc. & JV Inc/(loss) (5.9) 2.37 2.42 2.46 2.51 Chg in Wkg.Cap. (577) (813) 366 (287) (18.0) Other Operating CF (44.3) (46.7) 0.0 0.0 0.0 Net Operating CF 739 466 2,460 1,478 1,738 Capital Exp.(net) (1,078) (886) (845) (731) (678) Other Invts.(net) (66.4) (984) 56.0 54.6 53.2 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (18.0) 1,132 5.66 5.52 5.38 Net Investing CF (1,162) (738) (783) (671) (619) Div Paid (532) (573) (663) (927) (771) Chg in Gross Debt 575 1,684 (1,048) (46.6) (45.5) Capital Issues (241) 1,618 0.0 0.0 0.0 Other Financing CF 161 (1,670) 200 0.0 0.0 Net Financing CF (38.0) 1,059 (1,510) (974) (817) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (461) 787 167 (167) 302 Opg CFPS (sen) 123 120 196 165 165 Free CFPS (sen) (31.7) (39.3) 151 70.0 99.3



Source: DBS Bank

S.No. DateClosing

PriceT arget Price

Rat ing

1: 05 Mar 15 22.66 19.60 FULLY VALUED

2: 11 Mar 15 22.22 19.60 FULLY VALUED

3: 06 Apr 15 22.86 19.60 FULLY VALUED

4: 21 May 15 22.56 19.60 FULLY VALUED

5: 03 Jun 15 22.38 19.95 FULLY VALUED

6: 10 Aug 15 21.50 19.50 FULLY VALUED

7: 20 Aug 15 20.24 19.50 HOLD

8: 17 Sep 15 22.46 19.25 HOLD

9: 13 Oct 15 22.72 19.25 HOLD

10: 11 Nov 15 22.96 19.25 HOLD


Note : Share price and Target price are adjusted for corporate actions. 15: 10 Feb 16 22.96 20.00 HOLD

12

3

4

5 6

7

8

9

10

1112 13

14

15

19.20

20.20

21.20

22.20

23.20

24.20

25.20


RM

91

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:MA

HOLD (Upgrade from Fully Valued)

Last Traded Price: Rp1,485 (JCI : 4,778.79) Price Target : Rp1,360 (-8% downside) (prev Rp1,260) Where we differ: Higher than consensus FY17F earnings on higher CPO price expectations Analyst Ben Santoso +65 6682 3707 [email protected]

What’s New FY15/16F/17F EPS adjusted by -5%/+18%/+47% on

changes in our key assumptions Low rubber prices/lack of volume leverage drag

earnings potential TP adjusted to Rp1,360 from Rp1,260; mainly to

impute higher CPO price forecasts

Price Relative

Forecasts and Valuation FY Dec (Rp m) 2014A 2015F 2016F 2017F Revenue 4,727 4,056 4,340 4,807 EBITDA 1,125 698 814 1,093 Pre-tax Profit 1,189 762 895 1,205 Net Profit 917 579 681 916 Net Pft (Pre Ex.) 917 579 681 916 Net Pft Gth (Pre-ex) (%) 19.1 (36.9) 17.6 34.5 EPS (Rp) 134 84.9 99.8 134 EPS Pre Ex. (Rp) 134 84.9 99.8 134 EPS Gth Pre Ex (%) 19 (37) 18 35 Diluted EPS (Rp) 134 84.9 99.8 134 Net DPS (Rp) 46.0 54.8 34.6 40.7 BV Per Share (Rp) 1,058 1,084 1,149 1,243 PE (X) 11.1 17.5 14.9 11.1 PE Pre Ex. (X) 11.1 17.5 14.9 11.1 P/Cash Flow (X) 7.3 11.0 9.1 7.3 EV/EBITDA (X) 7.8 12.4 10.2 7.0 Net Div Yield (%) 3.1 3.7 2.3 2.7 P/Book Value (X) 1.4 1.4 1.3 1.2 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 13.3 7.9 8.9 11.2 Earnings Rev (%): (5) 18 47 Consensus EPS (Rp): 91.6 104 121 Other Broker Recs: B: 11 S: 3 H: 6


A dividend play

No FFB yield improvement. All of London Sumatra (Lonsum) estates experienced severe dry weather caused by El Nino in FY15, and registered slower production growth. This was further compounded by the lagged impact from previous dry weather in early FY14. Lonsum may face a steeper-than-normal drop in 1Q16 output. Lengthy FFB formation process means that FY15 El Nino may cut Lonsum’s FY16F and FY17F FFB yields to 16.3 MT/ha and 16.1 MT/ha, respectively – down from 16.8MT/ha in FY15F and 17.5MT/ha in FY14. Ageing profile offers limited cushion. On our estimates, Lonsum’s oil palm trees would have an average age of 13 years in FY16F. With a majority (86%) of its trees in prime and past prime stage and only 11% of their planted hectarage maturing over in FY16F through FY18F, we expect own FFB volume to expand by just 5% CAGR between FY15F and FY18F, not enough to mitigate CPO price and FFB yield volatility. Sustainable by 2019. As a subsidiary of IndoAgri, Lonsum’s own oil palm estates are targeted to achieve RSPO and ISPO certifications by end-2016, and its smallholder estates by end-2019. While RSPO and ISPO certifications do not necessarily translate into CPO ASP premium, they enhance the marketability of its CPO globally. Valuation: We employed DCF methodology (FY17F base year) to arrive at Lonsum’s fair value of Rp1,360/share (WACC 15.2%, Rf 8.8%, Rm 15.7% β 0.9x, TG 3%). We believe the stock has already priced in significant earnings recovery over the next two years, despite expectations of poor 4Q15 earnings Key Risks to Our View: There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take failed to live up to our expectations (2.5m kl) this year. Lonsum’s output could also fall below our expectations if there is a significant hit to its FFB yield in the aftermath of CY15 El Nino (vice versa). Changes in fund flows towards or out of emerging markets/ commodities would also affect valuations of plantation counters. At A Glance Issued Capital (m shrs) 6,823 Mkt. Cap (Rpbn/US$m) 10,132 / 752 Major Shareholders (%) Net Assets Management PT 59.5




London Sumatra Indonesia Version 4 | Bloomberg: LSIP IJ | Reuters: LSIP.JK Refer to important disclosures at the end of this report

28

48

68

88

108

128

148

168

188

208

841.5

1,341.5

1,841.5

2,341.5

2,841.5

3,341.5


Relative IndexRp

London Sumatra Indonesia (LHS) Relative JCI INDEX (RHS)

92


Company Guide


WHAT’S NEW

Forecasts, TP and rating adjustments We adjusted Lonsum’s earnings to reflect changes in our key assumptions. We imputed realised CPO and PK ASP (pegged to Astra Agro Lestari’s released 4Q15 auction prices) and actual exchange rates, together with revisions in our FY16 and FY17 CPO price outlook and reduced FFB yields. Changes in our forecasts are summarised below: We imputed 5% lower FY15E earnings (vs. previous

forecast) as 4Q15 CPO ASP is estimated to have come in lower than previously anticipated. We attribute this to stronger Rupiah and declining refining margins, which may have reduced demand for CPO during the quarter. Revisions in FY16F and FY17F exchange rates in favour of stronger IDR had also partly offset hikes in our CPO price forecasts.

We also raised CY16F/17F CPO price forecasts (US$/MT, FOB) by 12%/16% to US$600/US$649 – reflecting lower expected global CPO output and expansion in biodiesel usage in Indonesia – through deployment of CPO funds collected since Jul15. FY16F/17F earnings were raised by 18%/47% as a result.

With no significant capex and no debts, Lonsum should continue to deliver dividend payout ratio of 40% (subject to any opportunistic acquisitions) – translating to dividend yields of 2-3% over the next two years.

We raised our rating on the stock to HOLD from Fully Valued. Despite improved outlook from previous forecasts, we recommend investors to seek lower entry point.

Our earnings expectations are higher than consensus, as we believe CPO prices should maintain its current trajectory on limited substitution from soybean oil due to limited spare crushing capacity in Argentina.

93


Company Guide



Earnings Drivers:

CPO price. As a commodity producer, Lonsum is a price-taker. Movements in international CPO prices would directly impact group’s profitability. We currently expect CPO prices (FOB Pasir Gudang) to average US$600/MT (+7% y-o-y) in CY16 and US$649/MT in CY17 (+8% y-o-y). Adverse impact from Indonesia’s biodiesel policy. Lonsum sells more than half of its CPO output to its parent company, Salim Ivomas Pratama (SIMP), while the remainder is sold locally. While the group is not subject to biodiesel export levies (US$50/MT on CPO) on all of its CPO sales volumes, local ASP would nevertheless roughly reflect the same discount, given increased domestic supplies as a result of the export levies. We have already imputed this in our forecasts. Volume output. As at end-Dec-14, Lonsum’s trees were estimated to have an average age of 11.5 years. Approximately 12.5k ha will mature in FY15F through FY17F – representing 16% of its own mature hectarage at the end of FY14 – but not enough to keep its average age from rising towards 13.8 years by end-FY17F. On lack of aggressive expansion since 2009, Lonsum’s FFB output is forecast to expand by a 5% CAGR between FY15F and FY18F – the lowest in our Indonesia coverage. Hence, no capex outlay is expected to expand its milling capacity. We imputed 3.8% y-o-y lower FY15F FFB yield, principally on account of lower-than-expected North Sumatra output in 1Q15. Should a severe rainfall deficit occur in 2H15, the impact on FFB yields would only occur 11-12 months thereafter. Demand seasonality. As a major vegetable oil with 36% market share globally, palm oil is an important food staple. The other major vegetable oils are soybean oil, with 27% market share, followed by rapeseed/canola oil and sunflower oil with 16% and 10% market shares respectively. There is generally demand substitutability between vegetable oils, although certain vegetable oils are more suitable than others for certain applications. Relative to other oil crops, palm oil has the highest productivity per hectare (i.e. c.5 MT/ha), while soybean oil’s productivity is typically 0.5 MT/ha. Demand for palm oil is dominant in Asia, where local festivities drive higher demand in certain months of the year. For example, Ramadan month, Chinese New Year and Divali are typically high-demand periods in Asia.

CPO price (RM/MT)




Avg. USD/IDR rate


2,377 2,413

2,2002,340

2,450

0

300

600

900

1,200

1,500

1,800

2,100

2,400

2013A 2014A 2015F 2016F 2017F

74,944 76,65279,976

84,28087,341

0

17,800

35,600

53,400

71,200

89,000

2013A 2014A 2015F 2016F 2017F

440,999 449,021 437,115 446,697469,540

0

95,800

191,600

287,400

383,200

2013A 2014A 2015F 2016F 2017F

97,683

109,280 108,991 111,309116,884

0

14,800

29,600

44,400

59,200

74,000

88,800

103,600

2013A 2014A 2015F 2016F 2017F

10,84911,879

13,921

15,08314,490

0

3,000

6,000

9,000

12,000

15,000

2013A 2014A 2015F 2016F 2017F

94


Company Guide


Balance Sheet:

Clean balance sheet. As at end-Sep-15, Lonsum was in a net cash position (no borrowings). This generally reflects the group’s lack of major expansion projects on both its biological assets and its processing capacity. As at end-Sep-15, the group’s 4-quarter rolling cash conversion cycle stood at 40 days – down from 26 days in Jun-15 on shorter payables. Room for leverage. Amid lower CPO prices, we expect more private estates to be on offer. Given its net cash position, we believe Lonsum is in a strong position to acquire more brownfields to boost its flattish output growth outlook. Failing this, we believe the group should be able to increase its dividend payout to enhance ROE. Share Price Drivers:

No near-term catalysts. The stock is currently trading between -1SD and average forward PE, having rebounded from its Aug-15 low. Amid potential adverse El Nino impact and ongoing export levies, we believe the market has already priced in stronger CPO prices; and that there are no near-term upside catalysts beyond current level. Key Risks:

Volatility in CPO prices and USD exchange rates. Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from the expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect profitability of planters in general. Setback in expansion plans. Our forecasts are based on assumed hectarage for new planting and replanting. Any setback on these plans would negatively affect our valuation due to slower volume growth. Regulatory changes. Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/ Malaysian export taxes would impact demand for CPO/refined oils. Weather. Changes in rainfall pattern (caused by either El Nino or La Nina) would affect FFB yields with some lag time. Company Background

Lonsum is the second largest listed upstream player in Indonesia owned by Indofood Agri (IFAR SP). Besides palm oil, Lonsum has rubber, cocoa and seed businesses.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.4

0.5

0.5

0.6

0.6

0.00

0.01

0.01

0.02

0.02

0.03

0.03

0.04

0.04

0.05

0.05

2013A 2014A 2015F 2016F 2017F


0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

2013A 2014A 2015F 2016F 2017F


Rp

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2013A 2014A 2015F 2016F 2017F

Avg: 17.2x

+1sd: 20.3x

+2sd: 23.5x

‐1sd: 14x

‐2sd: 10.8x

7.1

9.1

11.1

13.1

15.1

17.1

19.1

21.1

23.1

25.1


(x)

Avg: 1.99x

+1sd: 2.59x

+2sd: 3.2x

‐1sd: 1.38x

‐2sd: 0.78x0.7

1.2

1.7

2.2

2.7

3.2

3.7


(x)

95


Company Guide


Key Assumptions


Segmental Breakdown

FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (Rpbn) Crude palm oil 3,154 3,712 3,047 3,319 3,685 Palm kernel 351 560 486 516 567 Rubber 340 276 299 269 302 Seeds 232 95.0 117 132 151 Others 56.0 84.0 108 104 102 Total 4,134 4,727 4,056 4,340 4,807


FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 4,134 4,727 4,056 4,340 4,807 Cost of Goods Sold (2,880) (3,090) (2,914) (3,067) (3,267) Gross Profit 1,253 1,636 1,142 1,272 1,540 Other Opng (Exp)/Inc (228) (396) (387) (406) (400) Operating Profit 1,026 1,241 756 866 1,140 Other Non Opg (Exp)/Inc (73.0) (116) (58.0) (52.0) (47.0) Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 44.0 64.0 64.0 82.0 112 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 997 1,189 762 895 1,205 Tax (228) (272) (183) (215) (289) Minority Interest 1.00 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 769 917 579 681 916 Net Profit before Except. 769 917 579 681 916 EBITDA 953 1,125 698 814 1,093 Growth Revenue Gth (%) (1.8) 14.3 (14.2) 7.0 10.8 EBITDA Gth (%) (26.0) 18.0 (38.0) 16.7 34.3 Opg Profit Gth (%) (22.5) 20.9 (39.1) 14.6 31.6 Net Profit Gth (Pre-ex) (%) (31.1) 19.1 (36.9) 17.6 34.5 Margins & Ratio Gross Margins (%) 30.3 34.6 28.2 29.3 32.0 Opg Profit Margin (%) 24.8 26.2 18.6 20.0 23.7 Net Profit Margin (%) 18.6 19.4 14.3 15.7 19.0 ROAE (%) 11.9 13.3 7.9 8.9 11.2 ROA (%) 9.9 11.0 6.6 7.5 9.4 ROCE (%) 11.4 12.7 7.2 7.9 9.7 Div Payout Ratio (%) 58.5 34.2 64.6 34.7 30.3 Net Interest Cover (x) NM NM NM NM NM


96


Company Guide



FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 1,152 1,202 888 1,191 997 Cost of Goods Sold (744) (830) (627) (850) (699) Gross Profit 408 372 262 341 298 Other Oper. (Exp)/Inc (105) (69.0) (75.0) (127) (81.0) Operating Profit 303 304 187 214 217 Other Non Opg (Exp)/Inc (24.0) (44.0) (13.0) (18.0) (12.0) Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 13.0 23.0 20.0 15.0 3.00 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 292 284 194 211 208 Tax (64.0) (66.0) (41.0) (55.0) (47.0) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Profit 228 218 153 156 161 Net profit bef Except. 228 218 153 156 161 EBITDA 343 349 257 284 244 Growth Revenue Gth (%) 5.5 4.4 (26.1) 34.1 (16.3) EBITDA Gth (%) (7.1) 1.6 (26.2) 10.2 (13.9) Opg Profit Gth (%) (8.5) 0.2 (38.5) 14.3 1.6 Net Profit Gth (Pre-ex) (%) (7.7) (4.4) (29.8) 1.8 3.2 Margins Gross Margins (%) 35.4 31.0 29.5 28.6 29.9 Opg Profit Margins (%) 26.3 25.3 21.0 17.9 21.8 Net Profit Margins (%) 19.8 18.1 17.2 13.1 16.1


FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 2,777 3,239 3,506 3,618 3,617 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 3,199 3,553 3,321 3,376 3,414 Cash & ST Invts 1,401 1,357 1,511 1,842 2,501 Inventory 374 380 356 375 399 Debtors 117 85.0 86.0 92.0 102 Other Current Assets 106 42.0 66.0 70.0 77.0 Total Assets 7,975 8,655 8,847 9,373 10,111 ST Debt 0.0 0.0 0.0 0.0 0.0 Creditor 336 444 368 387 413 Other Current Liab 468 304 352 373 403 LT Debt 0.0 0.0 0.0 0.0 0.0 Other LT Liabilities 556 688 731 772 818 Shareholder’s Equity 6,614 7,219 7,396 7,840 8,478 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 7,975 8,655 8,847 9,373 10,111 Non-Cash Wkg. Capital (207) (241) (212) (223) (237) Net Cash/(Debt) 1,401 1,357 1,511 1,842 2,501 Debtors Turn (avg days) 7.5 7.8 7.7 7.5 7.4 Creditors Turn (avg days) 41.8 46.1 50.9 44.9 44.7 Inventory Turn (avg days) 64.7 44.6 46.1 43.5 43.2 Asset Turnover (x) 0.5 0.6 0.5 0.5 0.5 Current Ratio (x) 2.5 2.5 2.8 3.1 3.8 Quick Ratio (x) 1.9 1.9 2.2 2.5 3.2 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) N/A N/A N/A N/A N/A Z-Score (X) 5.0 4.8 4.5 4.3 4.2


97


Company Guide



FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 997 1,189 762 895 1,205 Dep. & Amort. 289 298 329 379 412 Tax Paid (228) (272) (183) (215) (289) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 209 34.0 (29.0) 11.0 14.0 Other Operating CF 0.0 4.00 0.0 0.0 0.0 Net Operating CF 1,345 1,381 922 1,111 1,388 Capital Exp.(net) (1,090) (1,164) (492) (556) (455) Other Invts.(net) (207) 119 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (10.0) (68.0) 127 11.0 4.00 Net Investing CF (1,306) (1,114) (365) (545) (451) Div Paid (450) (314) (374) (236) (277) Chg in Gross Debt 0.0 0.0 0.0 0.0 0.0 Capital Issues 14.0 2.00 (28.0) 0.0 0.0 Other Financing CF 0.0 0.0 0.0 0.0 0.0 Net Financing CF (436) (312) (402) (236) (277) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (398) (45.0) 155 331 659 Opg CFPS (Rp) 166 197 139 161 201 Free CFPS (Rp) 37.4 31.7 63.1 81.4 137



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 02 Mar 15 1915 1760 HOLD

2: 04 May 15 1380 1760 HOLD

3: 03 Jun 15 1760 1580 HOLD

4: 10 Aug 15 1255 1340 HOLD

5: 17 Sep 15 1230 990 FULLY VALUED

6: 13 Oct 15 1385 990 FULLY VALUED




10: 10 Dec 15 1305 1260 FULLY VALUED

11: 12 Jan 16 1220 1260 FULLY VALUED12: 10 Feb 16 1470 1260 FULLY VALUED


1

2

3

4 5

6 7

8

9 10

11

12

888

1088

1288

1488

1688

1888


Rp

98

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:MA

HOLD(Downgrade from Buy) Last Traded Price: Rp1,800 (JCI : 4,778.79) Price Target : Rp1,880 (4% upside) (prev Rp1,760) Where we differ: Higher than consensus FY16F/17F earnings on higher CPO price expectations Analyst Ben Santoso +65 6682 3707 [email protected]

What’s New FY15/16F/17F EPS adjusted by -13%/+24%/+144%

on changes in our key assumptions Expect sequentially lower 4Q15 earnings on

weaker ASP and FFB yields TP raised to Rp1,880 but rating cut to HOLD on

limited upside

Price Relative

Forecasts and Valuation FY Dec (Rp m) 2014A 2015F 2016F 2017F Revenue 3,242,38 2,965,08 3,229,84 3,603,06EBITDA 798,650 768,499 893,762 1,071,64Pre-tax Profit 510,361 356,763 422,237 565,837 Net Profit 340,323 244,381 292,140 391,494 Net Pft (Pre Ex.) 340,323 244,381 292,140 391,494 Net Pft Gth (Pre-ex) (%) 185.7 (28.2) 19.5 34.0 EPS (Rp) 180 129 155 207 EPS Pre Ex. (Rp) 180 129 155 207 EPS Gth Pre Ex (%) 186 (28) 20 34 Diluted EPS (Rp) 180 129 155 207 Net DPS (Rp) 15.0 45.0 32.3 38.6 BV Per Share (Rp) 1,575 1,660 1,782 1,950 PE (X) 10.0 13.9 11.6 8.7 PE Pre Ex. (X) 10.0 13.9 11.6 8.7 P/Cash Flow (X) 4.7 6.7 5.7 4.7 EV/EBITDA (X) 6.2 6.7 5.8 4.6 Net Div Yield (%) 0.8 2.5 1.8 2.1 P/Book Value (X) 1.1 1.1 1.0 0.9 Net Debt/Equity (X) 0.5 0.5 0.5 0.4 ROAE (%) 12.1 8.0 9.0 11.1 Earnings Rev (%): (13) 24 144 Consensus EPS (Rp): 139 140 183 Other Broker Recs: B: 7 S: 0 H: 4 Source of all data: Company, DBS Bank, Bloomberg Finance L.P

Benefiting from past expansions Stars aligned. Hikes in our CPO price forecasts should more than offset expectations of stronger Rupiah to drive 27% earnings CAGR over the next two years. CPO output is forecast to expand 2% p.a. over the same period – despite lower expected FFB yields in its South Sumatra estates (primarily smallholders). Sampoerna Agro (SGRO) is due to harvest c.15.6k ha of maturing estates in FY16F through FY18F – thanks to aggressive new planting (mostly in Kalimantan) in CY12-CY14 – even as others were slowing down. At the cross road. SGRO has the second youngest age profile within our coverage of IDX-listed oil palm planters. Yet, FFB yields have been volatile and underperformed peers of similar age profile – as a significant part of FFB processed still comes from smallholders in South Sumatra. But rising contribution from SGRO’s Kalimantan estates – where smallholder estates are proportionately lower – should gradually improve margins. Severe dry weather last year in South Sumatra (where smallholder FFB contributes 59%) should hasten this process. Growing pains. Almost a third of the group’s estates are still immature. So it is not surprising that SGRO’s gross debts at end Sep15 expanded 8% q-o-q to Rp2.4tr, with short-term debts rising faster (+31% q-o-q) – to cover for cash flow shortfall due to weaker CPO prices in 9M15, capex needs for immature estates as well as 4k ha of new planting for own estates. This translated into a higher net debt-to-total equity ratio of 74%, from 50% at end-Dec-14. To balance its earnings growth vs. balance sheet strength, we expect SGRO to divest non oil-palm assets – starting with rubber estates JV announced in Dec15 – and to moderate pace of oil palm expansion (we expect none this year). Valuation: We employed DCF methodology (FY17F base year) to arrive SGRO’s fair value of Rp1,880/share (WACC 12.5%, Rf 8.8%, Rm 15.7% β 1.0x, TG 3%). Key Risks to Our View: There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take failed to live up to our expectations (2.5m kl) this year. SGRO’s output could also fall below our expectations if there was a significant hit to its FFB yield in the aftermath of FY15 El Nino (and vice versa). Changes in fund flows towards or out of emerging markets/ commodities would also affect valuations of plantation counters. At A Glance Issued Capital (m shrs) 1,890 Mkt. Cap (Rpm/US$m) 3,402,000 / 253 Major Shareholders (%) Sampoerna Agri Resources 67.1




Sampoerna Agro Version 4 | Bloomberg: SGRO IJ | Reuters: SGRO.JK Refer to important disclosures at the end of this report

24

44

64

84

104

124

144

164

184

204

945.0

1,445.0

1,945.0

2,445.0

2,945.0

3,445.0

3,945.0


Relative IndexRp

Sampoerna Agro (LHS) Relative JCI INDEX (RHS)

99


Company Guide

Sampoerna Agro

WHAT’S NEW

Adjustments to impute new CPO price forecasts We adjusted SGRO’s earnings to reflect changes in our key assumptions. We imputed realised FY15 CPO and PK ASPs (pegged to Astra Agro Lestari’s released 4Q15 auction prices) and actual exchange rates, together with revisions in our FY16 and FY17 CPO price outlook and reduced FFB yields. Changes in our forecasts are summarised below: We imputed 13% lower FY15E earnings (vs. previous

forecast) as 4Q15 CPO ASP was lower than previously anticipated. We attribute this to stronger Rupiah and declining refining margins, which may have reduced demand for CPO during the quarter.

We also raised CY16F/17F CPO price forecasts (US$/MT, FOB) by 12%/16% to US$600/US$649 – reflecting lower expected global CPO output and expansion in biodiesel usage in Indonesia – through deployment of CPO funds collected since Jul15. Partly offset by stronger Rupiah, FY16F/17F earnings were thus raised by 24%/144% given

SGRO’s higher operating leverage. We have also imputed slightly slower increase in labour cost, as we understand the group’s wages are already above minimum.

The group had no USD debts, hence revisions in exchange rates in favour of stronger IDR has no impact on the group’s debt service costs. We had previously anticipated that the weak ASP will tighten cash flows, but we now expect SGRO to have more than sufficient funds for capex (assuming no new planting), and debt servicing.

We downgraded our rating on the stock to HOLD from Buy as the stock’s YTD rally has moved ahead of its earnings potential.

Our earnings expectations are higher than consensus; we believe CPO prices should maintain its current trajectory on limited substitution from soybean oil due to limited spare crushing capacity in Argentina.

100


Company Guide

Sampoerna Agro


CPO price. As a commodity producer, SGRO is a price-taker. Movements in international CPO prices would directly impact the group’s profitability. We currently expect CPO prices (FOB Pasir Gudang) to average US$600/MT (+7% y-o-y) in CY16 and US$649/MT in CY17 (+8% y-o-y). Adverse impact from Indonesia’s biodiesel policy. SGRO sells all of its CPO domestically, which may then be re-exported. While the group is not directly subject to biodiesel export levies (US$50/MT on CPO) on all of its CPO sales volumes, local ASP would nevertheless reflect roughly the same discount, given increased domestic supplies as a result of the export levies. We have imputed this in our forecasts. Volume output. Seasonality affects SGRO’s FFB yields more than peers. Consequently, the group’s quarterly earnings have a high degree of volatility. As at end-2014, SGRO’s own oil palm trees were estimated to have an average age of 10 years, and approximately 13k ha will mature in FY15F through FY17F. The new maturities, representing c.23% of its own mature hectarage at the end of FY14, will continue to maintain an average age of 10 years by end-FY17F. Within the same period, SGRO’s own FFB output is forecast to expand by 6% CAGR – lagging peers. SGRO is not expected to expand its milling capacity until FY18F. As the dry weather continued in 2H15 in Kalimantan and South Sumatra, we believe the impact on yields will become apparent in 1Q16. Demand seasonality. As a major vegetable oil with 36% market share globally, palm oil is an important food staple. The other major vegetable oils are soybean oil, with 27% market share, followed by rapeseed/canola oil and sunflower oil with 16% and 10% market shares respectively. There is generally demand substitutability between vegetable oils, although certain vegetable oils are more suitable than others for certain applications. Relative to other oil crops, palm oil has the highest productivity per hectare (i.e. c.5 MT/ha), while soybean oil’s productivity is typically 0.5 MT/ha. Demand for palm oil is dominant in Asia, where local festivities drive higher demand in certain months of the year. For example, Ramadan month, Chinese New Year and Divali are typically high-demand periods in Asia.

