Plantation Sector: Sooner-than-expected recovery?

Sooner-than-expected recovery?

 

The CPO price is down 6.0% ytd at US$1,205/ton (10% off this year’s high), largely because of concerns over improving South America soybean production and expected recovery of palm oil production in major exporting countries. Yet we believe these concerns are overdone. This is because: 1) it will be some time before the expected weakening of the “La Nina” weather phenomenon gives way to favorable weather, 2) robust demand for soybeans may continue to support prices, and 3) progressive increases of Indonesian export taxes might limit exports (the January 2011 data shows a monthly decline of 15%).  Hence, CPO prices should stay firm until at least 2Q. Beyond this, prices are likely to weaken as demand rationing and an upturn in the yield-cycle might kick in by then. In the sector, we continue to favor BWPT (BW Plantation) given it is a low-cost producer and because of its higher-than-average FFB yield. BUY maintained with a TP of Rp1,350, implying P/E11F of 15.5x.

 

Is “La Nina” over?

According to the Australian Government Bureau of Meteorology, “La Nina” is expected to weaken during 2Q11. However, a recovery in production remains difficult to predict. This is because the production recovery depends on how quickly the fading “La Nina” gives way to more favorable weather conditions. Note that in the first month of 2011, Malaysia’s total

Bakrie finalizes sale of 25% Bumi Resources Tbk (BUMI IJ) to Vallar

This afternoon the 25% BUMI sale to Vallar (VAA LN) finally took place.

• 5.19bn shs@ 2500 was crossed in the market, worth about USD 1,477m.
• Prior to this cross a number of other crosses took place, about 3.4bn shs at various levels, which are likely antecedents and related to the above transaction.
• Today was the imposed deadline to close this deal failing which a USD 150m penalty would be levied against Bakrie. So it's a good thing it closed.
• The sale/purchase prospectus also mentioned a "step-up" possibility which could see Vallar increasing its stake in BUMI to 51%.

Latest consolidation news in the industry - Indosiar (IDKM IJ) acquisition by Emtek (EMTK IJ)

After a few days of trading suspension, pending the clarity of Surya Citra Media (SCMA IJ) and Indosiar (IDKM IJ) merger deal, Emtek Group (EMTK IJ) has shed some light on the matter with its official announcement yesterday.
As SCMA’s parent company, Emtek announced yesterday that Indosiar (IDKM IJ) will be merged into the group at the parent company level. Emtek plans to acquire a controlling stake in Indosiar, positioning Indosiar as SCMA’s sister company.

Key points for the announcement are as follows:
• Emtek will be purchasing 27.24% of Indosiar from Prima Visualindo, the current majority shareholder of Indosiar.
• Purchase price is set at Rp900 per share, lower than the pre-suspension close of Rp1,010 per  share. Total acquisition cost is Rp496.5bn.
• Emtek is required to do a tender offer following the acquisition. Tender offer price announced is the same as the purchase price at Rp900 per share. Depending on the subscription rate, Emtek will need another Rp1.8tn at most for the tender offer. There will be no earnings consolidation between Indosiar and SCMA. However, key benefits for both stations are as follows:
• Both stations will have greater bargaining power following the ownership consolidation. The two stations combined will be the second largest media group with 25% audience share.
• Both stations will benefit from synergies whereby they can share licensing rights, studios, broadcasting towers, talents, and other broadcasting assets.
• Potential turnaround story for Indosiar. Emtek’s SCMA is one of the best stations in terms of cost efficiencies, brand recognition, and cashflow management. Assuming that Emtek will do the same for Indosiar, the turnaround is imminent. Company that will benefit from the turnaround is Emtek at the parent level.
 

The merger is hugely positive for the Indonesian media sector. Consolidation ease competition, and the top three media players: MNC Group (RCTI, MNC TV, and Global TV), Emtek (SCTV and
Indosiar), and the Trans Group (Trans TV and Trans 7) control almost 90% of the total audience
share. Emtek looks interesting, given it is exposed to Indosiar’s turnaround story.

Indo Tambang Raya Megah - Alert: Analyst Meet - Cost Pressures to Taper Off

We came away from a meeting with the company more assured that the surging costs seen in 2H10 are unlikely to transpire in 2011, barring a further surge in the oil price and another major weather disruption.

 

The company attributed the weak 2010 results to:

1. Heavier than normal rainfall, which: 1) forced a move to a different pit in its Indominco mine and 2) resulted in sizable demurrage costs of US$23m. The former resulted in a substantially higher stripping ratio (SR).

 

2. Surging fuel prices (average of US$0.72/l in 2010 vs. US$0.52/l in 2009). For 2011, the company has hedged c.80% of its fuel requirement at c. US$90/b.

 

3. Several one-off items, such as the write-off of an underground project’s deferred exploration and development costs of US$25m and a standby fee to contractors of US$9m as the Jorong mine operation was suspended for several months.

 

4. Derivative losses. The company booked US$71m losses (realized and unrealized) on its coal  swap contracts in 2010.

 

Post the meeting, we take comfort in our view that the cost pressures are likely to taper off substantially in 2011. First, the company expects the SR of its major Indominco mine would decline to 13.6x in 1Q11 from 14.7x in 4Q10. Demurrage costs are also expected to be substantially lower as the company slows vessel acceptance and expects the waiting period for the vessels to normalize starting March. Finally, we expect the company’s coal swap losses to decline to c. US$30m in 2011E on our benchmark coal price assumption of US$122/t.

 

The company is upbeat on the coal price outlook and hence has locked in prices for only 40% of its 2011E volume target as at February. The buoyant coal price outlook, normalizing costs and attractive valuations lead us to maintain our Buy call. We view the current share price weakness as an enhanced buying opportunity.

Valuation
Our target price for ITM of Rp61,200 is based on 2011E EV/EBITDA of 7.3x. This is based on 1 standard deviation above the stock's mean since its listing. We have opted to use EV/EBITDA as our valuation metric to avoid distortions caused by differences in tax rates between Indonesian companies and their regional peers. The discount to the global average is warranted, in our view, given Indonesia's higher risks.
 

Risks
We rate ITM Low Risk , based on our quantitative risk rating system, which tracks 260-day historical share price volatility. We believe Low Risk is appropriate given the company's sizable cash and relatively high dividend payout. Risks that could prevent the shares from reaching our target price include: a) coal price volatility; b) fluctuating crude oil prices; c) poor weather conditions that might hamper coal production.

analysis by : Citi

Wilmar reportedly planning to expand into consumer flour in Indonesia.

News reports suggest that Wilmar is planning to enter Indonesia’s consumer flour market as early as 2012. 

· FFM is reportedly planning to spend US$46mn to double its flour production capacity in Indonesia and Malaysia      over the next 2Y. Plans appear to be for Wilmar to use its distribution network to sell the flour. 

·         This may be a threat to Indofod (INDF IJ) as Indonesia's flour market is dominated by Bogasari Flour Mills (Indofood) who has about 55% market share in the flour segment.

·         We also hear that Wilmar is planning to expand into branded cooking oil segment in Indonesia. This would be a threat to Indofood cooking oil Bimoli which is currently the market leader in branded cooking oil category.