Regional Industry Focus Plantation Companies - DBS Group Industry Focus Plantation Companies Strategy and stock picks Our key message 1. Increase exposure.We expect CPO prices to remain

ed-CK / sa- BC, PY

Resilient price, volume driven CY17F/18F crude palm oil (CPO) prices (US$/MT,

FOB) raised by 7%/3%

CY17F earnings lifted by up to 69% on price upgrades, weaker currencies

Expect strong CY17F earnings recovery on restocking demand, Indonesia’s B20 mandate

Top picks: AALI, TSH, BAL, and FR (upgraded to BUY)

Crude palm oil (CPO) price forecasts adjusted higher. El Nino’s adverse impact had cut global palm oil production by a steeper-than-expected 7% last year. This caused an inventory drawdown of 2.6m MT (-20% y-o-y) – as Indonesia’s B20 mandate kicked in. Even as global supply rebounds 10% this year; we expect palm oil stockpile to stay flat on continued demand growth. Backed by higher soybean oil prices, we raise CY17F/18F palm oil prices (US$/MT, FOB) by 7%/3%. We also raise CY17F/18F palm kernel prices (US$/MT, FOB) by 52%/48% on tight supply. Biodiesel blending to expand further. We expect Indonesia’s CPO Fund to collect US$865m of export levies this year; based on a 9% rebound in export volumes. In our estimation, this would be adequate to produce 3.2m kl (or 3.1m MT) of subsidised biodiesel. Hence, coupled with non- subsidised volume, we expect Indonesia’s biodiesel output to expand 0.5m MT y-o-y to 3.3m MT (5% of global palm oil demand). In Malaysia, biodiesel mandate is also expected to grow 12% y-o-y to 0.8m MT (based on USDA projection). Earnings/TP revised. Having imputed revised ASP, FFB yield recoveries and exchange rate forecasts, we lift our FY17F earnings by up to 69%. Stock valuations are likewise lifted by up to 16% - mainly reflecting higher medium-term free cash flow. We believe planters still have decent upside from current levels. Our top picks. We recommend investors to accumulate AALI, TSH, BAL and FR on a 12-month horizon. Based on our revised forecasts, these counters still have 11-22% upside potential from current levels. Even as we anticipate 2HCY17F palm oil prices to moderate slightly, these counters should register 33-57% earnings growth – premised on continued volume expansion and depreciating currencies against USD. As global palm oil supply growth decelerates thereafter, we also expect these counters to outperform peers in output growth – given their relatively younger age profile.

JCI : 5,380.67 KLCI : 1,708.90 STI : 3,072.47 Analyst Ben SANTOSO +65 6682 3707 [email protected] Regional Research Team Stock coverage

Sources: DBS Bank, Bloomberg Finance L.P. Prices as of close of 14 February 2017 CPO, soybean, soybean oil price forecast revisions Source: DBS Bank estimates

DBS Group Research . Equity 17 Feb 2017

Regional Industry Focus

Plantation Companies

Refer to important disclosures at the end of this report

Price * Mkt Cap* 12-mth

Target Price Performance (%) LCY US$m LCY 3 mth 12 mth Rating

Rp Astra Agro Lestari 15,625 2,257 18,100 2.8 (1.5) BUY London Sumatra 1,590 814 1,650 1.6 7.4 HOLD RM Felda Global Ventures 1.90 1,558 1.65 (3.6) 20.3 FV Genting Plantations 11.52 2,060 12.35 11.0 7.5 HOLD IOI Corporation 4.70 6,641 4.70 7.3 0.6 HOLD KL Kepong 25.10 6,008 22.75 5.9 8.3 HOLD Sime Darby 9.21 14,075 8.05 13.8 19.0 HOLD TSH Resources 1.93 588 2.25 (1.0) (1.5) BUY S$ Bumitama Agri 0.82 1,007 0.99 6.5 10.9 BUY First Resources 1.98 2,007 2.19 (0.3) 5.9 BUY Golden Agri Resources 0.43 3,853 0.49 11.7 19.4 NR Indofood Agri 0.545 535 0.57 13.5 25.3 HOLD Wilmar International 3.87 17,203 3.90 15.2 33.0 HOLD

15 16 17F 18F 19F 20F 21FCPO price (RM/MT FOB P.Gudang) 2,168 2,652 3,040 3,030 2,970 2,990 3,050CPO price (US$/MT FOB P.Gudang) 560 640 659 644 635 640 651Prev. CPO price (RM/MT FOB P.Gudang) 2,168 2,652 2,610 2,720 2,770 2,820 2,880Prev. CPO price (US$/MT FOB P.Gudang) 560 640 618 622 626 637 652

Soybean price (US$/MT FOB Chicago) 346 360 353 345 345 350 358Soybean oil price (US$/MT FOB Chicago) 667 696 772 754 753 765 783Previous SB price (US$/MT FOB Chicago) 346 360 335 335 340 349 359Previous SBO price (US$/MT FOB Chicago) 667 696 711 717 728 747 768

TSR20 price (US$/MT) 1,337 1,392 1,497 1,516 1,555 1,595 1,638Prev. TSR20 px (US$/MT) 1,337 1,392 1,342 1,360 1,395 1,431 1,469

Sugar price (US$/MT) 300 400 400 400 400 400 398Prev. sugar px (US$/MT) 300 350 350 360 360 360 364

Industry Focus


Peer comparison

Source: Companies, Bloomberg Finance L.P., DBS Bank

Regional Industry Focus


Es t. la nd ba nk

16F own ma t.

16F own

p la nte dSha re pric e Ma rke t c a p

Adjuste d 16F

EV/p la nte d

Adjuste d 16F

EV/ma ture

15-18F own FFB vo l

CAGR

15-18F EPS

CAGR Re c

12-month ta rge t pric e Ba s i s

(ha .) (ha .) (ha .) 2-14-2017 (m) (own) (own) 16F 17F 16F 17F 16F 17F 16F 17F 16F 17F % %

Indone s ia

Astra Agro L. n/a 205,488 236,311 15,625Rp 2,257US$ 9,382US$ 10,789US$ 20.2 12.8 1.1 2.3 97 57 14 4 10.0 6.9 0.5 51.0 B 18,100Rp DCF

London Sum.* 215,917 83,141 95,619 1,590Rp 814US$ 7,631US$ 8,776US$ 21.3 13.0 2.3 1.9 -18 64 NC NC 15.1 8.8 -0.3 15.6 H 1,650Rp DCF

Simple a vg 3,071US$ 8 ,507US$ 9 ,783US$ 20.7 12.9 12.5 7.8

Ma la ys ia

Felda Global V. 355,864 282,553 338,161 1.90RM 1,558US$ 7,198US$ 8,615US$ NM 32.6 2.1 2.6 NM NM 50 56 18.8 11.8 -4.0 NM FV 1.65RM DCF

Genting Plant. 150,912 107,331 131,858 11.52RM 2,060US$ 8,193US$ 10,066US$ 31.4 19.1 0.5 0.7 51 64 5 5 22.6 14.5 4.6 39.7 H 12.35RM SOP

IOI Corp** 220,593 148,166 179,271 4.70RM 6,641US$ 19,801US$ 23,958US$ 41.2 32.0 1.9 1.7 1,127 28 73 73 22.2 18.3 -1.8 173.0 H 4.70RM DCF

KL Kepong 245,905 179,016 209,118 25.10RM 6,007US$ 11,537US$ 13,477US$ 17.6 20.1 1.8 2.0 83 -19 23 27 16.5 13.6 2.6 18.2 H 22.75RM DCF

Sime Darby 647,373 510,148 605,046 9.21RM 14,075US$ 10,707US$ 12,699US$ 24.0 21.5 2.7 2.9 -3 3 35 28 17.0 14.1 1.5 6.2 H 8.05RM SOP

TSH Res. 82,841 29,990 42,816 1.93RM 588US$ 10,868US$ 15,516US$ 28.1 18.5 1.0 0.9 NM 52 87 78 21.9 16.3 6.8 NM B 2.25RM DCF

Simple a vg 30,929US$ 11,384US$ 14,055US$ 28.5 24.0 19.9 14.7

Singa pore

Bumitama A. 191,561 110,002 131,359 0.82S$ 1,007US$ 10,549US$ 12,597US$ 14.1 10.6 1.9 1.2 7 33 54 31 9.7 7.1 6.7 12.5 B 0.99S$ DCF

First Resources 312,488 140,704 179,938 1.98S$ 2,207US$ 13,852US$ 17,714US$ 18.8 12.5 1.9 1.2 12 50 8 NC 9.3 6.7 6.2 23.4 B 2.19S$ DCF

Golden Agri R. 558,000 362,522 374,387 0.43S$ 3,853US$ 17,367US$ 17,935US$ 10.5 13.2 0.5 1.4 NM -20 52 49 13.5 8.3 0.8 NM NR 0.49S$ DCF

Indofood Agri* 541,224 200,724 249,543 0.55S$ 535US$ 2,850US$ 3,543US$ 18.6 8.3 0.0 0.0 575 124 42 36 9.0 6.3 1.8 152.6 H 0.57S$ DCF

Wilmar Int'l 573,401 219,164 245,956 3.87S$ 17,203US$ 6,906US$ 7,751US$ 19.9 15.1 2.2 2.2 -15 32 86 81 15.3 11.8 0.8 4.9 H 3.90S$ DCF

Simple a vg 24,805US$ 11,154US$ 12,948US$ 16.4 11.9 11.4 8.0* Including rubber and other crops** Excluding effective stake in associates land bank

CY PER, x

FY Div. yie ld ,

%

EPS growth (inc . BA

ga ins ), %

FY Ne t ge a ring,

%FY EV/

EB ITDA, x

Page 2

Industry Focus


Analyst Ben SANTOSO +65 6682 3707 [email protected] Marvin KHOR +60 32604 3911 [email protected]

Table of contents Peer comparison 2 Strategy and stock picks 4

Our key message 4 Our recommendations 4 Changes to our key assumptions 4 Indonesia`s biodiesel continues to support demand 6 Valuations to rise with CPO prices 7 Expect higher 4QCY16 earnings 9 4QCY16 palm oil refining margins improving q-o-q 9 Where we can go wrong 10

Palm oil inventory to remain tight 12 A “short: start of the year 12 Higher for longer 12 Supply recovery to be driven by new maturities 12 Palm oil inventory expected to remain flat this year 12 CY17F/18F palm oil prices tweaked by +7%/+3% 13 Near-term correction not as steep as initially expected 13 CY17F/18F soybean oil prices raised by 9%/5% 13 China`s palm oil imports to recover 14

Appendix 16 3QCY16 results review and 4QCY16 results preview 16

Company Guides 21

Astra Agro Lestari 22 Bumitama Agri 28 Felda Global Ventures 34 First Resources 40 Genting Plantations 46 Indofood Agri Resources 53 IOI Corporation 59 KL Kepong 65 London Sumatra Indonesia 71 Sime Darby 77 TSH Resources 83 Wilmar International 89

Disclaimer 95

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Industry Focus


Strategy and stock picks Our key message

1. Increase exposure. We expect CPO prices to remain well supported this year. We prefer Indonesian planters for their stronger prospective rebound in output and cheaper valuations. We believe select counters remain undervalued.