CPO price (RM/MT)




Avg. USD/IDR rate


2,377 2,413

2,2002,340

2,450

0

300

600

900

1,200

1,500

1,800

2,100

2,400

2013A 2014A 2015F 2016F 2017F

94,746101,586

105,393110,966

114,662

0

23,400

46,800

70,200

93,600

2013A 2014A 2015F 2016F 2017F

296,311

325,786348,480 347,992 341,885

0

71,100

142,200

213,300

284,400

2013A 2014A 2015F 2016F 2017F

76,094 76,555

83,507 83,723 82,582

0

10,600

21,200

31,800

42,400

53,000

63,600

74,200

2013A 2014A 2015F 2016F 2017F

10,84911,879

13,921

15,08314,490

0

3,000

6,000

9,000

12,000

15,000

2013A 2014A 2015F 2016F 2017F

101


Company Guide

Sampoerna Agro

Balance Sheet:

Additional borrowings assumed. Weakness in CPO prices would require SGRO to obtain additional bank borrowings, based on our estimates. We assumed the group to incur Rp695bn of additional debt in FY15, payable after five years. Including capitalised interest, interest coverage is estimated at 2.2x in FY15E and 2.3x in FY16F, while net debt-to-total equity ratio is forecast at 54% by the end Dec-15 and 50% at the end of Dec-16. At end of Sep-15, SGRO’s 4-quarter rolling cash conversion cycle stood at 41 days (vs. 30 days at end-Jun-15). Rising free cash flow. We expect SGRO to spend Rp455bn on biological assets (i.e. c.4.0k ha new planting and 22k ha immature) in FY15E and Rp381bn in FY16F (i.e. no new planting and 21k ha immature). Despite lower yields, we forecast positive free cash flow of Rp195bn in FY16F and Rp495bn in FY17F, thanks to higher CPO price forecasts. Share Price Drivers:

A turnaround story. The stock is currently trading close to mean forward PE. We believe the catalyst for the counter would be driven by CPO price movements. Given potential adverse El Nino impact, we believe the risk is on the upside. Key Risks:

Volatility in CPO prices and USD exchange rates. Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from the expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect profitability of planters in general. Setback in expansion plans. Our forecasts are based on assumed hectarage for new planting and replanting. Any setback on these plans would negatively affect our valuation due to slower volume growth. Regulatory changes. Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/ Malaysian export taxes would impact demand for CPO/refined oils. Market sentiment. Changes in fund flows in or out of emerging markets would affect valuations of plantation counters. Weather. Changes in rainfall pattern (caused by either El Nino or La Nina) would affect FFB yields with some lag time. Company Background

Sampoerna Agro is a growing upstream oil palm plantation group based in Indonesia. As at end-FY14, the group had 77k ha of own planted oil palm estates, and 51k ha of planted smallholder estates – spread over South Sumatra and West/Central Kalimantan. The group sells crude palm oil, palm kernel, and oil palm seeds.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.4

0.5

0.5

0.6

0.6

0.7

0.7

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

2013A 2014A 2015F 2016F 2017F


0.0

200,000.0

400,000.0

600,000.0

800,000.0

1,000,000.0

1,200,000.0

2013A 2014A 2015F 2016F 2017F


Rp

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2013A 2014A 2015F 2016F 2017F

Avg: 17.1x

+1sd: 24.5x

+2sd: 31.9x

‐1sd: 9.7x

‐2sd: 2.4x2.1

7.1

12.1

17.1

22.1

27.1

32.1

37.1

42.1


(x)

Avg: 1.46x

+1sd: 1.92x

+2sd: 2.38x

‐1sd: 1.01x

‐2sd: 0.55x0.4

0.9

1.4

1.9

2.4

2.9


(x)

102


Company Guide

Sampoerna Agro

Key Assumptions


Segmental Breakdown

FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (Rpm) CPO 2,139,240 2,719,070 2,425,953 2,660,570 2,964,666 PK 271,120 374,730 366,241 399,233 442,175 Germinated Seeds 53,380 49,630 79,038 68,436 82,807 Others 96,960 98,950 93,854 101,608 113,419 Total 2,560,700 3,242,380 2,965,086 3,229,847 3,603,067

Income Statement (Rpm)

FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 2,560,706 3,242,382 2,965,086 3,229,847 3,603,067 Cost of Goods Sold (2,062,598) (2,373,805) (2,145,784) (2,307,774) (2,511,159) Gross Profit 498,108 868,577 819,302 922,073 1,091,908 Other Opng (Exp)/Inc (261,824) (295,806) (315,972) (320,715) (346,523) Operating Profit 236,284 572,771 503,331 601,358 745,385 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (62,469) (62,410) (146,567) (179,120) (179,549) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 173,815 510,361 356,763 422,237 565,837 Tax (53,435) (160,259) (105,360) (121,702) (163,093) Minority Interest (1,256) (9,779) (7,022) (8,395) (11,250) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 119,124 340,323 244,381 292,140 391,494 Net Profit before Except. 119,124 340,323 244,381 292,140 391,494 EBITDA 444,640 798,650 768,499 893,762 1,071,648 Growth Revenue Gth (%) (14.2) 26.6 (8.6) 8.9 11.6 EBITDA Gth (%) (34.7) 79.6 (3.8) 16.3 19.9 Opg Profit Gth (%) (51.4) 142.4 (12.1) 19.5 24.0 Net Profit Gth (Pre-ex) (%) (63.8) 185.7 (28.2) 19.5 34.0 Margins & Ratio Gross Margins (%) 19.5 26.8 27.6 28.5 30.3 Opg Profit Margin (%) 9.2 17.7 17.0 18.6 20.7 Net Profit Margin (%) 4.7 10.5 8.2 9.0 10.9 ROAE (%) 4.5 12.1 8.0 9.0 11.1 ROA (%) 2.8 6.8 4.2 4.7 5.9 ROCE (%) 4.2 8.7 6.7 7.4 8.8 Div Payout Ratio (%) 71.4 8.3 34.8 20.9 18.7 Net Interest Cover (x) 3.8 9.2 3.4 3.4 4.2


103


Company Guide

Sampoerna Agro

Quarterly / Interim Income Statement (Rpm)

FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 1,027,076 759,500 526,870 789,937 825,036 Cost of Goods Sold (771,048) (595,114) (397,439) (543,565) (573,228) Gross Profit 256,028 164,385 129,431 246,372 251,808 Other Oper. (Exp)/Inc (65,933) (96,757) (78,268) (85,299) (74,941) Operating Profit 190,095 67,629 51,163 161,073 176,867 Other Non Opg (Exp)/Inc 8.00 1.00 18.0 0.0 22.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (23,995) 3,458 (25,046) (33,099) (44,839) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 166,108 71,087 26,135 127,974 132,050 Tax (38,875) (40,837) (8,539) (43,535) (33,479) Minority Interest (2,182) (771) (1,009) (2,528) (2,086) Net Profit 125,043 29,479 16,569 81,911 96,464 Net profit bef Except. 125,043 29,479 16,569 81,911 96,464 EBITDA 246,050 124,901 107,716 223,982 223,692 Growth Revenue Gth (%) 27.4 (26.1) (30.6) 49.9 4.4 EBITDA Gth (%) (5.0) (49.2) (13.8) 107.9 (0.1) Opg Profit Gth (%) (6.0) (64.4) (24.3) 214.8 9.8 Net Profit Gth (Pre-ex) (%) (4.1) (76.4) (43.8) 394.3 17.8 Margins Gross Margins (%) 24.9 21.6 24.6 31.2 30.5 Opg Profit Margins (%) 18.5 8.9 9.7 20.4 21.4 Net Profit Margins (%) 12.2 3.9 3.1 10.4 11.7

Balance Sheet (Rpm)

FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 1,400,911 1,706,166 1,745,378 1,757,488 1,742,975 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 2,383,409 2,976,194 3,270,943 3,505,667 3,585,676 Cash & ST Invts 162,759 194,635 585,883 573,816 831,726 Inventory 271,784 297,600 254,772 271,265 292,220 Debtors 222,705 207,537 194,756 210,025 231,951 Other Current Assets 71,088 84,743 70,269 75,461 82,669 Total Assets 4,512,656 5,466,874 6,122,000 6,393,723 6,767,217 ST Debt 305,877 383,263 652,546 652,546 952,546 Creditor 277,447 344,677 320,516 348,159 382,631 Other Current Liab 109,878 250,823 146,619 159,256 176,217 LT Debt 991,476 1,307,157 1,648,374 1,633,374 1,318,374 Other LT Liabilities 129,340 163,613 170,282 177,284 184,636 Shareholder’s Equity 2,665,555 2,977,527 3,136,827 3,367,872 3,686,331 Minority Interests 33,083 39,814 46,837 55,232 66,481 Total Cap. & Liab. 4,512,656 5,466,874 6,122,000 6,393,723 6,767,217 Non-Cash Wkg. Capital 178,252 (5,620) 52,663 49,336 47,992 Net Cash/(Debt) (1,134,594) (1,495,785) (1,715,037) (1,712,104) (1,439,194) Debtors Turn (avg days) 28.7 24.2 24.8 22.9 22.4 Creditors Turn (avg days) 54.2 52.9 64.6 60.6 61.0 Inventory Turn (avg days) 62.6 48.4 53.6 47.6 47.1 Asset Turnover (x) 0.6 0.6 0.5 0.5 0.5 Current Ratio (x) 1.1 0.8 1.0 1.0 1.0 Quick Ratio (x) 0.6 0.4 0.7 0.7 0.7 Net Debt/Equity (X) 0.4 0.5 0.5 0.5 0.4 Net Debt/Equity ex MI (X) 0.4 0.5 0.5 0.5 0.4 Capex to Debt (%) 44.5 64.0 28.8 25.0 17.9 Z-Score (X) 2.2 2.1 1.8 1.8 1.7


104


Company Guide

Sampoerna Agro

Cash Flow Statement (Rpm)

FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 173,815 510,361 356,763 422,237 565,837 Dep. & Amort. 208,355 225,879 265,169 292,404 326,263 Tax Paid (53,435) (160,259) (105,360) (121,702) (163,093) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 6,811 142,980 (10,196) (340) (3,368) Other Operating CF 0.0 0.0 0.0 0.0 0.0 Net Operating CF 335,547 718,961 506,376 592,599 725,639 Capital Exp.(net) (577,284) (1,081,364) (662,112) (572,529) (405,444) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (126,401) (6,317) 12,820 34,777 16,109 Net Investing CF (703,684) (1,087,681) (649,292) (537,752) (389,335) Div Paid (85,050) (28,350) (85,081) (61,095) (73,035) Chg in Gross Debt 355,850 393,067 610,500 (15,000) (15,000) Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 33,820 35,880 8,744 9,182 9,641 Net Financing CF 304,619 400,597 534,164 (66,914) (78,394) Currency Adjustments (1,795) (1.0) 0.0 0.0 0.0 Chg in Cash (65,313) 31,876 391,248 (12,067) 257,910 Opg CFPS (Rp) 174 305 273 314 386 Free CFPS (Rp) (128) (192) (82.4) 10.6 169



Source: DBS Bank

S.No. DateClosing

PriceT arget Price

Rat ing

1: 31 Mar 15 1880 1910 HOLD

2: 04 May 15 1795 1910 HOLD

3: 03 Jun 15 1800 1980 HOLD

4: 28 Jul 15 1640 1710 HOLD

5: 10 Aug 15 1675 1710 HOLD

6: 17 Sep 15 1295 1110 FULLY VALUED



9: 02 Nov 15 1175 1760 BUY

10: 11 Nov 15 1290 1760 BUY

11: 10 Dec 15 1450 1760 BUY12: 12 Jan 16 1700 1760 BUY13: 10 Feb 16 1850 1760 BUY


12

3 4

5

6

78

9

10 11

12 13

997

1197

1397

1597

1797

1997

2197


Rp

105


HOLD

Last Traded Price: RM8.00 (KLCI : 1,680.02) Price Target : RM7.60 (-5% downside) Where we differ: Higher than consensus FY16F/17F earnings on higher CPO price expectations Analyst Ben Santoso +65 6682 3707 [email protected]

What’s New FY16F/17F earnings adjusted by -6%/-2% We cut Industrial and Motor segment profit

expectations – offset by better Plantations

contribution TP unchanged at RM7.60 (based on SOP)

