Tuesday, September 25, 2012

Komering sugar estates: Site visit notes

Bahana : SIMP

Vertically integrated sugar business

We recently visited a sugar cane plantation in Komering, South Sumatera (3 hours from Palembang), belonging to Laju Perdana Indah (LPI), which was acquired by Salim Ivomas Pratama (SIMP) in 2008.  LPI began its operation in 2011, before its full operation in the beginning of 2012.  Komering is a vertically integrated sugar business, capturing the entire supply chain from R&D center with 10 different varieties of cane seedlings to plantations to its end product: refined white sugar from 8,000 TCD physical refining plant. With total land of 25k ha, 90% of LPI’s sugar cane are harvested using equipment while the remaining 10% are done manually using contract workers.

Strong sugar growth in the next 2 years

With total sugar planted area of 12.3k ha in 1H12, SIMP plans to reach 18k ha planted area in the next 2 years. The target will be supported by the company’s plan to buy 2 new mechanical harvesting machines, which will support SIMP to produce 50k MT in 2012.  To channel its product, LPI utilizes Bogasari’s extensive flour distribution.  On pricing, sugar 1H12 ASP reached IDR9,033/kg, up 15% y-y and nearly 16% when compared to full-year 2011 average of IDR7,814/kg.  In 2012, the company has achieved consistently high quality sugar, encouraging it to consider entering the retail market.

BUY on 11% discount to the sector & 27% upside potential

While sugar business only represents less than 10% of revenue, consistent expansion activities in both palm oil upstream and downstream businesses have started to pay-off for SIMP, which we expect to book solid 2013 EPS growth of 14%.  With its vast land bank, downstream factories’ low utilization rates and strong balance sheet (low single digit net gearing), SIMP has sufficient capacity to grow both organically and inorganically ahead.  On valuation, SIMP is attractive on 2013 PE of 9.7x, 11% discount to the sector’s valuation.  With target price of IDR1,650, we reiterate our BUY recommendation given 27% share price upside potential.

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