Friday, July 29, 2011

Salim Ivomas Pratama Tbk - Undervalued

by CIMB Securities

PT SIMP is an undervalued CPO-related stock in Indonesia, trading at a forward P/E of only 9.6x vs. the regional sector’s average P/E of 13.7x. This is unjustified in view of its large capitalisation among Indonesia-listed planters and a strong 3-year earnings CAGR of 26%. We believe the market has overlooked the group’s wellintegrated palm-oil business and potential earnings accretion from its sugar business. Our target price of Rp1,860 is based on 14x forward P/E, in line with the historical valuations of its parent Indofood Agri. Potential upside is 45% from current levels, with catalysts expected from increased brokers’ coverage of the stock, higher than-expected production, better CPO, sugar & rubber prices and M&A possibilities.

Cheaper and direct exposure to plantation assets of Salim. We favour the stock over its parent Indofood Agri (IFAR) as it offers cheaper and direct exposure to the exact same plantation assets. The stock is also more liquid despite a slightly lower free float, and offers higher dividend yields as well as a clearer growth strategy.

Rising contributions from sugar assets. SIMP stands out among the planters for its exposure to sugar plantations in Indonesia. It is set to harvest the fruits of its investment in sugar when it completes its sugar mill. We estimate that the sugar division could account for 6% of its FY11 pretax profit. Rising sugar earnings are expected to offset our expectations of weaker CPO prices in 2012. We project a 105% yoy jump in its 2011 net profit on the back of higher CPO prices and production.

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