Price Relative

Forecasts and Valuation FY Jun (RM m) 2014A 2015A 2016F 2017F Revenue 43,908 43,729 45,328 47,873 EBITDA 5,375 4,449 4,839 5,349 Pre-tax Profit 4,228 3,003 2,973 3,473 Net Profit 3,353 2,313 2,166 2,530 Net Pft (Pre Ex.) 3,089 2,313 2,166 2,530 Net Pft Gth (Pre-ex) (%) (4.4) (25.1) (6.3) 16.8 EPS (sen) 55.3 37.2 34.9 40.7 EPS Pre Ex. (sen) 50.9 37.2 34.9 40.7 EPS Gth Pre Ex (%) (5) (27) (6) 17 Diluted EPS (sen) 55.3 37.2 34.9 40.7 Net DPS (sen) 36.1 18.6 17.4 20.4 BV Per Share (sen) 471 489 505 528 PE (X) 14.5 21.5 22.9 19.6 PE Pre Ex. (X) 15.7 21.5 22.9 19.6 P/Cash Flow (X) 16.6 16.4 13.5 14.5 EV/EBITDA (X) 10.5 14.7 13.4 12.0 Net Div Yield (%) 4.5 2.3 2.2 2.5 P/Book Value (X) 1.7 1.6 1.6 1.5 Net Debt/Equity (X) 0.2 0.5 0.4 0.4 ROAE (%) 11.7 7.6 6.9 7.7 Earnings Rev (%): (6) (2) Consensus EPS (sen): 33.3 39.8 Other Broker Recs: B: 0 S: 5 H: 18


Consolidating Multiple headwinds. Despite having a diversified business model, Sime Darby (Sime) is facing challenges on almost all of its key segments. From weak CPO prices/flat output affecting plantations; mining companies’ cost-cutting measures affecting industrials; China’s anti-corruption drive affecting motor; to tighter credit affecting take-up in Malaysia’s property market. A slower-than-expected recovery. Based on 2QFY16 CPO output (including full-quarter contribution from New Britain Palm Oil) and lacklustre demand for new equipment/new cars, we now expect a slower recovery in 2QFY16 earnings than previously expected. These prompted a 6% cut in FY16F earnings – despite expectations of a CPO price recovery in 2HFY16. The impact of these headwinds may spill over to FY17F earnings that we also cut by 2% in this note. . Conserving cash. Sime’s acquisition of New Britain Palm Oil (NBPOL) had expanded the group’s net debt to total equity ratio to 50% at end-Sep15. Highlighting this, we expect Sime to continue to reduce gearing through stringent capex outlay/dividend distribution, working capital management, as well as refinancing; until NBPOL can be re-listed. In a scenario where cash flow becomes tight, Sime still has c.US$700m of undrawn sukuk facility. The issuance of perpetual subordinated Islamic MTN of RM3bn is also proposed. Additionally, the group is reported to have considered the sale of assets to other entities, such as a real estate investment trust. We will impute the proposed corporate actions as they happen. Valuation: Despite our earnings adjustments, our SOP-based TP is unchanged at RM7.60. While reduced profit expectations in the industrials and motor segments weigh down Sime’s valuation, these were offset by higher plantation segment DCF estimates (WACC 6.9%, TG 3%) – thanks to upgrades in CPO price forecasts over the next two years. Key Risks to Our View: A strong recovery in commodity prices and a rebound in China’s economy would boost Sime’s earnings, potentially trumping our estimates. As Sime is an index component, changes in its weightings would also make it vulnerable to significant swings above or below our target price. At A Glance Issued Capital (m shrs) 6,327 Mkt. Cap (RMm/US$m) 50,617 / 12,003 Major Shareholders (%) Skim Amanah Saham Bumiputera 39.7 Employees Provident Fund 13.0 Permodalan Nasional Bhd 8.5

Free Float (%) 38.9 3m Avg. Daily Val (US$m) 7.6 ICB Industry : Industrials / General Industrials



Sime Darby Version 2 | Bloomberg: SIME MK | Reuters: SIME.KL Refer to important disclosures at the end of this report

64

84

104

124

144

164

184

204

6.3

6.8

7.3

7.8

8.3

8.8

9.3

9.8

10.3

10.8


Relative IndexRM

Sime Darby (LHS) Relative KLCI INDEX (RHS)

106


Company Guide

Sime Darby

WHAT’S NEW

Forecasts, TP and rating adjustments We adjusted Sime’s earnings to reflect changes in our key assumptions, as summarised below: We imputed realised CPO and PK production volumes,

exchange rates, and CPO ASP (based on average spot) in 4QCY15; together with revisions in our FY16 and FY17 CPO price outlook and FFB yields.

We upgraded CY16/17 CPO price forecasts (US$/MT, FOB) by 12%/16% to US$600/US$649 – reflecting lower expected global CPO output as well as expansion in biodiesel usage in Indonesia – through deployment of CPO fund collected since Jul 15.

We adjusted FY16F earnings 6% lower (vs. previous forecast) after imputing lower industrial and motor top line growth and margins – based on guidance in recent analyst briefing held by the management to provide updates on the performance of the various segments.

In the plantations segment, we now impute higher labour costs on the back of proposed hike in minimum wages (from 1 Jul 16) and hike in foreign workers’ levy. We also assume a 1% y-o-y drop in projected FFB yields for both

FY16F and FY17F (on top of already weak FY15 yields) – mainly reflecting impact from El Nino.

All in, Sime’s FY16F/17F EBIT contribution from the plantations segment netted -2% and +5% adjustments from our previous forecasts.

We kept FY16F/17F motor segment EBIT unchanged; as we anticipate better demand in Singapore and Vietnam to augment flattish growth in Malaysia. No further deterioration in China/HK markets is expected.

Industrial segment FY16F/17F EBIT was nevertheless cut by 25% and 20%, respectively. Pressure on the group’s industrial top and bottom lines was mainly due to miners’ continued cost-cutting measures as well as slowdown in the China/HK construction sector.

FY17F earnings expectations are higher than consensus, thanks to better plantations contribution. We believe CPO prices should maintain its current trajectory on limited substitution from soybean oil due to limited spare crushing capacity in Argentina.

Revisions in exchange rates in favour of a stronger MYR also adversely impacted our CPO price forecasts. Our HOLD call on the stock is unchanged.

107


Company Guide

Sime Darby


Plantation contribution. Movements in CPO prices would directly impact the group’s profitability. While Sime’s sheer size (i.e. having planted oil palm estates totalling 604k ha) should mitigate regional differences in FFB yields, the group’s relatively higher average age of oil palm trees (i.e. c.17.4 years) also limits growth potential relative to younger peers. Sime’s plantation segment is therefore relatively more prone to CPO price/currency volatilities and weather vagaries. Should a severe rainfall deficit occur in 2H15, the impact on FFB yields would be reflected in Sime’s books 11-12 months thereafter. The group’s large planted area also means that operational efficiency may lag smaller-sized peers. Following the New Britain Palm Oil acquisition, Sime’s average age is expected to come down to 16.5 years by end of FY16F and should gradually increase towards 16.6 years by FY17F – slightly offset by replanting. Given its large size and relatively older trees, Sime’s FFB output is forecast to expand by a 1.5% CAGR between FY15 and FY18F. Property contribution. We expect the group’s property segment to contribute c.30% of its operating profit this year. The segment has seen steady growth over the past few years and this has helped to offset volatility in plantations and industrial segment contributions. While seeing headwinds from tighter lending in Malaysia this year, we believe that property still offers growth from development of investment properties while benefitting from its sizeable land bank for further launches. We believe disclosure of its gross development value per project would help to unlock value in this segment. Industrial contribution. The group’s industrial segment is engaged in sales and rental of heavy equipment (mainly Caterpillar and Bucyrus brands), as well as after sales servicing and maintenance. Profit for this segment is driven by capex-spend principally undertaken by coal/iron ore miners, in addition to construction companies. Volatility in the underlying commodity prices, bank lending as well as construction would influence the demand for Sime’s heavy equipment products. While we expect the underlying commodity prices to recover, this is partly on the back of a scale-back from some of the smaller miners, which may not yet translate into positive impact on Sime’s industrial segment. Motor contribution. To a large extent, Sime’s motor segment depends on banks' lending policies, government regulations on taxes and consumer purchasing power. With roughly half of its profit contribution coming from Malaysia and the other half from China/HK, the group faces challenges this year. Tighter lending and GST implementation have pushed back appetite for new cars in Malaysia, while the crackdown on corruption and intense competition in China have also dampened its sales contribution in China/HK. Slated for a separate listing earlier this year, the spin-off has now been put on hold. We believe an eventual listing of this segment could offer some cash-flow reprieve for the group.

CPO price (RM/MT)


HK & PRC Motor rev.(RMm)

Australasia Industrial rev. (RMm)

Average MYR/USD


2,3172,451

2,193 2,243

2,462

0

300

600

900

1,200

1,500

1,800

2,100

2,400

2013A 2014A 2015A 2016F 2017F

466,849 455,556

526,052 525,617 524,986

0

107,300

214,600

321,900

429,200

536,500

2013A 2014A 2015A 2016F 2017F

7,035 7,2277,758

8,1468,513

0

1,700

3,400

5,100

6,800

8,500

2013A 2014A 2015A 2016F 2017F

9,607

6,894

6,1275,667 5,809

0

1,200

2,400

3,600

4,800

6,000

7,200

8,400

9,600

2013A 2014A 2015A 2016F 2017F

3.093.25

3.62

4.28 4.33

0.00

0.87

1.75

2.62

3.50

4.37

2013A 2014A 2015A 2016F 2017F

108


Company Guide

Sime Darby

Balance Sheet:

Managing gearing ratio. The group’s gross debt had expanded to RM19.9bn by end-Sep 15 (translating to gross and net gearing ratios of 60% and 50%, respectively). This primarily reflects the additional RM5bn bilateral bank borrowings to fund the acquisition and de-listing of New Britain Palm Oil. We understand the management intends to limit its gross gearing ratio at 60%; and expect the group’s net gearing ratio to decline towards 40% by end-FY17F from 46% at end of FY15 on CPO price recovery. Falling ROE-WACC spread. Faced with multiple headwinds the group’s ROE has been declining. Based on our revised forecasts, Sime’s ROE-WACC spread is expected to remain flat at 0.4% this year before recovering to 1% in FY17F – assuming no issuance of perpetual subordinated Islamic MTN. Share Price Drivers:

In consolidation mode. The stock is currently trading close to the average forward PE. We do not expect any catalyst in the near term, as the group is expected to focus its efforts on consolidating New Britain Palm Oil in FY16F, now that the listing of its motor segment and re-listing of NBPOL have been put on hold. Key Risks:

Volatility in commodity prices and USD exchange rates Continued weakness in CPO prices may deliver lower-than-expected earnings, while lower energy prices from the expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect the profitability of planters in general. The group's industrial division has significant exposure to demand for coal. Continued weakness in coal prices would have adverse consequences on demand for the group's Caterpillar equipment in Australia. Regulatory changes Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact the demand for CPO/refined oils. Market sentiment Changes in fund flows towards or out of emerging markets would affect valuations of plantation counters. Weather Changes in rainfall pattern (caused by either El Nino or La Nina) would affect FFB yields with some time-lag. Company Background

Sime Darby is a GLC conglomerate. The group's principal activities include plantations, property development, heavy equipment and motor vehicle distribution, as well as utilities.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.7

0.8

0.8

0.9

0.9

1.0

1.0

0.00

0.10

0.20

0.30

0.40

0.50

0.60

2013A 2014A 2015A 2016F 2017F


0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

8,000.0

9,000.0

2013A 2014A 2015A 2016F 2017F


RM

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2013A 2014A 2015A 2016F 2017F

Avg: 21.8x

+1sd: 24.9x

+2sd: 27.9x

‐1sd: 18.8x

‐2sd: 15.8x

14.1

16.1

18.1

20.1

22.1

24.1

26.1

28.1

30.1


(x)

Avg: 1.99x

+1sd: 2.21x

+2sd: 2.42x

‐1sd: 1.78x

‐2sd: 1.57x

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6


(x)

109


Company Guide

Sime Darby

Key Assumptions

FY Jun 2013A 2014A 2015A 2016F 2017F CPO price (RM/MT) 2,317 2,451 2,193 2,243 2,462 Mature palm oil hectarage 466,849 455,556 526,052 525,617 524,986 HK & PRC Motor 7,035 7,227 7,758 8,146 8,513 Australasia Industrial rev. 9,607 6,894 6,127 5,667 5,809 Average MYR/USD 3.09 3.25 3.62 4.28 4.33

Segmental Breakdown

FY Jun 2013A 2014A 2015A 2016F 2017F Revenues (RMm) Plantations 11,672 10,954 10,269 11,176 12,023 Property 2,325 2,792 3,455 3,801 4,162 Industrial 14,059 11,665 10,558 9,766 10,010 Motor 17,266 17,745 18,646 19,708 20,721 Others 788 752 801 877 957 Total 46,109 43,908 43,729 45,328 47,873 EBIT (RMm) Plantations 1,978 1,905 1,181 1,520 1,708 Property 523 529 929 912 984 Industrial 1,284 998 512 403 449 Motor 699 631 467 446 479 Others 10.2 57.2 311 166 181 Total 4,493 4,119 3,399 3,447 3,801 EBIT Margins (%)

Plantations 16.9 17.4 11.5 13.6 14.2 Property 22.5 18.9 26.9 24.0 23.6 Industrial 9.1 8.6 4.9 4.1 4.5 Motor 4.0 3.6 2.5 2.3 2.3 Others 1.3 7.6 38.8 18.9 18.9 Total 9.7 9.4 7.8 7.6 7.9