2. Current high prices may be stickier than thought. As we look at the anticipated recovery in China’s palm oil imports, the higher B20 blend in Indonesia, and the low levels of palm oil inventories in Malaysia, China and India; we believe palm oil demand should continue to balance supply this year – even with a prospective 10% output rebound.

3. We see low risk of price downside surprise. We expect fresh fruit bunch (FFB) yields to recover 8% in Malaysia and 6% in Indonesia this year. Yet, following a steep 14% and 15% declines in CY16, such recovery is not expected to bring output to its full potential. We believe there is relatively low risk of oversupply this year.

4. Expect higher dividends. As planters wind down their aggressive expansions due to the dwindling supply of suitable land, strict sustainability standards and potentially more regulatory restrictions; we expect more operating cash flow to be set aside as higher dividends – in absence of any opportunistic acquisitions.

Our recommendations

We favour planters with younger age profile for their higher volume growths. We also like planters with strong balance sheets, which would allow them to take advantage of any opportunistic brown field acquisitions, to expand value chain downstream, and/or to diversify their businesses into other crops. We recommend investors to increase exposure to Astra Agro Lestari (AALI: BUY, TP: Rp18,100); TSH Resources (TSH: BUY, TP: RM2.25), Bumitama Agri (BAL: BUY, TP: S$0.99) and First Resources (FR: upgraded to BUY, TP: S$2.19). In this report we downgrade our ratings on Indofood Agri (IFAR: HOLD, TP: S$0.57) and Genting Plantations (GENP: HOLD: TP: RM12.35) on limited upside potential. We also reiterate our HOLD calls on London Sumatra (LSIP: HOLD, TP: Rp1,650), IOI Corporation (IOI: HOLD, TP: RM4.70), KL Kepong (KLK: HOLD, TP: RM22.75), Sime Darby (SIME: HOLD, TP: RM8.05) and Wilmar International (WIL: HOLD, TP: S$3.90). Changes to our key assumptions

We raised CY17F/18F CPO prices (US$/MT, FOB) by 7%/3% to US$659/US$644. In MYR terms, they were raised by 16%/11% to account for Ringgit depreciation. We imputed higher CY17F soybean oil prices, though this was offset by reduced biodiesel output in Indonesia on lower-forecast palm oil export volumes (hence lower CPO fund collection vis-à-vis our previous forecast). We also made slight changes to sugar, cocoa and coffee price forecasts, based on the World Bank Commodity Outlook (January 2017).

Summary of CPO, soybean, and soybean oil price revisions Source: Bloomberg Finance L.P., Datastream, DBS Bank estimates

15 16 17F 18F 19F 20F 21FCPO price (RM/MT FOB P.Gudang) 2,168 2,652 3,040 3,030 2,970 2,990 3,050CPO price (US$/MT FOB P.Gudang) 560 640 659 644 635 640 651Prev. CPO price (RM/MT FOB P.Gudang) 2,168 2,652 2,610 2,720 2,770 2,820 2,880Prev. CPO price (US$/MT FOB P.Gudang) 560 640 618 622 626 637 652

Soybean price (US$/MT FOB Chicago) 346 360 353 345 345 350 358Soybean oil price (US$/MT FOB Chicago) 667 696 772 754 753 765 783Previous SB price (US$/MT FOB Chicago) 346 360 335 335 340 349 359Previous SBO price (US$/MT FOB Chicago) 667 696 711 717 728 747 768

TSR20 price (US$/MT) 1,337 1,392 1,497 1,516 1,555 1,595 1,638Prev. TSR20 px (US$/MT) 1,337 1,392 1,342 1,360 1,395 1,431 1,469

Sugar price (US$/MT) 300 400 400 400 400 400 398Prev. sugar px (US$/MT) 300 350 350 360 360 360 364

Page 4

Industry Focus


CY17F and CY18F Brent prices were little changed at US$51.7/bbl and US$53.3/bbl (from US$51.6 and US$53.3 respectively), based on recent forecasts published by US EIA (Energy Information Administration) Short Term Energy Outlook (December 2016). CY17F and CY18F rubber (STR20, FOB) prices were also revised up (based on the actual CY16 actual average) to US$1,497/MT and US$1,516/MT from US$1,342/MT and US$1,360/MT respectively. Incorporating the latest in-house currency forecasts, we anticipate a steeper depreciation in USD/MYR and USD/IDR

exchange rates in the near term – but flattish trend is expected in the long term. Hence, while we had raised USD palm oil price forecasts by 3-7%, the free cash flow impact from CY19F onwards is negative (vs. our previous forecasts). We assume no change in the prevailing export tax/levy structure – although this may change via possible policy synchronisation recommended by the Council of Palm Oil Producing Countries (CPOPC).

Revisions to our currency exchange rates Source: Bloomberg Finance L.P., DBS Bank estimates Summary of EPS and TP revisions Source: DBS Bank estimates

FX ra te s (YE) 15 16F 17F 18F 19F 20F 21FUSD/MYR 4.29 4.49 4.78 4.70 4.68 4.68 4.68USD/IDR 13,795 13,436 13,876 13,742 13,719 13,719 13,719USD/SGD 1.42 1.45 1.48 1.47 1.46 1.46 1.46USD/THB 36.0 35.8 36.8 36.7 36.6 36.6 36.6

Pre vious FX ra te s (YE) 15 16F 17F 18F 19F 20F 21FUSD/MYR 4.29 4.13 4.27 4.42 4.42 4.42 4.42USD/IDR 13,795 13,160 13,876 14,598 14,598 14,598 14,598USD/SGD 1.42 1.37 1.38 1.39 1.39 1.39 1.39USD/THB 36.0 35.1 35.7 36.3 36.3 36.3 36.3

% stre ngthe n (we a ke n) 15 16F 17F 18F 19F 20F 21FUSD/MYR 0% -8% -11% -6% -6% -6% -6%USD/IDR 0% -2% 0% 6% 6% 6% 6%USD/SGD 0% -5% -7% -5% -5% -5% -5%USD/THB 0% -2% -3% -1% -1% -1% -1%

R

Pre v. CY16F

EPS

Pre v. CY17F

EPS

Ne w CY16F

EPS

Ne w CY17F

EPS

CY16F EPS re v.

CY17F EPS re v. Pre v. TP Ne w TP TP re v.

Indone s ia (EPS/TP)Astra Agro Lestari (Rp) B 802 786 775 1,220 -3% 55% 18,500 18,100 -2%London Sumatra (Rp) H 70 104 75 123 7% 18% 1,580 1,650 4%

Ma la ys ia (EPS/TP)Felda Global V. (sen/RM) FV -1 4 -2 6 NM 48% 1.50 1.65 10%Genting Plant. (sen/RM) H 36 49 37 60 2% 24% 12.40 12.35 0%IOI Corporation (sen/RM) H 11 13 11 15 4% 14% 4.30 4.70 9%KL Kepong (sen/RM) H 140 115 142 125 1% 9% 22.50 22.75 1%Sime Darby (sen/RM) H 36 36 38 43 7% 18% 7.40 8.05 9%TSH Resources (sen/RM) B 7 9 7 10 -3% 15% 2.20 2.25 2%

Singa pore (EPS/TP)Bumitama Agri (Rp/S$) B 468 529 543 720 16% 36% 0.95 0.99 5%First Resources (US¢/S$) B 7 9 8 11 8% 28% 1.90 2.19 16%Golden Agri R. (US¢/S$) NR 3 2 3 2 -10% 3% 0.39 0.49 25%Indofood Agri (Rp/S$) H 261 363 274 614 5% 69% 0.58 0.57 -2%Wilmar Int'l (US¢/S$) H 13 17 14 18 6% 9% 3.39 3.90 15%

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Industry Focus


Indonesia’s biodiesel continues to support demand

Based on forecast CY17 palm oil export volume of 24.8m MT (i.e. c.76% of which is RBD Olein), we estimate the Indonesian Oil Palm Estate Fund Administrator (BPDP or CPO Fund) to collect US$865m of export levies. The proceeds are available to subsidise the difference between biodiesel price (based on fixed formula of domestic CPO price + US$125) and imported diesel price. Based on our revised forecasts, this difference should average US$282/MT this year (the higher the crude oil price, the lower the subsidy and vice versa).

