Monday, October 29, 2012

Increased nucleus productivity, higher EBITDA margin

by Trimegah

Given unaggressive new planting in the last 10 years, TBLA experienced inferior FY08-FY11 FFB yield of 12-14 tons/ha (industry: 20 tons/ha), increasing TBLA’s dependency to FFB purchase from third parties (70%  of processed FFB).

These has caused TBLA to post low FY07-FY10 average EBITDA margin of 16% (industry: 30%). However, given that around 8,000 hectares of the nucleus estates are reaching mid-production phase (7 to 12-year trees) with yield around 17-19 tons/ha, and additional 4,000 hectares maturing (above 3-year trees) in 2012, we believe TBLA would maintain its FY12 FFB yield of 19 tons per hectare in FY13 and FY14. We expect harvested FFB in FY13 would reach 783,000 tons (+0.0% YoY) before further increasing to 816,000 tons (+4.3% YoY). With improving nucleus estates’ productivity, we expect  FFB purchase from third parties would decrease to 335,000 tons (40% of total processed FFB) in FY13 before further declining to 326,000 tons (40% of total) in FY14, allowing EBITDA margin to increase to 30% in FY13 and FY14.

Growth option: sugar and new planting

We like TBLA’s expansion on the new sugar business ventures, which we expect would provide additional cash fl ow for TBLA. Please note that sugar cane has shorter mature age of only one  year and annual harvesting period in 4 years.

We also like TBLA’s expansion potential on the palm oil segment as it has a land bank of 20,000 hectares with attained location permit (Izin Lokasi), which provide opportunity for additional new-plantings.

Trading at 60% discount to the sector, 20% upside BUY

TBLA is a defensive play amid weak CPO price environment currently as it is well diversified in upstream and downstream CPO business. Additionally, sugar business would contribute 10% of total revenues, which we expect to commence initial sales contribution in 2013. Please note that Indonesian government has established a favorable regulation for local sugar players by setting a floor price for sugar (Rp8,100/kg). Furthermore, TBLA is trading relatively cheap with  2013 PE of 5x and  2013 PBV of 1x, and 65% discount to the plantation sector 2013 PE of 12x. We retain our BUY recommendation on the counter with target price of Rp600 which implies 2013 PE of 6x (50% discount to the sector) and 20% potential upsides.

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