FY Jun 2013A 2014A 2015A 2016F 2017F Revenue 46,109 43,908 43,729 45,328 47,873 Cost of Goods Sold (42,833) (40,748) (41,607) (42,894) (45,110) Gross Profit 3,276 3,160 2,121 2,434 2,763 Other Opng (Exp)/Inc 1,218 958 1,278 1,013 1,038 Operating Profit 4,493 4,119 3,399 3,447 3,801 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 141 100 (122) 34.3 152 Net Interest (Exp)/Inc (321) (254) (274) (508) (480) Exceptional Gain/(Loss) 471 263 0.0 0.0 0.0 Pre-tax Profit 4,785 4,228 3,003 2,973 3,473 Tax (953) (708) (567) (699) (816) Minority Interest (131) (168) (123) (108) (127) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 3,701 3,353 2,313 2,166 2,530 Net Profit before Except. 3,230 3,089 2,313 2,166 2,530 EBITDA 5,888 5,375 4,449 4,839 5,349 Growth Revenue Gth (%) (2.4) (4.8) (0.4) 3.7 5.6 EBITDA Gth (%) (16.4) (8.7) (17.2) 8.8 10.5 Opg Profit Gth (%) (22.4) (8.3) (17.5) 1.4 10.3 Net Profit Gth (Pre-ex) (%) (23.0) (4.4) (25.1) (6.3) 16.8 Margins & Ratio Gross Margins (%) 7.1 7.2 4.9 5.4 5.8 Opg Profit Margin (%) 9.7 9.4 7.8 7.6 7.9 Net Profit Margin (%) 8.0 7.6 5.3 4.8 5.3 ROAE (%) 13.7 11.7 7.6 6.9 7.7 ROA (%) 7.6 6.6 3.8 3.4 3.9 ROCE (%) 9.1 8.2 5.3 4.9 5.3 Div Payout Ratio (%) 53.7 65.4 50.0 50.0 50.0 Net Interest Cover (x) 14.0 16.2 12.4 6.8 7.9


Represents weighted average of spot (FOB Pasir Gudang) and Indonesia ASP net of export taxes/levies

110


Company Guide

Sime Darby


FY Jun 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016 Revenue 10,124 10,742 9,998 12,865 10,173 Cost of Goods Sold (9,699) (10,422) (9,606) (9,606) (9,837) Gross Profit 426 320 392 3,258 337 Other Oper. (Exp)/Inc 331 385 189 0.0 264 Operating Profit 756 706 796 1,141 600 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc (11.4) (48.2) (116) 53.9 16.9 Net Interest (Exp)/Inc (70.1) (64.7) (84.4) (55.1) (146) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 675 593 595 1,140 471 Tax (148) (128) (167) (124) (111) Minority Interest (25.9) (27.4) (42.4) (27.2) (31.7) Net Profit 501 437 386 989 328 Net profit bef Except. 501 437 386 989 328 EBITDA 1,042 942 959 1,594 932 Growth Revenue Gth (%) (19.1) 6.1 (6.9) 28.7 (20.9) EBITDA Gth (%) (39.7) (9.6) 1.8 66.2 (41.5) Opg Profit Gth (%) (47.2) (6.7) 12.8 43.4 (47.4) Net Profit Gth (Pre-ex) (%) (51.6) (12.6) (11.8) 156.1 (66.8) Margins Gross Margins (%) 4.2 3.0 3.9 25.3 3.3 Opg Profit Margins (%) 7.5 6.6 8.0 8.9 5.9 Net Profit Margins (%) 4.9 4.1 3.9 7.7 3.2

Balance Sheet (RMm)

FY Jun 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 14,096 14,347 16,488 16,830 17,037 Invts in Associates & JVs 2,882 3,111 3,846 3,880 4,032 Other LT Assets 8,279 9,085 15,463 15,730 15,904 Cash & ST Invts 4,094 4,382 3,645 4,639 4,295 Inventory 8,715 9,511 9,663 9,786 10,189 Debtors 6,057 6,526 7,487 7,191 7,519 Other Current Assets 4,336 3,974 5,002 5,127 5,255 Total Assets 48,458 50,936 61,594 63,183 64,231 ST Debt 2,092 3,072 6,324 7,631 8,396 Creditor 8,236 8,314 8,615 8,711 9,161 Other Current Liab 726 683 643 650 656 LT Debt 7,993 8,255 11,885 11,057 9,337 Other LT Liabilities 1,430 1,147 2,760 2,649 2,623 Shareholder’s Equity 27,096 28,589 30,355 31,364 32,812 Minority Interests 885 877 1,012 1,120 1,247 Total Cap. & Liab. 48,458 50,936 61,594 63,183 64,231 Non-Cash Wkg. Capital 10,146 11,014 12,894 12,743 13,147 Net Cash/(Debt) (5,992) (6,946) (14,564) (14,049) (13,437) Debtors Turn (avg days) 47.9 54.2 62.5 57.9 57.3 Creditors Turn (avg days) 72.3 76.6 77.8 76.5 76.5 Inventory Turn (avg days) 76.5 87.7 87.2 86.0 85.1 Asset Turnover (x) 1.0 0.9 0.7 0.7 0.7 Current Ratio (x) 2.1 2.0 1.7 1.6 1.5 Quick Ratio (x) 0.9 0.9 0.7 0.7 0.6 Net Debt/Equity (X) 0.2 0.2 0.5 0.4 0.4 Net Debt/Equity ex MI (X) 0.2 0.2 0.5 0.4 0.4 Capex to Debt (%) 31.1 20.3 46.7 8.8 9.2 Z-Score (X) 0.0 0.0 0.0 0.0 0.0


111


Company Guide

Sime Darby


FY Jun 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 4,314 3,965 3,003 2,973 3,473 Dep. & Amort. 1,254 1,156 1,172 1,358 1,396 Tax Paid (953) (708) (567) (699) (816) Assoc. & JV Inc/(loss) (141) (100) 122 (34.3) (152) Chg in Wkg.Cap. (132) (868) (1,880) 151 (404) Other Operating CF (641) (522) 1,171 (61.2) (62.0) Net Operating CF 3,701 2,923 3,021 3,688 3,436 Capital Exp.(net) (3,139) (2,303) (8,501) (1,651) (1,636) Other Invts.(net) (159) 238 (21.8) (26.6) (27.2) Invts in Assoc. & JV (800) 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 1,936 787 1,254 24.8 (71.9) Net Investing CF (2,161) (1,278) (7,269) (1,652) (1,735) Div Paid (1,923) (1,477) (2,192) (1,156) (1,083) Chg in Gross Debt 282 1,242 6,882 121 (955) Capital Issues (627) 306 1,665 0.0 0.0 Other Financing CF 360 (1,309) (3,100) (6.1) (6.1) Net Financing CF (1,908) (1,239) 3,255 (1,041) (2,045) Currency Adjustments (103) (118) 255 0.0 0.0 Chg in Cash (471) 288 (737) 994 (344) Opg CFPS (sen) 63.8 62.5 78.9 56.9 61.8 Free CFPS (sen) 9.35 10.2 (88.2) 32.8 29.0



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 25 May 15 8.53 8.85 HOLD

2: 03 Jun 15 8.63 8.75 HOLD

3: 10 Aug 15 8.40 8.10 HOLD

4: 27 Aug 15 7.45 7.40 HOLD

5: 17 Sep 15 8.08 7.60 HOLD

6: 13 Oct 15 8.68 7.60 HOLD

7: 11 Nov 15 8.13 7.60 HOLD

8: 27 Nov 15 8.05 7.60 HOLD

9: 10 Dec 15 7.44 7.60 HOLD

10: 12 Jan 16 7.35 7.60 HOLD

11: 02 Feb 16 7.57 7.60 HOLD12: 10 Feb 16 7.68 7.60 HOLD


12

3

45

6

7

8

9

10

11

12

6.66

7.16

7.66

8.16

8.66

9.16

9.66


RM

112


BUY (Upgrade from Hold)

Last Traded Price: RM2.00 (KLCI : 1,680.02) Price Target : RM2.30 (15% upside) (Prev RM1.90) Potential Catalyst: Strong increase in CPO prices Where we differ: In line with consensus Analyst Marvin KHOR +603 2604 3911 [email protected] Ben Santoso +65 6682 3707 [email protected]


changes in CPO price forecasts

Expect improved production figures in 4Q15 as maturities kick in

TP rises to RM2.30 after the earnings adjustments

Price Relative

Forecasts and Valuation FY Dec (RM m) 2014A 2015F 2016F 2017F Revenue 1,071 863 1,005 1,172 EBITDA 235 200 251 280 Pre-tax Profit 168 138 185 214 Net Profit 124 99.7 133 154 Net Pft (Pre Ex.) 132 99.7 133 154 Net Pft Gth (Pre-ex) (%) 3.2 (24.6) 33.9 15.3 EPS (sen) 9.20 7.41 9.92 11.4 EPS Pre Ex. (sen) 9.83 7.41 9.92 11.4 EPS Gth Pre Ex (%) 3 (25) 34 15 Diluted EPS (sen) 9.20 7.41 9.92 11.4 Net DPS (sen) 2.50 1.85 2.48 2.86 BV Per Share (sen) 88.0 92.9 101 110 PE (X) 21.7 27.0 20.2 17.5 PE Pre Ex. (X) 20.4 27.0 20.2 17.5 P/Cash Flow (X) 22.6 15.2 16.2 15.0 EV/EBITDA (X) 16.1 19.4 15.8 14.4 Net Div Yield (%) 1.3 0.9 1.2 1.4 P/Book Value (X) 2.3 2.2 2.0 1.8 Net Debt/Equity (X) 0.8 0.8 0.8 0.7 ROAE (%) 11.0 8.2 10.2 10.8 Earnings Rev (%): 0 13 17 Consensus EPS (sen): 7.50 9.90 11.3 Other Broker Recs: B: 4 S: 2 H: 5

Source of all data: Company, AllianceDBS Research, DBS Bank, Bloomberg Finance L.P

Boosted by higher prices Ready for an upswing. We are now expecting CPO prices to average RM2,600/RM2,810 per MT in FY16/17F, as the supply and demand dynamics turn favourable. Due to its upstream focus, we think that TSH stands to gain from the c.11% recovery in ASP. Our revised forecasts expect core earnings to grow 34%/15% in FY16/17F; in some part due to the lower base in FY15 which we project to fall 25%. Our DCF-derived TP is raised to RM2.30, upgrade to BUY. Maturity pipeline to support mid-term growth. TSH is set to see its mature planted area increase to c.40k ha by 2018 from c. 27k ha currently (c.14% CAGR), as a result of its aggressive planting in Indonesia previously. It will also have c.14k ha of immature planted area thereafter, or more, depending on its new planting schedule on >60k ha of unplanted land bank. This will support its growth in own FFB, which we estimate to grow at c.12% CAGR between 2015 and 2018. Divestments may be a prospect. To help fund its oil palm operations and reduce gearing, a possible avenue for TSH would be to divest some of its non-core assets such as Ekowood and the cocoa processing unit.

Valuation:

Our DCF-based TP is RM2.30, which takes into account our CY16/17 CPO price forecasts of RM2,600/ RM2,810 per MT. Key Risks to Our View:

TSH’s share price is driven by CPO price expectations. Hence, a strong recovery in CPO prices (either data or regulatory-driven) could lift its share price to above our fair value, and vice versa. A severe El Nino could also affect TSH’s productivity, cash generation, and ultimately its share price performance. At A Glance Issued Capital (m shrs) 1,356 Mkt. Cap (RMm/US$m) 2,711 / 643 Major Shareholders (%) Aik Pen Tan 12.4 Tunas Lestari Sdn Bhd 6.3 Embun Yakin Sdn Bhd 5.6




TSH Resources Version 3 | Bloomberg: TSH MK | Reuters: TSHR.KL Refer to important disclosures at the end of this report

78

98

118

138

158

178

198

218

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8


Relative IndexRM

TSH Resources (LHS) Relative KLCI INDEX (RHS)

113


Company Guide

TSH Resources

WHAT’S NEW


We adjusted TSH’s earnings to reflect changes in our forecasts; as we impute actual CPO prices and exchange rates in FY15F as well as revisions in our outlook from FY16F onwards. Changes in our forecasts are explained below:

FY16F/17F earnings are revised upwards 12.6%/16.8%. This primarily comes from our increased CPO ASP assumptions, after some trimming of production figures. Our DCF-derived TP is also adjusted to RM2.30/share (raised from RM1.90) previously.

We adjusted CY16F/17F CPO price forecasts by 12%/16% to US$600/US$649, translating to RM2,600/RM2,810 per MT. In ringgit terms, this is an increase of 11%/15% over previous forecasts of RM2,340/RM2,450 per MT.

In view of the weather impact, we trim our yield estimates on a per-hectare basis by a by 2%/1% in FY16/17F. Nevertheless, we still expect 9.6% growth in its internal FFB, as its mature planted area is set to increase by c.11%, as 3k ha in Indonesia moves into mature producing age.

We expect 4Q15 core earnings to come in between RM26m and RM29m, thus bringing FY15 core profit in line with our full-year projection – based on 4Q CPO production of c.80k MT (+12% q-o-q, -1% y-o-y).

114


Company Guide

TSH Resources


Earnings Drivers:

CPO prices. As a commodity producer, TSH is a price-taker. Movements in international CPO prices would directly impact the group’s profitability. We recently adjusted our CPO price forecasts to account for the expected fall in Malaysian production due to the bouts of lack of rainfall observed in 2015. We are expecting CPO prices (FOB Pasir Gudang) to average US$600 (RM2,600) in CY16 – representing an increase of 20% y-o-y in ringgit terms from 2015. Size of mature plantations. Due to its aggressive planting over the past few years, TSH is expected to see a steady climb in mature hectarage, which currently makes up 63% of 42.8 k ha of total planted area. We expect the mature planted area to grow by 48% over the next three years to 39.9k ha in 2018, and total planted area to grow by 25% to 53.5k ha – if it keeps to its planting schedule of up to 3-4k ha/year. All these will support its internal FFB output, which we expect to register a double-digit CAGR. Production volume. TSH has six palm oil mills: three in Sabah, one in Sumatra, and two in Kalimantan. The Sabah mills currently process the bulk of FFB from external sources, and so its overall CPO production trend also depends on FFB production at nearby plantations. TSH’s oil extraction rate has been decent, averaging 21% in Sabah and 21.5% in Indonesia. Currently, about 60% of its overall CPO production comes from Sabah, but that ratio will drop as FFB production at its Indonesian plantations picks up. Regulations. Tariff and non-tariff regulations are common in the agricultural commodities sector, and palm oil is no exception. Any changes in export/import tariffs, as well as various taxes and levies, would affect trade flows and prices. The USD50/MT export levy by Indonesia, due to be implemented in Aug 2015, will impact TSH’s Indonesian operations. Seasonal demand. As a major vegetable oil with 36% global market share, palm oil is an important food staple. The next largest is soybean oil, with 27% market share. These two vegetable oils are direct substitutes (suggesting high price elasticity of demand), although certain vegetable oils are more suitable than others for certain applications. Demand for palm oil is dominant in Asia, where local festivities result in seasonal demand during different months of the year. The Ramadan month, Chinese New Year, and Divali are typically high-demand periods in Asia.