Hence, including non-subsidised biodiesel output, we anticipate Indonesia to produce 3.3m MT or 3.4m kl of biodiesel – representing an increase of 0.5m MT y-o-y. According to USDA, Indonesia currently has a nameplate capacity of 7.286m MT p.a. – and this is expected to expand to 7.628m MT in CY17 – implying a mere c.45% utilisation rate. Execution remains key; as we believe absorption also depends on the underlying demand for the blended diesel itself. A breakdown of our estimates is presented below:

Estimated CPO Fund proceeds, and diesel spread to be subsidised, and estimated biodiesel produced Sources: USDA, Handbook of Energy & Economic Statistics of Indonesia, Oil World, Pertamina, Kontan newspaper, DBS Bank estimates Biodiesel pricing formula: CPO price + US$125/MT

Indonesia palm oil vo lumes 2014 2015 2016 2017F 2018F 2019F 2020F 2021FIndonesia's palm oil output (m MT) 31.4 33.4 31.8 34.8 36.7 38.5 39.6 40.5Indonesia's dom. consumption (m MT) 8.6 7.0 9.1 10.0 11.1 12.3 13.6 15.1 growth 6.3% -18.2% 28.8% 10.6% 10.9% 10.8% 11.0% 10.9% GDP growth 5.0% 4.8% 5.1% 5.3% 5.5% 5.5% 5.7% 5.7% ratio to GDP growth 1.3 -3.8 5.6 2.0 2.0 2.0 1.9 1.9Indonesia's palm oil exports (m MT) 22.8 26.4 22.8 24.8 25.6 26.2 25.9 25.4 growth 10.5% 15.6% -13.7% 9.0% 3.3% 2.3% -1.0% -2.1%

9%

Indonesia biodiese l mandate est imates 2014 2015 2016 2017F 2018F 2019F 2020F 2021FCPO price forecast (US$/MT, FOB) 738.3 560 640 659 644 635 640 651Domestic CPO pirce (net of export levy) (US$/MT) 510 590 609 594 585 590 601Biodiesel price (dom. CPO px + US$125) (US$/MT) 635 715 734 719 710 715 726Crude oil price - Brent (US$/bbl) 52 43 52 53 57 60 64Gas oil price (US$/MT) 450 392 452 464 489 516 545Biodiesel & diesel fuel px-spread (subsidy needed) (US$/MT) 185 323 282 255 222 199 181

CPO export vol. subject to levy (m MT) 3.4 5.6 6.0 6.2 6.4 6.3 6.2 share of export vol. 26% 24% 24% 24% 24% 24% 24%CPO export levies - US$50/MT (US$ m) 170 278 302 312 320 316 310Olein export vol. subject to levy (m MT) 9.8 17.2 18.7 19.4 19.8 19.6 19.2 share of export vol. 74% 76% 76% 76% 76% 76% 76%Olein export levies - US$30/MT (US$ m) 294 516 562 581 594 588 576Export levies co llect ed (US$ m) 464 794 865 893 914 905 885How much biodiesel can be produced (m MT) 0.600 2.454 3.066 3.499 4.124 4.554 4.892How much biodiesel can be produced (m kl) 0.620 2.535 3.167 3.614 4.259 4.703 5.052

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Industry Focus


Indonesia’s biodiesel demand projections Sources: USDA, Handbook of Energy & Economic Statistics of Indonesia, Oil World, Pertamina, Kontan newspaper, DBS Bank estimates Biodiesel pricing formula: CPO price + US$125/MT Malaysia’s biodiesel demand projections Sources: USDA, MPOB, DBS Bank estimates Biodiesel pricing formula: RBD Palm Oil price + RM515/MT

Valuations to rise with CPO prices

The share price performance over 2016 was generally more positive for SGX- and IDX-listed plantation counters, and milder for Bursa-listed planters. This mirrored their respective country’s index performances. Varying degrees of appreciation was seen towards year-end on the upturn of CPO prices.

YTD 2017, Bursa-listed planters benefited from a weaker Ringgit propping up CPO prices, thus leading to their outperformance vs the FBMKLCI. Additionally, valuations were lifted by Sime Darby which appreciated with its move to firm up its restructuring plan to unlock value via its demerger into pure-play units. Otherwise, SGX- and IDX-listed planters generally underperformed their respective indices. From our updated forecasts, Bursa-listed planters are trading at an average forward PE of 23x, keeping its premium to SGX-

Malaysia 2014 2015 2016 2017F 2018F 2019F 2020F 2021FDiesel consumption (m litres) 5,286 5,416 5,544 5,793 6,054 6,326 6,611 6,908in m MT 4.652 4.766 4.878 5.098 5.327 5.567 5.818 6.079 growth 2% 2% 2% 5% 5% 5% 5% 5%

Biodiesel exports (m litres) 95 195 74 74 74 74 74 74 Domestic on-road biodiesel (m litres) 370 525 530 770 805 841 879 918 implied blend 7% 10% 10% 13% 13% 13% 13% 13% Domestic biodiesel non subsidised (m litres) - - - - - - - - implied blend 0% 0% 0% 0% 0% 0% 0% 0% Chg. in inventory (m litres) -14 -170 93 -60 0 0 0 0Tota l biodiesel produced (m lit res) 451 550 697 784 878 914 952 992 growth -12% 22% 27% 12% 12% 4% 4% 4%Nameplate capacity (m litres) 2,880 2,880 2,880 2,880 2,880 2,880 2,880 2,880 utilisation rate 16% 19% 24% 27% 30% 32% 33% 34%

Malaysia palm oil production (MT) 19,666,993 19,961,581 18,428,981 19,461,990 20,071,662 21,075,633 22,039,556 22,906,013 growth 2% 1% -8% 6% 3% 5% 5% 4%Palm oil required for biodiesel production (MT) 436,633 532,533 674,430 758,667 850,311 885,370 922,007 960,293 % energy recovery rate 91% 91% 91% 91% 91% 91% 91% 91%Non biodiesel domestic palm oil consumption (MT) 2,381,367 2,384,467 2,058,464 2,161,387 2,269,456 2,382,929 2,502,075 2,627,179 growth 31% 0% -14% 5% 5% 5% 5% 5%Total domest ic pa lm o il consumpt ion (MT) 2,818,000 2,917,000 2,732,893 2,920,054 3,119,767 3,268,299 3,424,083 3,587,472

Indonesia 2014 2015 2016 2017F 2018F 2019F 2020F 2021FTransport diesel consumption (m litres) 26,437 26,142 26,220 26,966 27,053 27,152 27,253 27,353in m MT 23.265 23.005 23.074 23.730 23.806 23.894 23.982 24.071 growth -5% -1% 0% 3% 0% 0% 0% 0%

Biodiesel exports (m litres) 1,350 343 200 100 - - - - Domestic biodiesel PSO (m litres) 1,520 817 2,490 3,167 3,614 4,259 4,703 5,052 implied blend 6% 3% 9% 12% 13% 16% 17% 18% Domestic biodiesel non subsidised (m litres) 80 43 247 144 144 145 146 146 implied blend 0% 0% 1% 1% 1% 1% 1% 1% Chg. in inventory (m litres) 50 -23 0 0 0 0 0 0Total biodiesel produced (m lit res) 3,000 1,180 2,937 3,411 3,758 4,404 4,848 5,199 growth 7% -61% 149% 16% 10% 17% 10% 7%Nameplate capacity (m litres) 5,670 6,750 7,280 7,628 7,628 7,628 7,628 7,628 utilisation rate 53% 17% 40% 45% 49% 58% 64% 68%

Indonesia palm oil production (MT) 31,400,000 33,400,000 31,800,000 34,992,452 36,990,451 38,793,219 39,994,589 41,040,570 growth 9% 6% -5% 10% 6% 5% 3% 3%Palm oil required for biodiesel production (MT) 2,904,725 1,142,525 2,843,600 3,302,320 3,638,862 4,264,508 4,694,510 5,033,467Non biodiesel palm oil consumption (MT) 5,688,275 5,884,475 6,206,400 6,088,935 6,423,826 6,828,527 7,258,724 7,716,024 growth 6% 3% 5% -2% 6% 6% 6% 6%Total domest ic palm o il consumpt ion (MT) 8,593,000 7,027,000 9,050,000 9,391,255 10,062,689 11,093,035 11,953,234 12,749,491

Page 7

Industry Focus


listed planters’ 12x and IDX-listed planters’ 13x. However all have eased relative to earlier multiples, implying more palatable valuations as earnings outlooks improve.

Bursa-listed planters’ valuations have come down, but still remain at regional premium Source: Bloomberg Finance L.P., DBS Bank estimates

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Indonesia 1-year Forward PE

+1sd: 21.6x

Avg: 14.3x

+2sd: 28.8x

-1sd: 7.1x

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Singapore 1-year Forward PE

+1sd: 17x

Avg: 11.4x

+2sd: 22.6x

-1sd: 5.8x

5

7

9

11

13

15

17

19

21

23

25

Jan-

07

Jul-

07

Jan-

08

Jul-

08

Jan-

09

Jul-

09

Jan-

10

Jul-

10

Jan-

11

Jul-

11

Jan-

12

Jul-

12

Jan-

13

Jul-

13

Jan-

14

Jul-

14

Jan-

15

Jul-

15

Jan-

16

Jul-

16

Jan-

17

Regional 1-year forward PE

+1sd: 20x

+2sd: 23.2x

Avg: 16.8x

-1sd: 13.5x

-2sd: 10.3x

10

12

14

16

18

20

22

24

26

28

30

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

Jan-

16

Jan-

17

Malaysia 1-year Forward PE

+2sd: 26.2x

+1sd: 21.8x

Avg: 17.3x

-1sd: 12.8x

Page 8

Industry Focus


Singapore’s P/BV valuation is the cheapest regionally, as GGR, IFAR and WIL are trading below book Source: Bloomberg Finance L.P., DBS Bank estimates Expect higher 4QCY16 earnings

We expect 4QCY16 earnings to sequentially improve on the back of both yield and price recoveries from mid-October through December 2016. In our estimation, earnings should rebound by 8% to >100% q-o-q; as we impute the average spot palm oil price of US$682/MT (FOB Pasir Gudang) and up to 90% q-o-q rebound in FFB output. Based on data produced by some planters, we understand November 2016 output was the peak for the year. A summary of our 4QCY16 earnings expectations is presented in this report’s Appendix. The 4QCY16 CPO spot prices from the MPOB and Indonesian local prices were estimated at RM2,952/MT (+12% q-o-q) and Rp8,365/kg (+7% q-o-q), respectively.

