Friday, November 25, 2011

Gozco Plantations Tbk. - Slackening Production (GZCO)

by Etrading : GZCO

Production of FFB Nucleus for 3Q 11 has grown 12.5% from 2Q 11 (QoQ) and increased slightly at 4.7% for 9M 11 compared to 9M 10 (YoY). However, if we look more into it, production in 3Q 11 has re-gressed 21.7% compared to production in 3Q 10. GZCO’s 9M 11 FFB nucleus production had only made up about 59.3% of our 2011 fore-cast. Even if contribution by 3rd party FFB purchases had more than fill in the blank left, margins are squeezed. Volume-wise CPO sales for the 9M 11 has made up about 71% of full year 2010’s sales, mainly boosted by 3rd party FFB purchases.

Margin Squeeze

Margins across the board are squeezed out of their juices in the 3Q 11. Gross margin, operating margin, and net margin fall 14.6%, 15.0%, and 17.4% respectively in 3Q 11 compared to 3Q 10 margins. For 9M 11, net margin increased a slight 1.8% but gross and operat-ing margins declined 6.2% and 6.1% respectively.

We have looked into it and determined that gross margin are hit in the 2Q 11 by a spike in maintenance cost, harvest cost and pur-chased of 3rd party FFB which are 152.7%, 119.6%, and 114.8% on a YoY basis as compared to 2Q 10. This spiked in cost is prolonged al-beit not as much in the 3Q 11 with maintenance cost and purchased of 3rd party FFB for 48.0% and 115.2% accordingly on a YoY basis as compared to 3Q 10. Those two factors are main contributors that drove up total cost of goods sold in the 3Q 11 to 50.6% YoY as com-pared to 3Q 10. Please kindly take note that in the last two quarters, purchase of 3rd Party FFB has been the common denominator to the swelling cost. It is good to have 3rd Party FFB to fill up idle capacity in your factory but on the whole picture, it’s always better to fill up your capacity with own nucleus. Own nucleus production is trans-lated into better FFA content which can be used as leverage for the producer to demand higher prices and higher profit margins per ton production.

Saved by Associate Company – Indotruba

On an annual basis, we have been seeing less and less organic growth from Gozco Plantations. In other words, gross profit and operating profit growth for the last consecutive reporting quarters has been marginal. The boost in the bot-tom line is pretty much driven by Indotruba. This is a good thing if they periodically improved their upper margins by upping the ante for own productions and doing efficiency measures in terms of operating expenses.

Our View

We conclude that we will revise down our initial target price from RP 450 to RP 335, a 15% upside from current price. Valuation is based on DCF calculation with 11.99% WACC, 4% terminal growth, and discount factor of 20% due to the illiquidity of the stock. Company fair value of RP 335 per share will reflect PE12F of 7.71, relatively cheap compared to peers. We still call a Hold for this particular stock mainly because of their large land banks, young age profile for the plantation which means future growth, and their valuation itself is still cheap compared to other peers in the plantation industry.

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