CPO price


CPO sales volume

PK sales volume

Average MYR/USD

Source: Company, AllianceDBS Research, DBS Bank

2,377 2,413

2,168

2,6002,810

0

400

800

1,200

1,600

2,000

2,400

2,800

2013A 2014A 2015F 2016F 2017F

24,09825,677

26,960

29,960

33,149

0

6,800

13,600

20,400

27,200

2013A 2014A 2015F 2016F 2017F

312,644

345,293

289,595303,228

337,306

0

70,400

140,800

211,200

281,600

352,000

2013A 2014A 2015F 2016F 2017F

69,30374,364

63,135 65,332

72,675

0

9,400

18,800

28,200

37,600

47,000

56,400

65,800

2013A 2014A 2015F 2016F 2017F

3.2 3.31

4.084.34 4.34

0.00

0.88

1.75

2.63

3.50

4.38

2013A 2014A 2015F 2016F 2017F

115


Company Guide

TSH Resources

Balance Sheet:

High gearing due to aggressive planting. TSH’s net gearing is over 0.8x, primarily due to aggressive planting over the past few years. About 40% of the overall debt is denominated in US dollar terms. We expect mild increases in TSH’s overall financing if it sticks to its planting schedule of 3-4k ha per year. Share Price Drivers:

Look for signs of output and earnings recovery. We expect TSH to see organic production growth over the next few years due to the young age profile for its estates, which should translate into earnings growth given favourable CPO prices. The stock may be rerated once macro issues (such as weather and excess supply of soybeans) dissipate, and valuations become more palatable. Key Risks:

Volatility in CPO prices and USD exchange rate. Continued depressed CPO prices would hurt earnings, especially for upstream planters. Additionally, low crude oil prices may affect CPO demand for biofuel. Finally, CPO prices in ringgit would also be directly affected by the currency’s strength relative to the US dollar. Setback in expansion plans. Our forecasts are based on assumed hectarage for new planting and replanting. A setback to these plans could hurt our valuation through slower volume growth. Market sentiment. Changes in fund flows towards or out of emerging markets would affect valuations of plantation counters. Extreme changes in the weather. Sudden and significant changes in rainfall and humidity, such as in the case of a strong El Nino event (prolonged dryness), can affect FFB yields. Company Background

TSH is an upstream planter, owning over 100k ha of plantation land in Sabah and Kalimantan and six palm oil mills. It also has a 50:50 JV refinery with Wilmar International. Non-core businesses include palm waste integration, wood flooring (Ekowood Bhd) and cocoa processing.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.3

0.3

0.3

0.4

0.4

0.4

0.4

0.4

0.5

0.5

0.5

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

2013A 2014A 2015F 2016F 2017F


0.0

50.0

100.0

150.0

200.0

250.0

300.0

2013A 2014A 2015F 2016F 2017F


RM

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2013A 2014A 2015F 2016F 2017F

Avg: 21.5x

+1sd: 26.4x

+2sd: 31.3x

‐1sd: 16.6x

‐2sd: 11.7x10.5

15.5

20.5

25.5

30.5


(x)

Avg: 2.34x

+1sd: 2.6x

+2sd: 2.87x

‐1sd: 2.08x

‐2sd: 1.82x

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

3.6


(x)

116


Company Guide

TSH Resources

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F CPO price (RM/MT) 2,377 2,413 2,168 2,600 2,810 Mature palm oil hectarage 24,098 25,677 26,960 29,960 33,149 CPO sales volume 312,644 345,293 289,595 303,228 337,306 PK sales volume 69,303 74,364 63,135 65,332 72,675 Average MYR/USD 3.20 3.31 4.08 4.34 4.34

Segmental Breakdown

FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (RMm) Oil Palm Plantation 902 967 762 904 1,071 Wood Products 51.1 43.0 46.5 44.4 42.4 Cocoa 65.0 61.4 55.3 56.8 58.4 Total 1,018 1,071 863 1,005 1,172 EBIT (RMm)

Oil Palm Plantation 157 194 157 205 235 Wood Products (3.5) (6.1) (4.6) (4.3) (4.0) Cocoa 6.44 3.07 2.76 2.84 2.92 Total 159 191 155 204 234 EBIT Margins (%) Oil Palm Plantation 17.4 20.1 20.6 22.7 21.9 Wood Products (6.8) (14.2) (9.9) (9.6) (9.3) Cocoa 9.9 5.0 5.0 5.0 5.0 Total 15.7 17.8 17.9 20.3 19.9


FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 1,018 1,071 863 1,005 1,172 Cost of Goods Sold (715) (712) (583) (656) (774) Gross Profit 303 359 280 349 398 Other Opng (Exp)/Inc (168) (175) (133) (153) (177) Operating Profit 135 184 147 196 222 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 24.1 6.91 7.68 8.03 12.2 Net Interest (Exp)/Inc (17.8) (15.0) (16.8) (18.7) (20.0) Exceptional Gain/(Loss) 22.8 (8.4) 0.0 0.0 0.0 Pre-tax Profit 164 168 138 185 214 Tax (7.9) (32.5) (26.8) (36.6) (43.1) Minority Interest (5.6) (11.5) (11.7) (14.9) (16.9) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 151 124 99.7 133 154 Net Profit before Except. 128 132 99.7 133 154 EBITDA 185 235 200 251 280 Growth Revenue Gth (%) 3.4 5.2 (19.4) 16.4 16.6 EBITDA Gth (%) 18.7 27.2 (14.9) 25.7 11.5 Opg Profit Gth (%) 21.4 36.1 (20.1) 32.9 13.3 Net Profit Gth (Pre-ex) (%) 43.4 3.2 (24.6) 33.9 15.3 Margins & Ratio Gross Margins (%) 29.8 33.6 32.5 34.7 34.0 Opg Profit Margin (%) 13.3 17.2 17.0 19.5 18.9 Net Profit Margin (%) 14.8 11.6 11.5 13.3 13.1 ROAE (%) 15.5 11.0 8.2 10.2 10.8 ROA (%) 6.5 5.0 3.7 4.6 4.9 ROCE (%) 6.0 6.4 4.6 5.6 5.9 Div Payout Ratio (%) 20.8 27.2 25.0 25.0 25.0 Net Interest Cover (x) 7.6 12.3 8.8 10.5 11.1


117


Company Guide

TSH Resources


FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 247 244 206 206 181 Cost of Goods Sold (156) (162) (134) (132) (122) Gross Profit 90.6 82.2 71.5 73.9 59.2 Other Oper. (Exp)/Inc (52.8) (48.4) (38.4) (41.8) (41.8) Operating Profit 37.8 33.8 33.1 32.1 17.4 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc (1.3) 3.40 2.32 (1.4) 5.51 Net Interest (Exp)/Inc (2.9) (2.6) (3.3) (4.8) (2.9) Exceptional Gain/(Loss) (3.7) (9.6) (23.7) (10.6) (71.2) Pre-tax Profit 30.0 25.0 8.53 15.4 (51.2) Tax (7.3) (4.9) (1.7) (7.4) 1.74 Minority Interest (2.1) (2.2) (0.4) (0.9) 1.29 Net Profit 20.6 18.0 6.44 7.08 (48.2) Net profit bef Except. 24.3 27.6 30.1 17.7 23.0 EBITDA 36.5 37.2 35.4 30.7 22.9 Growth Revenue Gth (%) (18.2) (1.2) (15.6) 0.1 (12.0) EBITDA Gth (%) (22.6) 1.8 (4.6) (13.3) (25.4) Opg Profit Gth (%) (22.3) (10.5) (1.9) (3.2) (45.7) Net Profit Gth (Pre-ex) (%) (31.4) 13.5 9.2 (41.2) 30.3 Margins Gross Margins (%) 36.7 33.7 34.7 35.8 32.6 Opg Profit Margins (%) 15.3 13.8 16.1 15.6 9.6 Net Profit Margins (%) 8.4 7.4 3.1 3.4 (26.6)

Balance Sheet (RMm)

FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 1,452 1,740 1,920 2,095 2,247 Invts in Associates & JVs 140 147 155 163 175 Other LT Assets 261 285 281 277 272 Cash & ST Invts 143 59.1 138 143 165 Inventory 207 191 168 189 223 Debtors 154 146 133 155 180 Other Current Assets 10.7 21.5 21.5 21.5 21.5 Total Assets 2,368 2,590 2,816 3,043 3,285 ST Debt 406 569 569 569 569 Creditor 138 121 106 119 141 Other Current Liab 10.6 16.0 16.0 16.0 16.0 LT Debt 518 467 630 720 803 Other LT Liabilities 134 128 128 128 128 Shareholder’s Equity 1,061 1,183 1,250 1,358 1,479 Minority Interests 100 106 118 133 150 Total Cap. & Liab. 2,368 2,590 2,816 3,043 3,285 Non-Cash Wkg. Capital 224 221 200 230 268 Net Cash/(Debt) (781) (976) (1,061) (1,146) (1,207) Debtors Turn (avg days) 56.8 51.1 58.9 52.2 52.2 Creditors Turn (avg days) 74.8 71.5 78.1 68.5 66.4 Inventory Turn (avg days) 118.4 109.9 123.5 108.6 105.3 Asset Turnover (x) 0.4 0.4 0.3 0.3 0.4 Current Ratio (x) 0.9 0.6 0.7 0.7 0.8 Quick Ratio (x) 0.5 0.3 0.4 0.4 0.5 Net Debt/Equity (X) 0.7 0.8 0.8 0.8 0.7 Net Debt/Equity ex MI (X) 0.7 0.8 0.8 0.8 0.8 Capex to Debt (%) 25.1 26.4 18.9 17.5 15.0 Z-Score (X) 2.3 2.1 1.8 1.8 1.8


118


Company Guide

TSH Resources


FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 142 176 138 185 214 Dep. & Amort. 49.2 50.5 52.6 55.5 58.5 Tax Paid (7.9) (32.5) (26.8) (36.6) (43.1) Assoc. & JV Inc/(loss) (24.1) (6.9) (7.7) (8.0) (12.2) Chg in Wkg.Cap. 28.5 7.95 20.7 (29.6) (38.1) Other Operating CF (125) (76.3) 0.0 0.0 0.0 Net Operating CF 62.0 119 177 166 179 Capital Exp.(net) (232) (274) (227) (226) (206) Other Invts.(net) (104) 88.6 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 194 8.09 0.0 0.0 0.0 Net Investing CF (142) (177) (227) (226) (206) Div Paid (21.0) (31.4) (33.6) (24.9) (33.4) Chg in Gross Debt (51.7) 98.5 163 90.5 82.5 Capital Issues 45.3 0.0 0.0 0.0 0.0 Other Financing CF 92.4 (3.6) 0.0 0.0 0.0 Net Financing CF 65.0 63.5 130 65.6 49.2 Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (15.3) 5.39 80.0 5.65 21.8 Opg CFPS (sen) 2.49 8.24 11.6 14.6 16.1 Free CFPS (sen) (12.6) (11.5) (3.7) (4.5) (2.0)



Source: AllianceDBS Research, DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 25 Feb 15 2.25 2.60 BUY

2: 21 May 15 2.25 2.60 BUY

3: 23 Jun 15 2.25 2.35 HOLD

4: 26 Aug 15 1.83 2.00 HOLD

5: 17 Sep 15 1.86 1.95 HOLD

6: 13 Oct 15 2.09 1.95 HOLD

7: 11 Nov 15 2.00 1.95 HOLD

8: 16 Nov 15 1.97 1.90 HOLD

9: 19 Nov 15 1.96 1.90 HOLD

10: 10 Dec 15 1.97 1.90 HOLD

11: 12 Jan 16 1.99 1.90 HOLD12: 02 Feb 16 2.03 1.90 HOLD13: 10 Feb 16 1.95 1.90 HOLD


1

2

3

4

5

6

7

8

9

10

11

12

13

1.66

1.76

1.86

1.96

2.06

2.16

2.26

2.36

2.46


RM

119


BUY

Last Traded Price: S$3.11 (STI : 2,657.57) Price Target : S$3.85 (24% upside) (Prev:S$3.70) Potential Catalyst: Recovery in Tropical Oils/Sugar margins, acquisitions Where we differ: FY16F/17F earnings expectations are lower than consensus on conservative assumptions Analyst Ben Santoso +65 6682 3707 [email protected]

What’s New 4QFY15 results ahead of our expectations, no

significant tweaks to our forecast Expect recovery in Tropical Oils in 1Q16 from

contribution from biodiesel in Indonesia DCF-based TP raised to S$3.85 – on slightly higher