4QCY16 palm oil refining margins improving q-o-q

Having imputed spot prices of CPO, RBD (Refined Bleached Deodorised) Olein prices, RBD Stearin and PFAD (Palm Fatty Acid Distillate) to date, we found that spot palm oil refining margins continued to improve in both Malaysia and Indonesia – mainly in consequence to recoveries in RBD Olein, RBD Stearin and PFAD (Palm Fatty Acid Distillate) prices since November 2016. However, Indonesian refining margins continued to average lower than those in Malaysia; as Malaysian export taxes worked to reduce domestic feedstock cost. In Indonesia, export levies instituted since July 2015 (to subsidise the mandatory biodiesel programme in Indonesia) had also worked to reduce RBD Olein, RBD Stearin and PFAD net ASPs – relative to Malaysian peers.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jan

-07

Jul-0

7

Jan

-08

Jul-0

8

Jan

-09

Jul-0

9

Jan

-10

Jul-1

0

Jan

-11

Jul-1

1

Jan

-12

Jul-1

2

Jan

-13

Jul-1

3

Jan

-14

Jul-1

4

Jan

-15

Jul-1

5

Jan

-16

Jul-1

6

Jan

-17

Regional 1-year Forward PB

Avg: 2.2x

+1sd: 2.9x

+2sd: 3.6x

-1sd: 1.6x

-2sd: 0.9x

0.5

2.5

4.5

6.5

8.5

10.5

12.5

Jan

-07

Jul-0

7

Jan

-08

Jul-0

8

Jan

-09

Jul-0

9

Jan

-10

Jul-1

0

Jan

-11

Jul-1

1

Jan

-12

Jul-1

2

Jan

-13

Jul-1

3

Jan

-14

Jul-1

4

Jan

-15

Jul-1

5

Jan

-16

Jul-1

6

Jan

-17

Singapore 1-year Forward PB

Avg: 3.2x

-1sd: 0.7x

+1sd: 5.8x

+2sd: 8.3x

0.5

1.5

2.5

3.5

4.5

5.5

6.5

7.5

8.5

Jan

-07

Jul-0

7

Jan

-08

Jul-0

8

Jan

-09

Jul-0

9

Jan

-10

Jul-1

0

Jan

-11

Jul-1

1

Jan

-12

Jul-1

2

Jan

-13

Jul-1

3

Jan

-14

Jul-1

4

Jan

-15

Jul-1

5

Jan

-16

Jul-1

6

Jan

-17

Indonesia 1-year Forward PB

-2sd: 0.8x

Avg: 3.1x

+2sd: 5.4x

+1sd: 4.2x

-1sd: 1.9x

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan

-07

Jul-0

7

Jan

-08

Jul-0

8

Jan

-09

Jul-0

9

Jan

-10

Jul-1

0

Jan

-11

Jul-1

1

Jan

-12

Jul-1

2

Jan

-13

Jul-1

3

Jan

-14

Jul-1

4

Jan

-15

Jul-1

5

Jan

-16

Jul-1

6

Jan

-17

Malaysia 1-year Forward PB

-2sd: 1.7x

-1sd: 2x

+2sd: 3x

+1sd: 2.7x

Avg: 2.3x

Page 9

Industry Focus


Improving trends: 4QCY16 spot palm oil refining margins and spot soybean crush margins in China

Source: Bloomberg finance L.P., SEA of India, MPOB, DBS Bank estimates Quarterly palm oil refining margin (in US$/MT -– calculated based on spot CPO, RBD Olein, RBD Stearin, PFAD prices) Source: Bloomberg Finance L.P., SEA of India, MPOB, DBS Bank estimates Where we can go wrong

Risks to our view are summarised below: 1. Energy price volatility and biodiesel volumes. We

assumed certain biodiesel volume as a key palm oil demand driver – which ultimately is dependent on actual allocation as a percentage of overall diesel consumption. Should this fail to materialise, our CPO price forecast would be negatively affected. Yet, given the rundown in global palm oil and soybean inventories in 2016, we believe chances for a collapse in CPO prices should be limited. On the other hand, any strength in crude oil price above our forecasts (i.e. lower subsidy/MT) should also increase the chances of more blending. In our forecasts, we employed long-term Brent crude oil prices based on EIA and World Bank forecasts. Energy price volatility would impact the demand for palm and soybean oil for energy use, subject to biodiesel subsidies.

2. Release of China’s rapeseed oil state reserves. China still has c.4.1m MT of rapeseed oil reserves (as at end-August 2016). Recent Oil World report highlighted the Chinese government’s decision to release 2m MT of rapeseed oil from state reserves starting mid-October. This could have bearish pressures on soybean/palm oil prices as it did in 1HCY16.

3. Exchange rates. In our forecasts, we assume a strong

USD. A reversal of this trend would have an adverse impact on soybean and crude oil prices in USD terms as well as CPO prices in Ringgit and Rupiah terms. A strong USD would also make planting soybeans in South America more profitable in local currencies.

4. Weather anomalies. Dry weather (such as strong El Nino

events) typically disrupts supply in the affected estates with some time lag (typically two years thereafter) and influence palm oil prices. Dryness/flooding in soybean growing

-60

-40

-20

0

20

40

60

80

Jan-

14

Feb-

14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-1

4

Aug

-14

Sep-

14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep-

15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb-

16

Mar

-16

Apr

-16

May

-16

Jun-

16

Jul-1

6

Aug

-16

Sep-

16

Oct

-16

Nov

-16

Dec

-16

Jan-

17

Indonesia estimated palm oil refining margin

Malaysia estimated palm oil refining margin

China's JCI-reported soybean crushing margin

US$/MT

2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16Indonesia 42.0 23.0 40.7 24.7 15.6 3.1 8.1 -5.4 -12.0 20.5 16.8 1.5 13.3 17.3 18.5 gross refining margin 5% 3% 5% 3% 2% 0% 1% -1% -2% 4% 3% 0% 2% 3% 3%Malaysia 32.1 35.6 30.9 36.8 45.0 46.4 -6.9 -5.5 -1.8 3.6 -8.2 -19.6 23.0 30.3 37.7 gross refining margin 4% 5% 4% 4% 5% 6% -1% -1% 0% 1% -2% -3% 3% 5% 5%

Page 10

Industry Focus


regions would likewise influence the price of soybean oil. CPO price upside is also possible if a strong La Nina (a weather phenomenon, that causes drought in North/South Americas which typically ensues a strong El Nino), occurs. In CY07-08, a moderate La Nina caused Brazil and Argentine soybean harvests to drop 17% y-o-y, thus boosting both soybean CPO prices. The last severe La Nina impact on South American soybean crop occurred in 2009.

5. China’s economic growth. We imputed demand growth

for both soybean and palm oil based on October 2016 IMF global GDP growth forecasts. Weaker-than-expected economic growth forecasts globally would have adverse consequences on our price forecasts. In this sector, Chinese economic growth is an important demand proxy. China occupies 14% and 47% shares of global palm oil and soybean oil (implied) imports respectively. Any steep depreciation in CNY could also work to reduce processors’ margins.

6. Change in export/import tax structure. Changes in Indian soybean and palm oil import taxes would have implications on Indian demand. According to Oil World, India accounts for 20%and 31% of global palm oil and soybean oil imports respectively.

7. The pace of South American soybean sales may also have some bearing on palm oil price direction. USD strength may lead to an increase in soybean exports and result in further price pressures. We still expect expanded planting of Argentine soybean this year, on the back of reduced export tax and favourable exchange rate.

8. Shift in seasonal planting patterns. The price

divergence in soybean and corn prices may shift farmers’ planting to corn for the 2016/17 marketing year.

9. Changes in import/export taxes. Any move by the

Indian Government to raise/lower refined edible oil import taxes would have consequences on Malaysian refiners' margins. Likewise, changes in Indonesian/Malaysian export taxes in response would have consequences on planters’ net ASP and margins.

10. Faster-than-expected rise in production cost. The unit

cost of producing one MT of CPO in Indonesia is rising faster than inflation. Recent increases in workers' wages have all taken a toll on cost and may further erode margins. Likewise, labour shortages in Malaysia would continue to affect productivity and palm oil unit cost over the long term.

Page 11

Industry Focus


Palm oil inventory to remain tight A “short” start of the year

As expected, Malaysia’s January 2017 palm oil production declined 13% m-o-m to 1.277m MT, as fresh fruit bunch (FFB) entered a seasonally lower-yield period. Combined with resilient export demand (despite high prices), the low output depleted Malaysia’s palm oil stockpile by 8% m-o-m (-33% y-o-y) to 1.540m MT – the lowest level in five months. We expect this to further tighten towards 1.082m MT by end-June 2017 before rebounding. Clearly, we think palm oil prices are well supported for at least the next six months – based on our current trajectory. Global palm oil consumption for food is due for a rebound, following a contraction last year (after stripping out expansions in Indonesian and Malaysian biodiesel production). Despite forecast 10% jump in global output, we expect global palm oil inventory to remain flat this year. In addition to a recovery in food demand, biodiesel blending in Indonesia is poised to expand 0.5m MT y-o-y. Higher for longer

In the near term, we believe there are two key demand drivers – which we believe should maintain near term momentum for palm oil prices: 1. Seasonal Eid festival demand from end April 2017 –

which we have imputed; and 2. Indonesia’s next batch of B20 biodiesel allocation (May –

October 2017) – which we expect to increase to 1.64m kl vs. November 2016 – April 2017 allocation of 1.53m kl. This is based on our revised FY forecast of 3.2m kl (subsidised portion)

This is more bullish than our expectations in October 2016; as 4QCY16 Malaysian output did not recover as strongly as we had initially anticipated. Indonesian palm oil output (based on data reported by Bumitama and First Resources) had decidedly recovered better. However, the increased supply was more

than compensated by strong demand recovery over the same period on restocking activities. Supply recovery to be driven by new maturities

Following 15% and 14% drops last year, we expect this year’s FFB yields to rebound 6% in Indonesia and 8% in Malaysia. FFB yields are not expected to fully normalise back to the CY15 level; given lingering impacts from reduced fertiliser application in 2015 as well as typical second-year impact following a severe El Nino. Having imputed CY16 production data, we adjusted our CY17F and CY18F palm oil supply forecasts slightly. This mainly reflects lower forecast output from producers outside Indonesia and Malaysia. We now expect global palm oil supply to expand 10% y-o-y to 63.7m MT this year; though decelerating to 5% to 66.3m MT in CY18F. Out of the expected 5.5m MT of output growth this year, Malaysia will contribute 37%; while Indonesia will contribute 53% (partly powered by its strong pipeline of maturing trees). Approximately 526k ha of oil palm estates are due to mature in Indonesia this year – while 620k ha that matured last year will continue to pick up additional yields. New maturities are comparatively lower in Malaysia (i.e. at 251k ha this year and 204k ha last year). Palm oil inventory expected to remain flat this year

Global palm oil inventory had shrunk to 10.3m MT at the end of CY16, based on Oil World December 2016 report. This represented c.16.6% of annual global demand (down from 21.3% in the previous year). By end of this year, we expect palm oil inventory to settle at 10.5m MT or 16.4% of global annual demand. This indicates that palm oil prices should remain relatively strong this year.

