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Monday, May 30, 2011

Peak Potential - PT. Gozco Plantations Tbk

by Etrading Securities: GZCO

Effects of Moratorium Law Passed by SBY

With such a huge unplanted land bank, we think there will be limited effects of the moratorium law passed. However the question will be, of the huge land banks that Gozco have under its belt, how many of them have land rights use or HGU (Hak Guna Usaha)? Keep in mind the moratorium is only in effect for the next two years and are only applicable to the new concessions for the conversion of peat and natural forest land; therefore not applicable to lands with existing rights.

2010 – Rising Prices and Indotruba’s Earnings

FFB production from nucleus increased a mere 5% y-o-y while production from third party buying decreased about 36% compared to 2009. This is mainly because in 2008, the third party and/or small holder planters (excluding plasma planters) weren’t able to fertilize their plantation due to cost-constraint reasons. Yields harvested two years later showed the insufficient fertilizing. Sales volume for CPO and PK also dropped 5% and 13% respectively. However average selling price for both CPO and PK rose 15% and 55% respectively compared to the year before; thus negating any effects on the lower sales volume and production. In addition to that, gains from associate company namely Indotruba which increased 66.9% compared to last year; or was a representation of about 50.8% of the gross profit recorded by Gozco in the year of 2010 (calculation derived by dividing the gain from associate company by gross profit recorded in 2010), which helped boosted the company’s bottom line. Net margin in 2009 jumped to 50% from a previously 19% recorded in 2008 contributed partly by forex gain and discount from debt settlement, while net margin in 2010 decreased to 35% compared to previous year, but still an improvement from the previous 19% net margin. Again this jump in net margin is due to the contribution of Indotruba.

Maximized Mill’s Capacity

In the year of 2009, they had an increased in production capacity of their mill located in Suryabumi Plantation, Sumatra Selatan from 45ton/hour to 90ton/hour. This enabled them to boost up sales volume by buying fresh fruit bunches (FFB) from third party. If the small holder planters are able to fertilize properly after the cost-constrain situation in 2008, then 3rd party buying of FFB to fill up the idle capacity in the Suryabumi mill will return to the 2009 level (about 112.955 tons from plasma and third party buying).

Upgrade in Target Price

Upgrade TP to IDR 450– We upgrade our target price from IDR 420 to IDR 450 due to future projection growth and idle capacity in the new mill that enables GZCO to boost up their sales volume. Using WACC 12.08% combined with a terminal growth of 5% and risk free rate of 8.00%, the fair value of the stock comes to IDR450. The stock is currently trading at P/E 2011 of 8.35 with EPS estimate 46.06; relative cheap compared to other peers in the industry. There’s a 17% upside potential to the current share price – we call Buy. 

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