Oilseeds & Grains contribution in the longer term

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2014A 2015A 2016F 2017F Revenue 43,085 38,777 39,606 43,450 EBITDA 2,185 2,234 2,487 2,720 Pre-tax Profit 1,538 1,429 1,504 1,609 Net Profit 1,156 1,056 1,114 1,190 Net Pft (Pre Ex.) 1,221 1,151 1,114 1,190 Net Pft (ex. BA gains) 1,162 1,075 1,114 1,190 Net Pft Gth (Pre-ex) (%) (5.2) (5.7) (3.2) 6.8 EPS (S cts) 25.4 23.2 24.4 26.1 EPS Pre Ex. (S cts) 26.8 25.3 24.4 26.1 EPS Gth Pre Ex (%) (5) (6) (3) 7 Diluted EPS (S cts) 25.4 23.2 24.4 26.1 Net DPS (S cts) 8.4 8.4 8.5 9.1 BV Per Share (S cts) 340.1 332.0 326.6 344.0 PE (X) 12.3 13.4 12.7 11.9 PE Pre Ex. (X) 11.6 12.3 12.7 11.9 P/Cash Flow (X) 8.7 4.6 13.4 14.2 EV/EBITDA (X) 13.0 12.2 11.2 10.4 Net Div Yield (%) 2.7 2.7 2.7 2.9 P/Book Value (X) 0.9 0.9 1.0 0.9 Net Debt/Equity (X) 0.8 0.8 0.8 0.8 ROAE (%) 7.6 6.9 7.4 7.8 Earnings Rev (%): 0 (1) Consensus EPS (S cts): 27.7 29.7 Other Broker Recs: B: 11 S: 2 H: 6 Source of all data: Company, DBS Bank Bloomberg Finance L.P

Steadying the ship Navigating volatility. China’s decelerating economic growth means that Wilmar is focused on expanding margins within its product portfolio. As one of the world’s largest integrated Agribusiness companies, Wilmar should benefit from stable commodity prices, diversified business model and risk management. Over the long term, we expect the group to gradually extend the penetration of its well-established brands through vast existing distribution networks in Asia’s growing markets. Key beneficiary of Indonesia’s biodiesel programme. Starting 16 Jul15, Indonesia began charging levies for exports of various palm oil products at differentiated rates. The consequential drop in domestic prices translates into lower feedstock prices for Wilmar – which buys most of its CPO requirements. Equipped with the largest biodiesel capacity in Indonesia, Wilmar should likewise produce biodiesel profitably with subsidies collected from export levies. With reduced participation of financial traders, we believe the catalyst for Wilmar lies in potentially stronger FY16 earnings. Mitigating impact from currency devaluation. Wilmar’s reporting currency is in USD. Movements in its subsidiaries’ various functional currencies against USD affect translations in Wilmar’s statements. But, Wilmar has mitigated the impact through: (1) currency hedging on raw material procurements and intercompany loans; (2) large fully integrated processing capacities and brands to defend margins vs. competitors; and (3) diversified business segments/ geographies. Valuation: We employed DCF methodology (FY17F base year) to arrive at our TP of S$3.85 (WACC 6.2%, TG 3%). We reiterate our BUY call. Key Risks to Our View: Wilmar’s share price is linearly driven by palm oil refining/ soybean crushing margins on top of CPO/sugar price expectations. There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take fails to live up to our expectations (2.5m kl) this year. As Wilmar is an index component, changes in its weightings would also make it vulnerable to swings significantly above or below our TP. At A Glance Issued Capital (m shrs) 6,320 Mkt. Cap (S$m/US$m) 19,655 / 14,010 Major Shareholders (%) Archer-Daniels-Midland Co 18.3 Longhlin Asia Limited 5.3




Wilmar International Version 3 | Bloomberg: WIL SP | Reuters: WLIL.SI Refer to important disclosures at the end of this report

41

61

81

101

121

141

161

181

201

221

2.3

2.8

3.3

3.8

4.3

4.8

5.3

5.8

6.3


Relative IndexS$

Wilmar International (LHS) Relative STI INDEX (RHS)

120


Company Guide

Wilmar International

WHAT’S NEW

Adjustments to impute new CPO price forecasts We adjusted WIL’s earnings to reflect changes in our key assumptions which are summarised below: We imputed actual FY15 earnings, and accordingly made

changes to our operating assumptions in FY16 and FY17. This includes higher biodiesel volumes and stronger Consumer product margins.

We also raised CY16F/17F CPO price forecasts (US$/MT, FOB) by 12%/16% to US$600/US$649 – reflecting lower expected global CPO output and expansion in biodiesel usage in Indonesia – through deployment of CPO funds collected since Jul15.

Our FY16F/17F earnings expectations are lower than consensus. Despite the group’s efficient, diversified and integrated business model, we continue to remain conservative in our assumptions, given volatility in exchange rate and commodity prices. We expect Wilmar’s growth to be driven by volume and high-margin Consumer products over the long term. This should move Wilmar’s forward PE closer to its average of 15.1x from 11.3x currently (close to -1SD), in our view.

Highlights on 4Q15 results 4Q15 core earnings slightly ahead.

Core 4Q15 earnings of US$350m (-15% y-o-y; -3% q-o-q) was ahead of our US$210m forecast, but in line with consensus. This brought core FY15 net profit to US$1,166m (-4% y-o-y). Reported 4Q15 earnings came in at US$337m (-16% y-o-y; +22% q-o-q) – which included US$1.5m mark-to-market gains on investment in securities. A final DPS of S$0.055 was declared, payable 18 May16 – bringing total payout ratio to 36%.

Tropical oils pretax softer than expected.

Oilseeds & Grains M&P pretax contribution was better than expected due to higher volumes, decent soybean crush margin and strong volumes in Consumer Products (particularly in China). Associates' contribution had also sequentially more than tripled from previous quarter on better contributions from India, Ukraine, China and Goodman Fielder.

However, these were offset by softer-than-expected Tropical Oils segment, due to lower palm oil prices, weak biodiesel demand and lower downstream margins. We understand the jump in oleochemical capacities in Indonesia (prompted by favourable export tax structure) had diluted margins. However, this should be offset through higher contribution from biodiesel in 1Q16.

The group’s 4Q15 Sugar pretax of US$80m was also below our US$92m forecast – despite higher-than expected volumes. Significantly weaker Australian Dollar, weaker Merchandising and Manufacturing margins also dragged overall Sugar pretax.

Balance sheet: lower borrowings

Ending cash & cash equivalents was US$3.7bn (-43% q-o-q) as total debts dropped 19% q-o-q to 17.4bn. Cash flow from operations was also negative, due to US$1.1bn spike in inventory. We believe this indicates not only seasonal peak, but also accumulation of cheap feedstock (mainly CPO).

Total borrowing amounted to US$17.4bn (dropping from US$21.6m at the end of previous quarter). We understand this was partly due to lower working capital needs amidst drop in commodity prices as well as maturity of structured products (both on and off balance sheet) which had in the past contributed to positive net interest income. The group guided for continued drop in borrowings as more pledged deposits mature over the next we months (hence rising net interest expense). Net gearing ratio (ex NCI, liquid working capital, including other deposits in financial institutions): reported at 39% - down from 42% at the end of 3Q15. 4Q15 capex was US$206m, a pickup from US$177m in 3Q15.

Outlook Stronger Tropical Oils contribution expected in 1Q16.

We expect 1Q16 soybean crush margins to remain strong on favourable feedstock costs and seasonally higher consumer volumes in China. We believe lower palm oil supply should maintain soybean oil prices, while soybean meal prices in China are benefiting from lower DDGS (Distillers Dried Grains with Soluble) imports. Likewise, we expect Tropical Oils pretax to improve next quarter on recognition of biodiesel processing profits and higher CPO prices boosting plantation margins (offset by seasonally lower processed volumes).

Further acquisitions not ruled out Given the drop in commodity prices over the past year, we understand the group is looking into acquiring more assets, although pricing remains a pivotal consideration. These may include plantation assets/brands that would complement current businesses. Meanwhile, we expect Wilmar to continue to develop and expand the number of brands acquired through Goodman Fielder.

121


Company Guide



Earnings Drivers:

CPO and soybean prices. Approximately 20% of its EBIT comes from sales of CPO and Palm Kernel. Movements in CPO prices hence directly affect the group’s Plantations segment’s profit. As one of the largest processors of both CPO and soybeans globally, the group holds varying amounts of inventory. Abrupt changes in prices would expose any unhedged inventories. Generally, changes in commodity prices would also affect the group’s Consumer segment with some lag. Capacity utilisation and volume output. Wilmar continually assesses its capacity utilisation. Changes in soybean imports by competitors into China and in soybean prices may prompt Wilmar to adjust its crushing volumes as well as margins. Weather and supply chain congestion. We have not imputed any impact from El Nino conditions in our forecasts. A severe rainfall deficit in 2HCY15 may impact FFB yields 11-12 months thereafter. Wilmar continually assesses its (origination) supply chain to avoid delays in deliveries to customers. Changes in export tax policy. Prospective increase in biodiesel production in Indonesia may cause an oversupply and lower prices of glycerin (by-product of biodiesel output) in Wilmar’s Oleochemicals unit – although this may make up only a small share of the group’s downstream operations. Zero export taxes instituted for much of CY15 in both Malaysia and Indonesia has had an adverse impact on palm oil refining margins. Changes in tax policy should therefore have a direct impact on Wilmar’s refining operations. Movements in crude oil prices. Global demand for both ethanol and biodiesel are subject to certain crude oil price thresholds. Below this level, demand for both products would be adversely affected, and would influence sugarcane, corn and palm oil prices. Wilmar’s sugar milling segment is exposed to volatility in sugar prices if unhedged. Geographic exposure. Wilmar’s consolidated revenue is globally distributed with China contributing over 45% in FY14. Southeast Asia accounted for 23%, while Europe contributed 8% of revenue. This means currency movements in China and Southeast Asia would affect Wilmar’s earnings. Prospective economic recoveries in these markets should also improve Wilmar’s earnings outlook. Yet, we should also note that competing processors are also vying for the same markets – which would make recoveries not unique to Wilmar. We should also note that Wilmar requires a significant amount of working capital, which would affect the group’s borrowing costs should USD interest rates start to rise again.

CPO price (RM/MT)

Tropical oils pretax (US$/MT)

Oilseeds & grains pretax (US$/MT)

Sugar pretax (US$/MT)

Oil palm planted area (Ha)


2,377 2,413

2,168

2,600

2,810

0

400

800

1,200

1,600

2,000

2,400

2,800

2013A 2014A 2015A 2016F 2017F

11.2

4.4

1514.3

15.1

0.0

3.1

6.2

9.3

12.3

15.4

2013A 2014A 2015A 2016F 2017F

34.9

22.3

10.6 10.8 11.2

0.0

7.1

14.2

21.4

28.5

35.6

2013A 2014A 2015A 2016F 2017F

14.4

10.5

87.1

6.4

0.0

1.8

3.6

5.5

7.3

9.1

10.9

12.7

14.5

2013A 2014A 2015A 2016F 2017F

241,048 238,287 240,956 245,956 250,956

0

50,700

101,400

152,100

202,800

2013A 2014A 2015A 2016F 2017F

122


Company Guide


Balance Sheet:

Decent balance sheet. Adjusted for liquid working capital, the group’s net debt-to-total equity ratio was reported at 39% as at end of Dec15. We forecast FY16 EBITDA/interest ratio at 7.5x, while FY16 current ratio is forecast at 1.2x. Positive ROE-WACC. We expect the group to earn an ROE-WACC spread of c.0.5-0.8% in FY16-17, despite lower commodity prices. With steady capex outlay of c.US$790-850m p.a. over the next three years, we expect Wilmar to maintain positive free cash flow throughout our forecast period, yielding 2% of intrinsic value in FY16F. Share Price Drivers:

Undervalued. The stock is currently trading close to -1SD forward PE. We believe consistent earnings delivery would continue to drive Wilmar’s share price. Jump in biodiesel blending in Indonesia would be an upside catalyst for Wilmar, in our view. Key Risks:

Volatility in CPO prices and USD exchange rates Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect profitability of planters in general. Reputation Emergence of food safety scandals is one of the risks for food producers. Lapses in the supply chain could heighten this risk. Regulatory changes Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact demand for CPO/refined oils. Market sentiment Changes in fund flows towards or out of emerging markets would affect valuations of plantation counters. Company Background

Wilmar International is an integrated agribusiness company. It is involved in oil palm cultivation, edible oil refining, oilseed crushing, consumer pack edible oil processing and merchandising, specialty fats, oleochemical and biodiesel manufacturing, and grain processing and merchandising. Wilmar also manufactures and distributes fertilisers and owns a fleet of vessels.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.9

1.0

1.0

1.1

1.1

1.2

1.2

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

2013A 2014A 2015A 2016F 2017F


0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

2013A 2014A 2015A 2016F 2017F


US$

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2013A 2014A 2015A 2016F 2017F

Avg: 13.8x

+1sd: 15.8x

+2sd: 17.7x

‐1sd: 11.9x

‐2sd: 9.9x8.9

10.9

12.9

14.9

16.9

18.9

20.9

22.9

24.9

26.9


(x)

Avg: 1.13x

+1sd: 1.35x

+2sd: 1.56x

‐1sd: 0.91x

‐2sd: 0.69x0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4


(x)

123


Company Guide


Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F CPO price (RM/MT) 2,377 2,413 2,168 2,600 2,810 Tropical oils pretax 11.2 4.38 15.0 14.3 15.1 Oilseeds & grains pretax 34.9 22.3 10.6 10.8 11.2 Sugar pretax (US$/MT) 14.4 13.8 6.35 7.06 6.37 Oil palm planted area 241,048 238,287 240,956 245,956 250,956