Palm oil supply and demand forecast Source: USDA, Oil World, EIA short-term outlook (Jan15), Bloomberg Finance L.P., DBS Bank estimates

CPO price

(US$/MT) FOB

Ending Stocks (k MT)

Global demand (k MT)

Global supply (k MT)

Stock/ usage

rat io (%)

Soybean o il price (US$/MT)

FOB

CPO price

(US$/MT) FOB




Stock/ usage

rat io (%)

Soybean o il price (US$/MT)

FOB2016 640 10,297 61,979 58,306 16.6% 696 2016F 633 10,297 62,186 59,594 16.6% 7322017F 659 10,472 63,673 63,847 16.4% 772 2017F 618 10,042 64,535 64,280 15.6% 7112018F 644 11,061 66,304 66,893 16.7% 754 2018F 622 10,729 66,581 67,269 16.1% 7172019F 635 12,197 69,026 70,162 17.7% 753 2019F 626 11,976 68,969 70,216 17.4% 7282020F 645 13,388 71,534 72,725 18.7% 765 2020F 637 13,226 71,296 72,545 18.6% 7472021F 651 14,426 73,940 74,978 19.5% 783 2021F 652 14,101 73,674 74,549 19.1% 768

New forecasts - Palm Oil Prev. forecasts - Palm Oil

Page 12

Industry Focus


CY17F/18F palm oil prices tweaked by +7%/+3%

Global palm oil demand was estimated to have expanded 1.5m MT to 62.0m MT last year. Taking away the Indonesian/ Malaysian biodiesel mandates, global palm oil demand would have shrunk by c.0.4m MT. This year, palm oil demand is expected to expand at a moderate rate of 2.7% or 1.7m MT to 63.7m MT. A majority of this growth (or c.1m MT) should come from food demand; biodiesel demand is forecast to expand by 0.6m MT (of which 0.5m MT would come from Indonesia’s B20 mandate). We reduced our demand forecast from 64.6m MT on lower economic growth forecasts in palm oil’s largest consuming countries. We also lowered Indonesia’s biodiesel mandate after trimming export volumes (vs. previous forecasts). Indonesia is forecast to produce c.3.1m MT this year (lowered from 3.7m MT previously). Likewise, including 74k MT of exports, we now expect Malaysia to produce c.784k MT of biodiesel (lowered from 960k MT in our previous forecast). We believe the revised biodiesel production target for Indonesia is achievable; based on estimated export levy collection of US$865m. Having imputed our revised volumes, CY17F/18F CPO prices (US$/MT, FOB basis) are hence adjusted +7%/+3% to US$659/US$644. In MYR terms, they were revised by +16%/+11% to RM3,040/RM3,030 – reflecting a weaker Ringgit vis-à-vis previous expectations. Near-term correction not as steep as initially expected

On the prospects of a recovery in global palm oil inventory, we continue to observe backwardation in palm oil futures prices – although current market expectations still match our average RM3,040 forecast for the year. Compared to the current front month futures price of RM3,306; there is 8% downside potential compared to our average CY17F price; as output recovers in 2HCY17. However, this assumes no disruptions in supply throughout the year. Our average CY18F is 10% higher

than average futures prices currently indicate, as we expect continued decline in inventory (as a share of annual demand). CY17F/18F soybean oil prices raised by 9%/5%

Notwithstanding the record US crop in October 2016-September 2017 marketing year, we expect soybean prices to remain relatively resilient in CY17F. We forecast soybean prices to average US$353/MT this year (raised from our previous estimate of US$335/MT) vis-à-vis the CY16 average of US$360/MT. We expect global soybean production to increase 7% y-o-y to 334.3m MT in the current marketing year – relatively unchanged from the previous forecast of 334.2m MT. Although there was a notable 4.0m MT (c.7%) reduction in Argentine’s forecast soybean output vs. our previous forecast (due to flooding in some areas); this was more than compensated by higher expected production in the US (+2.9m MT or +2%) and Brazil (+2.0m MT or 3%). We lowered global soybean demand slightly by 2.8m MT or c.1%; based on Oil World forecast. World crushing is expected to expand 5% y-o-y on strong demand from China, offset by lower crushing in Argentina due to weaker-than-expected demand for soybean meal as well as slow release by farmers. We continue to expect spillover soybean oil demand on the back of a palm oil supply deficit in 1HCY17 and higher US biodiesel blending. Based on adjusted supply and demand, revisions in soybean and soybean oil price expectations, as well as changes in our FX rate forecasts, CY17F/18F soybean prices (USD/MT, FOB basis) were adjusted by +5%/+3% to US$353/ US$345. Likewise, we revised CY17F/18F soybean oil prices (USD/MT, FOB basis) by +9%/+5% to US$772/US$754 – premised on increased oil substitution demand. We expect soybean meal prices to average US$353/MT this year and US$341/MT next year – adjusted from US$335/MT and US$332/MT previously. This is mainly driven by c.5.1% y-o-y expansion in global soybean meal demand this year – accelerating from 4.0% growth in CY16F.

Soybean supply and demand forecast Source: USDA, Oil World, DBS Bank estimates

Price of soybeans (US$/MT)

(FOB)




St ock/ usage

rat io (%)

Crude o il price

(US$/bbl)

Price of soybeans (US$/MT)

(FOB)




Stock/ usage

rat io (%)

Crude o il price

(US$/bbl)

PSB K QD QS K CRUD PSB K QD QS K CRUD2016 360 80,500 315,050 311,573 25.6% 42.5 2016F 364 82,360 315,610 313,086 26.1% 42.52017F 353 84,800 330,010 334,310 25.7% 51.6 2017F 335 80,630 332,790 331,059 24.2% 51.62018F 345 80,082 342,743 338,025 23.4% 53.3 2018F 335 70,479 344,303 334,152 20.5% 53.32019F 345 78,398 355,555 353,871 22.0% 56.7 2019F 340 65,756 356,408 351,686 18.4% 56.72020F 350 74,263 368,093 363,958 20.2% 60.4 2020F 349 60,630 368,709 363,583 16.4% 60.42021F 358 71,641 380,328 377,706 18.8% 64.4 2021F 359 57,187 381,396 377,953 15.0% 64.4

New forecasts - Soybeans Prev. forecasts - Soybeans

Page 13

Industry Focus


China’s palm oil imports to recover

China had resumed sales of its rapeseed oil reserves on 12 October 2016, according to USDA report. Out of 4.1m MT reserves at the end of August, c.200k MT was auctioned (as part of an intended release of c.1m MT of rapeseed oil). We do not expect subsequent auctions to have a detrimental impact on palm oil imports as they did last year; as certain minimum level of reserves is likely to be maintained. As at 23 September 2016, China had also sold c.1.6m MT out of 6.0m MT of soybean reserves. While this should work to reduce soybean imports, we also note that anti-dumping and countervailing duties on Distillers Dried Grains with Solubles (DDGS) imports currently has a positive impact on soybean meal demand as a substitute. The USDA report also pointed to a recovery in Chinese swine inventory and demand for industrial feed in 4QCY16 – which

should boost Chinese soybean imports to yet another record of 86m MT in the current season. Following the Chinese government’s intensified efforts in environmental management, we understand that sow population has increased (although piglet supply remained tight). A steady GDP growth of 6.5% (DBS Group Research forecast) is also expected to increase the demand for animal protein – thereby supporting demand for soybean meal. Oil World puts China’s share of global soybean crushing at 29% in the 16/17F season, vis-à-vis 26% two years earlier. As palm oil output seasonally recovers, we expect palm oil prices to move in tandem with soybean oil prices. Based on both Oil World and USDA data, China is expected to import c.5.2m MT of palm oil this year – up 16% from last year’s reported volume of 4.5m MT.

Palm oil hectarage forecasts

Source: Oil World, MPOB, Ministry of Agriculture of Indonesia, DBS Bank estimates

Palm oil supply forecasts

Source: Oil World, MPOB, Ministry of Agriculture of Indonesia, DBS Bank estimates

Oi l palm planted area ('000 hectares )2014 2015 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F

Mature 4,689.3 4,859.4 4,964.9 5,113.4 5,308.2 5,486.1 5,575.2 5,616.7 5,634.1 5,640.4 5,641.3 5,639.0 Immature 702.9 783.5 815.9 743.3 590.1 435.3 358.7 324.2 310.6 306.4 306.7 309.6 New planting 162.5 250.7 137.9 75.8 41.7 22.9 12.6 6.9 3.8 2.1 1.2 0.6Malaysia 5,392.2 5,642.9 5,780.8 5,856.7 5,898.4 5,921.3 5,933.9 5,940.9 5,944.7 5,946.8 5,948.0 5,948.6

Mature 8,129.6 8,503.8 8,985.5 9,326.0 9,536.7 9,747.4 9,778.7 9,749.6 9,681.7 9,614.2 9,557.1 9,494.3 Immature 2,625.2 2,796.6 2,614.9 2,439.4 2,319.5 2,158.8 2,154.9 2,199.1 2,275.3 2,347.3 2,407.0 2,471.2 New planting 289.8 545.6 300.1 165.0 90.8 49.9 27.5 15.1 8.3 4.6 2.5 1.4Indonesia 10,754.8 11,300.4 11,600.4 11,765.5 11,856.2 11,906.2 11,933.6 11,948.7 11,957.0 11,961.6 11,964.1 11,965.5

Mature 12,818.9 13,363.2 13,950.4 14,439.4 14,845.0 15,233.5 15,353.9 15,366.3 15,315.8 15,254.7 15,198.3 15,133.3 Immature 3,328.1 3,580.1 3,430.9 3,182.7 2,909.6 2,594.0 2,513.6 2,523.3 2,585.9 2,653.7 2,713.7 2,780.8 New planting 452.3 796.3 438.0 240.9 132.5 72.9 40.1 22.0 12.1 6.7 3.7 2.0Total 16,147.0 16,943.3 17,381.3 17,622.1 17,754.6 17,827.5 17,867.6 17,889.6 17,901.7 17,908.4 17,912.1 17,914.1 % growth 2.9 4.9 2.6 1.4 0.8 0.4 0.2 0.1 0.1 0.0 0.0 0.0

CPO product ion (m MT)2014 2015 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F

Malaysia 19.667 19.962 17.319 19.379 20.287 21.293 22.294 23.185 23.975 24.647 25.166 25.650 vol. growth 0.5 0.3 -2.6 2.1 0.9 1.0 1.0 0.9 0.8 0.7 0.5 0.5 % growth 2.3 1.5 -13.2 11.9 4.7 5.0 4.7 4.0 3.4 2.8 2.1 1.9Indonesia 31.400 33.400 31.800 34.747 36.640 38.426 39.616 40.652 41.441 41.912 42.501 42.630 vol. growth 2.7 2.0 -1.6 2.9 1.9 1.8 1.2 1.0 0.8 0.5 0.6 0.1 % growth 9.3 6.4 -4.8 9.3 5.4 4.9 3.1 2.6 1.9 1.1 1.4 0.3Others 8.864 9.194 9.187 9.722 9.966 10.444 10.816 11.141 11.406 11.593 11.774 11.869 vol. growth 0.5 0.3 0.0 0.5 0.2 0.5 0.4 0.3 0.3 0.2 0.2 0.1 % growth 5.8 3.7 -0.1 5.8 2.5 4.8 3.6 3.0 2.4 1.6 1.6 0.8Total 59.931 62.556 58.306 63.847 66.893 70.162 72.725 74.978 76.821 78.152 79.442 80.149 vol. growth 3.6 2.6 -4.3 5.5 3.0 3.3 2.6 2.3 1.8 1.3 1.3 0.7 % growth 6.4 4.4 -6.8 9.5 4.8 4.9 3.7 3.1 2.5 1.7 1.7 0.9

Page 14

Industry Focus


Appendix

Results review and outlook

Company Results vs forecasts

Latest results highlights Realised FFB yield

Realised CPO ASP

Realised CPO Cost

4QCY16 results

Astra Agro Lestari Below AALI booked 3Q16 earnings of

Rp353.2bn (-6% q-o-q) including Rp32.3bn of FX gains. The slightly weaker than expected results was due to timing differences in CPO/Olein sales volume and sequentially higher income tax rate (31%% vs. 23% in 2Q16). FFB output rebounded by 18% q-o-q (-20% y-o-y) in 3Q16. The strong operating performance was not translated to financial performance as the spike in production only started in September.

c.4.6 MT/ha

c.Rp8,662 /kg

n.a. We expect AALI to report 4QCY16 earnings of Rp346bn. The group is due to announce its results on 1 March 2017

London Sumatra Indonesia

Above Lonsum booked 3Q16 earnings of Rp159.7bn (-0.7% y-o-y; 156.8% q-o-q) – beating estimates. The better-than-expected earnings were principally attributable to a sequential recovery in both sales volumes and ASP. FFB output expanded by 35% q-o-q (-15% y-o-y) in 3Q16 – as adverse impact from El Nino began to dissipate visibly from September

c.3.8 MT/ha

c.Rp8,051 /kg

n.a. We expect LSIP to report 4QCY16 earnings of Rp237.8bn. The group is due to announce its results on 28 February 2017

Felda Global Ventures

Below FGV’s posted a 3Q16 core loss of RM31.9m (81% narrower y-o-y). Sugar cluster PBT saw 3Q16 fall 56% y-o-y to RM38.5m due to higher raw sugar costs. CPO production rebounded 19% q-o-q though remained 17% lower y-o-y, in line with recovering FFB yields. Higher y-o-y CPO ASP of +13% further helped offset the still-soft volume

c. 4.1 MT/ha

c.RM2,479 /MT

n.a. We expect FGV to post 4Q16F core performance of between RM7m profit or RM13m of losses. This is due to a 6% q-o-q fall in CPO production which may not be fully covered by ASP rises. The group is due to announce its results on 22 February 2017

Genting Plantations

Above GENP booked a 3Q16 net profit of RM97.8m (+195% y-o-y; +139% q-o-q), which was better than anticipated. The strong performance was attributable to 118% q-o-q jump (+107% y-o-y) in Plantations EBITDA and 73% q-o-q rise in Property contribution (partly helped by one-off land sale). Both rebounds in fresh fruit bunch (FFB) production and PK and CPO ASP helped to propel Plantations contribution.

c.4.2 MT/ha

RM2,617 /MT

n.a. We expect GENP to report 4QCY16 earnings of RM121.8m. The group is due to announce its results on 22 February 2017

Page 15

Industry Focus





Realised CPO ASP

Realised CPO Cost

4QCY16 results

IOI Corporation In line IOI reported 1QFY17 headline

earnings of RM94.4m, turning around q-o-q and y-o-y. Plantation EBIT rebounded to RM334.2m (+62% y-o-y, +>100% q-o-q) primarily due to 16% higher CPO ASPs (-2% q-o-q). Meanwhile, FFB and CPO production recovered 22% and 27% q-o-q. Manufacturing EBIT of RM107.8m was 38% lower y-o-y, though this represents a 65% q-o-q rebound.

c.6.0 MT/ha

RM2,464 /MT

n.a. We expect IOI to post 2QFY17 profits, excluding translation effects, of between RM322m-RM356m. However expect translation of losses of between RM288m-RM312m, which will drag headline earnings. The group is due to announce its results on 20 February 2017

KL Kepong In line KLK reported 4QFY16 core earnings of RM454m (+96% y-o-y; -22% q-o-q) – bringing FY16 core earnings to RM1.11bn (+27%), meeting expectations. 4QFY16 Plantations EBIT rose 17% y-o-y (+5% q-o-q) on higher CPO and PK ASP. Production sequentially improved (+16% q-o-q) for FFB and CPO, though lower on a y-o-y basis (-14%, -16% respectively). 4QFY16 core Manufacturing EBIT was 30% lower y-o-y (-36% q-o-q) as margins were impacted by sharp rises in raw material prices.

c.5.0 MT/ha

RM2,497 /MT

n.a. KLK reported 1QFY17 earnings of RM361m

Sime Darby

Below Excluding gains from disposal, SIME’s 1QFY17 underlying earnings were RM247m (-24% y-o-y; -55% q-o-q) – weaker than expected. This was attributable to poor Property contribution which only managed to break even at the operating profit level. Plantations 1QFY17 operating profit came in at RM287m (+2% y-o-y; -45% q-o-q). The results were driven by a 24% y-o-y jump in crude palm oil (CPO) ASP, 94% y-o-y jump in palm kernel (PK) ASP, and 19% y-o-y growth in midstream/downstream EBIT.

c.4.2 MT/ha

RM2,592 /MT

n.a. We expect SIME to report 2QFY17 earnings of RM629m. The group is due to announce its results on 28 February 2017

TSH Resources

In line TSH reported 3Q16 core earnings of RM21.2m (-3% y-o-y, -5% q-o-q), meeting our expectation but slightly below consensus. 3Q16 topline spiked 18% y-o-y (+0.4% q-o-q), driven by higher CPO ASP (+23% y-o-y). CPO production remained 14% lower y-o-y, though it rebounded 11% q-o-q. This tracked FFB volumes which were 13% lower y-o-y but 7% higher q-o-q.

c.5.2 MT/ha

c.RM2,453 /MT

n.a. We expect TSH to post 4Q16 core profit of between RM29m-RM32m to meet our full-year expectations. The group is due to announce its results on 27 February 2017

Page 16

Industry Focus





Realised CPO ASP

Realised CPO Cost

4QCY16 results

Bumitama Agri In line BAL posted 3Q16 earnings of Rp206.4bn (+29% y-o-y; +92% q-o-q). The 25% sequential rebound in CPO output (-8% y-o-y) to 167.4k MT was not as strong as anticipated, as the group did not procure enough external FFB to cover for the internal shortfall. CPO ASP for the quarter expanded by 1% q-o-q (+16% y-o-y).

c.3.7 MT/ha

Rp7,823 /kg

n.a. We expect BAL to report 4QCY16 earnings of Rp411.7bn. The group is due to announce its results on 24 February 2017

.

First Resources Below FR booked 3Q16 earnings of US$35.9m (+26% y-o-y; +37% q-o-q). The sequential earnings growth reflects 29%/31% recoveries in CPO and PK sales volumes, respectively. However, EBITDA margin for Plantations eased slightly to 56% from 62%, as implied CPO ASP declined 2% q-o-q.

c.5.0 MT/ha

US$611 /MT

n.a. We expect FR to report 4QCY16 earnings of US$53.1m. The group is due to announce its results on 27 February 2017

Golden Agri Below GGR’s 3Q16 core pretax profit came in

at US$71.0m (vs. a pretax loss US$29.3m in 3Q15). This brought 9M16 core pretax to US$92.2m – c.50% of initial full-year estimates. Weaker-than-expected pretax was attributable to a less than-expected 23% q-o-q rebound in Plantation EBITDA to US$90m – despite a 37% q-o-q jump in CPO output, sequentially flat CPO ASP, and 15% q-o-q lower unit cost.

c.4.9 MT/ha

US$677 /MT

n.a. We expect GGR to report 4QCY16 earnings of US$56.2m. The group is due to announce its results on 24 February 2017

Indofood Agri Above Ex. fair value changes on biological assets and FX gains, IndoAgri booked 3Q16 PAT of Rp130bn. Sequential improvements were driven by 23% y-o-y jump (+66% q-o-q) in 3Q16 Plantations EBITDA. In addition to lumpy Rp186bn sugar EBITDA contribution for the quarter, the group also booked 20% and 86% y-o-y spikes in 3Q16 CPO and PK ASP.

c.4.0 MT/ha

Rp7,988 /kg

n.a. We expect IFAR to report 4QCY16 earnings of Rp196.8bn. The group is due to announce its results on 28 February 2017

Wilmar International

Above Core 3Q16 earnings of US$384.9m (+10% y-o-y against restated US$350.4m). Oilseeds & Grains delivered a strong pretax profit of US$248.1m (+2% y-o-y) – against US$125m expected. We suspect a drop in soybean origination costs had boosted crushing margins. Plantations sub-segment FFB yields (-18% y-o-y) were still adversely affected by El Nino; although higher ASP worked to partly offset the impact.

c.4.7 MT/ha

n/a n/a We expect WIL to report 4QCY16 earnings of US$487m. The group is due to announce its results on 20 February 2017

Sources: Companies, DBS Bank estimates

Page 17

Industry Focus


Acronyms List

Bloomberg Code Acronyms Company Description

AALI IJ Equity AALI Astra Agro Lestari AALI is the largest listed plantations in Indonesia with c.260,000 hectares of land bank. It operates mostly oil palm plantations and produces crude palm oil, palm kernel, palm kernel oil, as well as palm kernel expeller.

LSIP IJ Equity LSIP London Sumatra Indonesia PP London Sumatra Indonesia (Lonsum) is a listed upstream player in Indonesia, and a subsidiary of SGX-listed Indofood Agri Resources. Besides palm oil, Lonsum has rubber, cocoa and seedling businesses.