Segmental Breakdown

FY Dec 2013A 2014A 2015A 2016F 2017F Revenues (US$ m) Tropical oils 22,254 20,009 15,607 17,438 18,902 Oilseeds & grains 21,187 17,986 17,705 17,722 19,884 Sugar 4,031 3,795 4,441 4,813 5,052 Others 2,667 2,377 2,252 2,373 2,373 Elimination (6,055) (1,083) (1,229) (2,740) (2,760) Total 44,085 43,085 38,777 39,606 43,450 Pretax (US$ m) Tropical oils 1,182 1,134 969 546 632 Oilseeds & grains 171 451 348 690 677 Sugar 100 127 134 83 98 Others 110 (21) 20 17 15 Unallocated costs/others 212 (153) (43) 168 186 Total 1,775 1,538 1,429 1,504 1,609 Pretax Margins (%) Tropical oils 5.3 5.7 6.2 3.1 3.3 Oilseeds & grains 0.8 2.5 2.0 3.9 3.4 Sugar 2.5 3.3 3.0 1.7 1.9 Others 4.1 (0.9) 0.9 0.7 0.6 Total 4.0 3.6 3.7 3.8 3.7

Income Statement (US$ m)

FY Dec 2013A 2014A 2015A 2016F 2017F Revenue 44,085 43,085 38,777 39,606 43,450 Cost of Goods Sold (40,360) (39,268) (34,819) (35,465) (38,877) Gross Profit 3,725 3,817 3,957 4,141 4,573 Other Opng (Exp)/Inc (2,066) (2,373) (2,561) (2,601) (2,861) Operating Profit 1,659 1,444 1,396 1,540 1,712 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 104 81 101 104 113 Net Interest (Exp)/Inc (18) 77 26 (140) (216) Exceptional Gain/(Loss) 31 (65) (95) 0 0 Pre-tax Profit 1,775 1,538 1,429 1,504 1,609 Tax (385) (314) (294) (318) (340) Minority Interest (72) (68) (79) (72) (79) Preference Dividend 0 0 0 0 0 Net Profit 1,319 1,156 1,056 1,114 1,190 Net Profit before Except. 1,288 1,221 1,151 1,114 1,190 Net Pft (ex. BA gains) 1,325 1,162 1,075 1,114 1,190 EBITDA 2,370 2,185 2,234 2,487 2,720 Growth Revenue Gth (%) (3.0) (2.3) (10.0) 2.1 9.7 EBITDA Gth (%) 2.6 (7.8) 2.2 11.3 9.4 Opg Profit Gth (%) 0.9 (13.0) (3.3) 10.3 11.2 Net Profit Gth (%) 5.1 (12.3) (8.7) 5.5 6.8 Margins & Ratio Gross Margins (%) 8.4 8.9 10.2 10.5 10.5 Opg Profit Margin (%) 3.8 3.4 3.6 3.9 3.9 Net Profit Margin (%) 3.0 2.7 2.7 2.8 2.7 ROAE (%) 9.0 7.6 6.9 7.4 7.8 ROA (%) 3.0 2.6 2.6 2.9 3.0 ROCE (%) 3.2 2.8 3.0 3.5 3.8 Div Payout Ratio (%) 21.3 33.1 36.0 34.9 35.0 Net Interest Cover (x) 90.3 NM NM 11.0 7.9


124


Company Guide


Quarterly / Interim Income Statement (US$ m)

FY Dec 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 Revenue 10,778 9,411 9,285 10,649 9,431 Cost of Goods Sold (9,705) (8,541) (8,573) (9,373) (8,332) Gross Profit 1,073 870 712 1,276 1,099 Other Oper. (Exp)/Inc (576) (583) (445) (808) (725) Operating Profit 496 288 267 468 374 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 36 39 (10) 15 57 Net Interest (Exp)/Inc 17 9 9 10 (2) Exceptional Gain/(Loss) (7) (26) 8 (79) 1 Pre-tax Profit 542 310 274 414 431 Tax (111) (61) (53) (118) (62) Minority Interest (30) (8) (18) (20) (32) Net Profit 401 241 202 276 337 Net profit bef Except. 408 267 194 355 336 EBITDA 703 493 424 650 608 Growth Revenue Gth (%) (6.5) (12.7) (1.3) 14.7 (11.4) EBITDA Gth (%) (1.0) (29.9) (14.0) 53.4 (6.5) Opg Profit Gth (%) (2.5) (42.1) (7.2) 75.5 (20.0) Net Profit Gth (%) (5.0) (39.9) (16.3) 36.7 22.2 Margins Gross Margins (%) 10.0 9.2 7.7 12.0 11.7 Opg Profit Margins (%) 4.6 3.1 2.9 4.4 4.0 Net Profit Margins (%) 3.7 2.6 2.2 2.6 3.6

Balance Sheet (US$ m)

FY Dec 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 9,337 9,477 8,983 8,949 8,804 Invts in Associates & JVs 2,035 2,153 2,757 2,861 2,974 Other LT Assets 7,418 7,412 7,397 6,586 6,673 Cash & ST Invts 13,315 9,139 5,265 5,182 6,291 Inventory 7,221 6,581 6,318 6,569 7,201 Debtors 7,066 8,040 6,652 7,503 8,231 Other Current Assets 240 756 567 567 567 Total Assets 46,632 43,558 37,939 38,217 40,741 ST Debt 19,392 15,204 11,076 13,421 14,724 Creditor 3,200 3,332 3,034 3,242 3,554 Other Current Liab 600 661 580 620 629 LT Debt 6,804 7,158 6,348 4,480 4,480 Other LT Liabilities 750 792 821 551 579 Shareholder’s Equity 15,005 15,495 15,127 14,880 15,673 Minority Interests 882 916 952 1,024 1,102 Total Cap. & Liab. 46,632 43,558 37,939 38,218 40,741 Non-Cash Wkg. Capital 10,727 11,384 9,922 10,777 11,816 Net Cash/(Debt) (12,881) (13,224) (12,159) (12,719) (12,913) Debtors Turn (avg days) 54.6 64.0 69.1 65.2 66.1 Creditors Turn (avg days) 29.7 30.9 34.1 33.1 32.7 Inventory Turn (avg days) 65.9 65.2 69.1 67.9 66.2 Asset Turnover (x) 1.0 1.0 1.0 1.0 1.1 Current Ratio (x) 1.2 1.3 1.3 1.1 1.2 Quick Ratio (x) 0.9 0.9 0.8 0.7 0.8 Net Debt/Equity (X) 0.8 0.8 0.8 0.8 0.8 Net Debt/Equity ex MI (X) 0.9 0.9 0.8 0.9 0.8 Capex to Debt (%) 5.5 6.0 6.1 5.1 4.4 Z-Score (X) 1.7 1.8 1.7 1.8 1.8


125


Company Guide


Cash Flow Statement (US$ m)

FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 1,775 1,538 1,429 1,504 1,609 Dep. & Amort. 607 660 737 843 895 Tax Paid (385) (314) (294) (318) (340) Assoc. & JV Inc/(loss) (104) (81) (101) (104) (113) Chg in Wkg.Cap. (1,114) (201) 1,353 (894) (1,048) Other Operating CF 14 32 (7) 29 (1) Net Operating CF 795 1,634 3,117 1,060 1,001 Capital Exp.(net) (1,453) (1,350) (1,063) (913) (854) Other Invts.(net) 0 0 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 269 (12) 200 (38) (53) Net Investing CF (1,184) (1,362) (863) (951) (908) Div Paid (281) (383) (381) (369) (397) Chg in Gross Debt 3,950 (3,833) (4,938) 477 1,303 Capital Issues 0 0 0 0 0 Other Financing CF (108) (393) (628) (377) 28 Net Financing CF 3,562 (4,609) (5,947) (269) 933 Currency Adjustments 0 0 0 0 0 Chg in Cash 3,173 (4,336) (3,693) (160) 1,027 Opg CFPS (US cts.) 29.8 28.7 27.5 30.5 32.0 Free CFPS (US cts.) (10.3) 4.4 32.1 2.3 2.3



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 05 Mar 15 3.24 3.50 HOLD

2: 11 Mar 15 3.20 3.50 HOLD

3: 11 May 15 3.20 3.50 HOLD

4: 03 Jun 15 3.38 4.05 BUY

5: 10 Aug 15 3.17 4.00 BUY

6: 31 Aug 15 2.85 3.70 BUY

7: 13 Oct 15 2.92 3.70 BUY

8: 11 Nov 15 3.05 3.70 BUY

9: 12 Nov 15 2.97 3.70 BUY

10: 10 Dec 15 2.89 3.70 BUY

11: 12 Jan 16 2.75 3.70 BUY12: 10 Feb 16 2.97 3.70 BUY13: 19 Feb 16 3.16 3.70 BUY


1

2

3

4

5

6

7

8

9

10

11

1213

2.39

2.59

2.79

2.99

3.19

3.39

3.59


S$

126

Industry Focus


Page 22

Acronyms List

Bloomberg Code Acronyms Company Description AALI IJ Equity AALI Astra Agro Lestari AALI is the largest listed plantations in Indonesia

with c.260,000 hectares of land bank. It operates mostly oil palm plantations and produces crude palm oil, palm kernel, palm kernel oil, as well as palm kernel expeller.

BWPT IJ Equity BWPT Eagle High Plantations Eagle High Plantations is among the youngest Indonesian upstream oil palm planters. Following the acquisition of BW Plantations, the combined group managed c.152k ha of oil palm estates as at 31 Mar15.

LSIP IJ Equity LSIP London Sumatra Indonesia PP London Sumatra Indonesia (Lonsum) is a listed upstream player in Indonesia; and a subsidiary of SGX-listed Indofood Agri Resources. Besides palm oil, Lonsum has rubber, cocoa and seedling businesses.

SGRO IJ Equity SGRO Sampoerna Agro Sampoerna Agro is a growing upstream oil palm plantation group based in Indonesia. The group sells crude palm oil, palm kernel, and oil palm seedlings. It also has sago estates and Industrial Timber Plantations.

FGV MK Equity FGV Felda Global Ventures FGV is a major plantation player in Malaysia with core businesses in the area of plantation (palm oil, rubber), downstream (oleochemical, soybean) and sugar. Felda has total of about 290k ha of planted area in Malaysia and Indonesia.

GENP MK Equity GENP Genting Plantations GENP is in the palm oil plantation business with over 220k ha of plantation in Malaysia and Indonesia and 9 palm oil mills currently. Its other/non-core businesses are biotechnology and property development.

IJMP MK Equity IJM P IJM Plantations IJMP is a mid-cap pure play operating in Sabah and Indonesia, with total plantable landbank of about 50,000 hectares.

IOI MK Equity IOI IOI Corporation IOI is an integrated plantation company, with one of the highest yields in Malaysia and one of the largest oleochemical manufacturing capacities in the world.

KLK MK Equity KLK KL Kepong KLK's core business is plantation with over 250k ha of palm oil and rubber plantations in Malaysia and Indonesia. Its other businesses are manufacturing (mainly oleochemicals) and property development.

SIME MK Equity Sime Sime Darby Sime Darby is a GLC conglomerate. The group's principal activities include plantations, property development, heavy equipment and motor vehicle distribution, as well as energy and utilities.

Source: DBS Bank

127

Industry Focus


Page 23

Acronyms List (Cont’d)

Bloomberg Code Acronyms Company Description TSH MK Equity TSH TSH Resources TSH is a upstream planter, owning over100k ha

of plantation land in Sabah and Kalimantan and 6 palm oil mills. It also has a 50:50 JV refinery with Wilmar International. Noncore businesses include palm waste integration, wood flooring (Ekowood Bhd) and cocoa.

BAL SP Equity BAL Bumitama Agri Bumitama Agri's primary businesses include cultivation and harvesting of oil palms, processing of FFB from both own, smallholder and third-party estates in Sumatra and Kalimantan (Indonesia) into crude palm oil and palm kernel.

FR SP Equity FR First Resources FR is a mid-sized planter with a strong balance sheet and decent growth outlook. FR has been aggressively planting since 2004.

IFAR SP Equity IFAR Indofood Agri Indofood Agri Resources is an integrated agribusiness company. The company and its subsidiaries are involved in sugarcane and oil palm cultivation and milling, research and development, and seed breeding. Indofood Agri Resources also refines, brands and markets its cooking oil, margarine, shortening and other palm oil products.

WIL SP Equity WIL Wilmar International Wilmar International is an integrated agribusiness company. It is involved in oil palm cultivation, edible oil refining, oilseed crushing, consumer pack edible oil processing and merchandising, specialty fats, oleochemical and biodiesel manufacturing, and grain processing and merchandising. Wilmar also manufactures and distributes fertilisers and owns a fleet of vessels.

Source: DBS Bank

128

Industry Focus


Page 25

DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

GENERAL DISCLOSURE/DISCLAIMER

This report is prepared by DBS Bank Ltd This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd,

its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document may

be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS

Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,

the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to

change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard

to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of

addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal

or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of

profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This

document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or

persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have

positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and

other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can

be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.

The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it

may not contain all material information concerning the company (or companies) referred to in this report.

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and

assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on

which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual

results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED

UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:

(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and

(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein.

Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)

mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the

commodity referred to in this report.

DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research

department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction

in the past twelve months and does not engage in market-making.

ANALYST CERTIFICATION

The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the

companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her

compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 22 Feb 2016,

the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities

recommended in this report (“interest” includes direct or indirect ownership of securities).

129

Industry Focus


Page 26

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have proprietary positions in

Indofood Agri Resources, Golden Agri Resources, Wilmar International recommended in this report as of 31 Jan 2016

2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

3. Compensation for investment banking services:

DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a

manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further

information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document

should contact DBSVUSA exclusively.

RESTRICTIONS ON DISTRIBUTION

General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission.

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia.

Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.

United Kingdom This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Conduct Authority. Research distributed in the UK is intended only for institutional clients.

Dubai

This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

130

Industry Focus


Page 27

United States This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named

on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank Ltd

12 Marina Boulevard, Marina Bay Financial Centre Tower 3

Singapore 018982

Tel. 65-6878 8888

Company Regn. No. 196800306E

131

regional industry focus plantation companies - dbs bank industry focus plantation companies page 3...

Documents