FGV MK Equity FGV Felda Global Ventures FGV is a major plantation player in Malaysia with core businesses in the area of plantation (palm oil, rubber), downstream (oleochemical, soybean) and sugar. FGV has about 290k ha of planted areas in Malaysia and Indonesia.

GENP MK Equity GENP Genting Plantations GENP is in the palm oil plantation business with over 220k ha of plantations in Malaysia and Indonesia, and nine palm oil mills currently. Its other/non-core businesses are biotechnology and property development.

IOI MK Equity IOI IOI Corporation IOI is an integrated plantation company, with one of the highest yields in Malaysia and one of the largest oleochemical manufacturing capacities in the world.

KLK MK Equity KLK KL Kepong KLK's core business is in plantations with over 250k ha of palm oil and rubber plantations in Malaysia and Indonesia. Its other businesses are manufacturing (mainly oleochemical) and property development.

SIME MK Equity SIME Sime Darby Sime Darby is a GLC conglomerate. The group's principal activities include plantations, property development, heavy equipment and motor vehicle distribution, as well as energy and utilities.

TSH MK Equity TSH TSH Resources TSH is an upstream planter, owning over 100k ha of plantation land in Sabah and Kalimantan, and six palm oil mills. It also has a 50:50 JV refinery with Wilmar International. Non-core businesses include palm waste integration, wood flooring (Ekowood Bhd) and cocoa.

BAL SP Equity BAL Bumitama Agri Bumitama Agri's primary businesses include cultivation and harvesting of oil palms, and the processing of FFB from both own, smallholder and third-party estates in Sumatra and Kalimantan (Indonesia) into crude palm oil and palm kernel.

FR SP Equity FR First Resources FR is a mid-sized planter with a strong balance sheet and decent growth outlook. FR has been aggressively planting since 2004.

IFAR SP Equity IFAR Indofood Agri Indofood Agri Resources is an integrated agribusiness company. The company and its subsidiaries are involved in sugarcane and oil palm cultivation and milling, research and development, and seed breeding. Indofood Agri Resources also refines, brands and markets its cooking oil, margarine, shortening and other palm oil products.

WIL SP Equity WIL Wilmar International Wilmar International is an integrated agribusiness company. It is involved in oil palm cultivation, edible oil refining, oilseed crushing, consumer pack edible oil processing and merchandising, specialty fats, oleochemical and biodiesel manufacturing, and grain processing and merchandising. Wilmar also manufactures and distributes fertilisers and owns a fleet of vessels.

Source: DBS Bank

Page 18

Industry Focus


Company guides

Page 19

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:MA, PY

BUY

Last Traded Price (14 Feb 2017): Rp15,625 (JCI : 5,380.67) Price Target 12-mth: Rp18,100 (16% upside) (Prev Rp18,500) Potential Catalyst: Strong 4Q16 and 1Q17 results Where we differ: Higher FY17F and FY18F earnings on higher CPO and PK price forecasts Analyst Ben SANTOSO +65 6682 3707 [email protected]

Price Relative

Forecasts and Valuation FY Dec (Rp m) 2015A 2016F 2017F 2018F Revenue 13,059 13,700 16,504 17,364 EBITDA 2,197 3,294 4,558 4,935 Pre-tax Profit 1,176 2,168 3,413 3,789 Net Profit 619 1,492 2,348 2,608 Net Pft (Pre Ex.) 619 1,492 2,348 2,608 Net Pft Gth (Pre-ex) (%) (75.3) 141.0 57.4 11.0 EPS (Rp) 393 775 1,220 1,355 EPS Pre Ex. (Rp) 393 775 1,220 1,355 EPS Gth Pre Ex (%) (75) 97 57 11 Diluted EPS (Rp) 393 947 1,491 1,656 Net DPS (Rp) 472 178 354 557 BV Per Share (Rp) 7,166 8,538 9,404 10,202 PE (X) 39.7 20.2 12.8 11.5 PE Pre Ex. (X) 39.7 20.2 12.8 11.5 P/Cash Flow (X) 128.5 10.2 8.7 7.8 EV/EBITDA (X) 14.8 10.0 6.9 6.0 Net Div Yield (%) 3.0 1.1 2.3 3.6 P/Book Value (X) 2.2 1.8 1.7 1.5 Net Debt/Equity (X) 0.6 0.1 0.0 CASH ROAE (%) 5.5 10.8 13.6 13.8 Earnings Rev (%): (3) 55 12 Consensus EPS (Rp): 796 957 1,108 Other Broker Recs: B: 23 S: 1 H: 2

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P

Growth drivers intact

Time to accumulate. We expect Astra Agro Lestari (AALI) to deliver 4Q16 earnings of Rp346.4bn (-27% y-o-y; -2% q-o-q). We expect EBITDA to jump 53% this year, supported by both output and price recoveries, on top of expanded downstream operations. In this report, we reiterate our call to BUY for 16% upside potential plus c.2% dividend yield.

FY16F/17F/18F earnings adjusted by -3%/+55%/+12%. As the El Nino impact dissipates, we imputed 6% and 1% increases in FY17F and FY18F FFB yields respectively. Combined with new maturities, lower external FFB, 6%/11% higher CPO ASP, and a weaker Rupiah; changes in our forecasts resulted in sizeable FY17F/18F earnings upgrades. Adjustments in our FX exchange rates also resulted in smaller translation FX losses in FY17F and translation FX gains in FY18F.

Long-term growth drivers. AALI has significantly reduced planting since 2015; and we expect no new planting this year. With strict sustainability criteria, we believe long-term earnings growth would be driven by an expanded downstream segment, acquisitions of planted estates, and crop diversification – all requiring capital expenditures. Aside from existing refineries, we have not imputed any additional downstream/diversification/ acquisition plans in our forecasts – pending disclosures.

Valuation:

We employed DCF methodology (FY17F base year) to arrive at a fair value of Rp18,100/share (WACC 12.1%, Rf 8.4%, Rm 13.3% β:1.0x, TG 3%) – adjusted from Rp18,500 previously. This translates to 16% upside potential from the current level.

Key Risks to Our View:

There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take fails to live up to our expectations (3.7m MT) next year. CPO price could also move higher than forecast if there is significant yield deterioration in South American 1QCY17 soybean crop in the event of a strong La Nina. Changes in fund flows towards or out of emerging markets/commodities would also affect the valuations of plantation counters.

At A Glance Issued Capital (m shrs) 1,925 Mkt. Cap (Rpbn/US$m) 30,073 / 2,257 Major Shareholders (%) PT Astra International Tbk 79.7

Free Float (%) 20.3 3m Avg. Daily Val (US$m) 2.0 ICB Industry : Consumer Goods / Food Producers


Indonesia Company Guide

Astra Agro Lestari Version 9 | Bloomberg: AALI IJ | Reuters: AALI.JK Refer to important disclosures at the end of this report

62

82

102

122

142

162

182

202

222

11,405.6

13,405.6

15,405.6

17,405.6

19,405.6

21,405.6

23,405.6

25,405.6

27,405.6

29,405.6

Feb-13 Feb-14 Feb-15 Feb-16 Feb-17

Relative IndexRp

Astra Agro Lestari (LHS) Relative JCI (RHS)

ASIAN INSIGHTS VICKERS SECURITIES Page 2

Company Guide

Astra Agro Lestari

CRITICAL DATA POINTS TO WATCH Earnings Drivers:

CPO price. As a commodity producer, AALI is a price-taker. Movements in international CPO prices would directly impact the group’s profitability. We currently expect CPO prices (FOB Pasir Gudang) to average US$659/MT (+3% y-o-y) in CY17 and US$644/MT in CY18 (-2% y-o-y). Volume output. Extreme changes in weather patterns will have a meaningful impact on AALI’s productivity with some time lag. It takes 5-6 months from flowering to the harvesting of ripe fruits. So, a sustained water deficit would not have an immediate impact on yields, but would impact fruit formation through abortion of female flowers, delayed ripening, reduced fruit weight, as well as fruit abortion. Palm oil is a thirsty crop, requiring a minimum of 1,600mm rainfall per annum, and is typically grown in areas with 2,000-2,500mm of annual rainfall. Oil palm trees are best grown within a 10-degree latitude on either side of the equator. A drop in rainfall to below 100mm per month for three consecutive months would result in so- called “tree-stress”, causing a drop in productivity (i.e. Fresh Fruit Bunch yield) within 12 and 24 months thereafter. Regulations. Tariff and non-tariff regulations are common practice in agriculture commodities, and palm oil is no exception. Any changes in export/import tariffs, as well as various taxes and levies, would therefore impact trade flows and prices. Biodiesel demand. Driven by high energy prices and climate-change concerns, demand for vegetable oils for energy has multiplied since 2005, mainly supported by mandatory mixing of petroleum fuel with biodiesel. This demand has created a link between vegetable oil and energy prices. Oil World estimates that palm oil used for biodiesel accounts for c.16% of total demand – both mandatory and discretionary (driven by positive spreads between diesel and biodiesel prices). Seasonal demand. As a major vegetable oil with 38% market share globally, palm oil is an important food staple. The other major vegetable oils are soybean oil with 29% market share, followed by rapeseed/canola oil and sunflower oil with 16% and 10% market shares respectively. There is regular demand substitution between the major vegetable oils (high price elasticity of demand), although certain vegetable oils are more suitable than others for certain applications. Relative to other oil crops, palm oil has the highest productivity per hectare (c.5 MT/ha), while it is only 0.5 MT/ha for soybean oil. Demand for palm oil is dominant in Asia, where local festivities typically drive up demand in certain months of the year. For example, the Ramadan month, Chinese New Year, and Divali are high-demand periods in Asia.

CPO price (RM/MT)

Mature oil palm hectareage

CPO sales volume (MT)

Palm kernel sales vol. (MT)

Avg. USD/IDR rate

Source: Company, DBS Bank

2413

2168

2652

3040 3030

0.0

438.6

877.3

1315.9

1754.5

2193.1

2631.8

3070.4

2014A 2015A 2016F 2017F 2018F

193708 196177205488

212455220184

0.0

44917.5

89835.1

134752.6

179670.1

224587.6

2014A 2015A 2016F 2017F 2018F

1374536

1041895993911

11743021270574

0.00

280405.34

560810.69

841216.03

1121621.38

1402026.72

2014A 2015A 2016F 2017F 2018F

366288

334078 336370

370700391367

0.0

79056.1

158112.2

237168.4

316224.5

2014A 2015A 2016F 2017F 2018F

11879

1371713237 13608 13764

0.0

2780.3

5560.7

8341.0

11121.3

13901.6

2014A 2015A 2016F 2017F 2018F

Page 21


Company Guide

Astra Agro Lestari

Balance Sheet:

Conservative balance sheet. AALI has mostly taken a conservative approach to borrowings. However, the group took on additional leverage over the past three years as it embarked on high capex outlays to fund immature estates, additional mills, as well as to build its downstream business. As at end-Jun 16, the group’s net debt-to-total equity ratio was 22% (vs. 61% at end-Dec 15), primarily reflecting proceeds from rights issue and some debt repayments Capex spend to be reduced. At end-Jun 16, AALI’s 4-quarter rolling cash conversion cycle stood at 37 days (vs. 41 days at end-Mar 16) – mainly representing higher payable days. This year, we expect the group to spend c.Rp1.7tr (assumed no new planting) on new mills, as well as on immature estates. Share Price Drivers:

Strong earnings as near-term catalyst. We expect AALI’s 3Q16 earnings to sequentially expand – in line with recovery in FFB yields. This momentum should continue in 4Q16 Key Risks:

Volatility in CPO prices and USD exchange rates. Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from expansion of US shale gas would have an adverse impact on the demand for vegetable oils for biofuels. Likewise, volatility in USD would affect the profitability of planters in general. Setback in expansion plans. Our forecasts are based on assumed hectarage for new planting/replanting. Any setback on these plans would negatively affect our valuation due to slower volume growth. Regulatory changes. Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/ Malaysian export taxes would impact the demand for CPO/refined oils. Company Background

AALI is the largest listed plantation company in Indonesia with c.230k ha of planted oil palm estates. Approximately 72% of its revenues are from sales of CPO and PK, while the remaining 27% is from its 600k MT p.a. refining operations. The group also has a 300k MT p.a. refinery under a JV with Kuala Lumpur Kepong. AALI is majority-owned (c.80%) by Astra International, a prominent conglomerate in Indonesia known for its good corporate governance.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.6

0.7

0.7

0.8

0.8

0.9

0.9

1.0

1.0

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2014A 2015A 2016F 2017F 2018F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

2014A 2015A 2016F 2017F 2018F

Capital Expenditure (-)

Rpm

0.0%

5.0%

10.0%

15.0%

20.0%

2014A 2015A 2016F 2017F 2018F

Avg: 23.5x

+1sd: 36.1x

+2sd: 48.8x

‐1sd: 10.8x

-1.6

8.4

18.4

28.4

38.4

48.4

58.4


(x)

Avg: 2.82x

+1sd: 3.49x

+2sd: 4.16x

‐1sd: 2.14x

‐2sd: 1.47x1.3

1.8

2.3

2.8

3.3

3.8

4.3

4.8


(x)

Page 22


Company Guide

Astra Agro Lestari

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F CPO price (RM/MT) 2,413 2,168 2,652 3,040 3,030 Mature oil palm 193,708 196,177 205,488 212,455 220,184 CPO sales volume (MT) 1,374,536 1,041,895 993,911 1,174,302 1,270,574 Palm kernel sales vol. (MT) 366,288 334,078 336,370 370,700 391,367 Avg. USD/IDR rate 11,879 13,717 13,237 13,608 13,764 Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (Rpbn) CPO 11,384 7,263 7,760 9,731 10,391 PK 1,866 1,468 2,061 2,614 2,763 PKO 0.0 0.0 0.0 0.0 0.0 Refined products 2,980 3,970 3,879 4,159 4,210 Others 76.1 358 0.0 0.0 0.0 Total 16,306 13,059 13,700 16,504 17,364 Income Statement (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 16,306 13,059 13,700 16,504 17,364 Cost of Goods Sold (11,354) (9,977) (10,623) (11,794) (12,381) Gross Profit 4,952 3,082 3,077 4,710 4,983 Other Opng (Exp)/Inc (1,229) (1,229) (1,134) (1,285) (1,373) Operating Profit 3,722 1,853 1,943 3,425 3,611 Other Non Opg (Exp)/Inc 40.7 (580) 336 29.0 135 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (73.1) (97.7) (111) (41.3) 43.3 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 3,690 1,176 2,168 3,413 3,789 Tax (1,069) (480) (607) (956) (1,061) Minority Interest (118) (76.6) (69.1) (109) (121) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 2,504 619 1,492 2,348 2,608 Net Profit before Except. 2,504 619 1,492 2,348 2,608 EBITDA 4,539 2,197 3,294 4,558 4,935 Growth Revenue Gth (%) 28.6 (19.9) 4.9 20.5 5.2 EBITDA Gth (%) 39.3 (51.6) 49.9 38.4 8.3 Opg Profit Gth (%) 23.9 (50.2) 4.8 76.3 5.4 Net Profit Gth (Pre-ex) (%) 39.0 (75.3) 141.0 57.4 11.0 Margins & Ratio Gross Margins (%) 30.4 23.6 22.5 28.5 28.7 Opg Profit Margin (%) 22.8 14.2 14.2 20.8 20.8 Net Profit Margin (%) 15.4 4.7 10.9 14.2 15.0 ROAE (%) 23.5 5.5 10.8 13.6 13.8 ROA (%) 14.9 3.1 6.7 9.6 9.9 ROCE (%) 17.6 6.0 6.7 10.9 10.6 Div Payout Ratio (%) 37.7 120.1 22.9 29.0 41.1 Net Interest Cover (x) 50.9 19.0 17.6 82.9 NM


Page 23


Company Guide

Astra Agro Lestari

Quarterly / Interim Income Statement (Rpbn)

FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 3,118 2,712 3,018 3,327 3,243 Cost of Goods Sold (2,471) (1,918) (2,417) (2,594) (2,464) Gross Profit 647 795 601 733 779 Other Oper. (Exp)/Inc (294) (301) (262) (253) (241) Operating Profit 353 494 339 480 537 Other Non Opg (Exp)/Inc (595) 302 281 70.4 16.7 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (27.3) (28.4) (49.7) (42.2) (9.6) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit (269) 767 571 509 545 Tax (8.2) (272) (145) (119) (167) Minority Interest (22.0) (21.1) (8.2) (14.6) (24.3) Net Profit (299) 474 418 375 353 Net profit bef Except. (299) 474 418 375 353 EBITDA (72.9) 977 807 738 747 Growth Revenue Gth (%) (22.0) (13.0) 11.3 10.2 (2.5) EBITDA Gth (%) nm nm (17.3) (8.5) 1.2 Opg Profit Gth (%) (36.4) 39.8 (31.3) 41.6 11.9 Net Profit Gth (Pre-ex) (%) nm nm (11.9) (10.3) (5.7) Margins Gross Margins (%) 20.8 29.3 19.9 22.0 24.0 Opg Profit Margins (%) 11.3 18.2 11.2 14.4 16.6 Net Profit Margins (%) (9.6) 17.5 13.8 11.3 10.9 Balance Sheet (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 8,335 9,362 9,797 9,725 9,302 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 7,821 9,337 9,460 9,607 9,619 Cash & ST Invts 611 294 1,778 3,557 5,585 Inventory 1,278 1,692 1,581 1,755 1,843 Debtors 33.2 45.6 41.4 49.8 52.4 Other Current Assets 481 782 663 798 840 Total Assets 18,559 21,512 23,320 25,492 27,241 ST Debt 2,299 2,025 700 700 4,114 Creditor 923 734 825 916 962 Other Current Liab 889 764 820 967 1,015 LT Debt 2,128 5,708 3,433 3,542 95.0 Other LT Liabilities 487 583 625 674 707 Shareholder’s Equity 11,416 11,285 16,433 18,100 19,635 Minority Interests 418 414 483 592 713 Total Cap. & Liab. 18,559 21,512 23,320 25,492 27,241 Non-Cash Wkg. Capital (19.4) 1,022 640 720 758 Net Cash/(Debt) (3,816) (7,438) (2,355) (686) 1,376 Debtors Turn (avg days) 0.4 1.1 1.2 1.0 1.1 Creditors Turn (avg days) 28.3 33.4 29.6 29.7 30.6 Inventory Turn (avg days) 35.9 59.9 62.2 57.0 58.7 Asset Turnover (x) 1.0 0.7 0.6 0.7 0.7 Current Ratio (x) 0.6 0.8 1.7 2.4 1.4 Quick Ratio (x) 0.2 0.1 0.8 1.4 0.9 Net Debt/Equity (X) 0.3 0.6 0.1 0.0 CASH Net Debt/Equity ex MI (X) 0.3 0.7 0.1 0.0 CASH Capex to Debt (%) 84.5 35.2 42.5 24.8 16.6 Z-Score (X) 4.5 3.0 4.6 4.5 4.5


Page 24


Company Guide

Astra Agro Lestari

Cash Flow Statement (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 3,690 1,176 2,168 3,413 3,789 Dep. & Amort. 776 924 1,016 1,104 1,189 Tax Paid 0.0 0.0 0.0 0.0 0.0 Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (645) (1,340) 374 (89.9) (47.1) Other Operating CF (1,075) (568) (607) (956) (1,061) Net Operating CF 2,746 191 2,950 3,471 3,870 Capital Exp.(net) (3,739) (2,722) (1,756) (1,053) (700) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 91.4 134 (37.5) (43.1) (47.1) Net Investing CF (3,648) (2,588) (1,793) (1,096) (748) Div Paid (943) (743) (342) (681) (1,073) Chg in Gross Debt 1,719 3,307 (3,599) 110 (32.1) Capital Issues 0.77 0.13 3,998 0.0 0.0 Other Financing CF 27.2 (483) 269 (24.7) 10.5 Net Financing CF 804 2,080 326 (596) (1,094) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (97.9) (317) 1,483 1,779 2,028 Opg CFPS (Rp) 2,153 972 1,339 1,850 2,035 Free CFPS (Rp) (631) (1,607) 621 1,256 1,647


Target Price & Ratings History

Source: DBS Bank

Analyst: Ben SANTOSO

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 23 Feb 16 16270 16389 HOLD

2: 26 Feb 16 13483 15817 HOLD

3: 10 Mar 16 16675 15817 HOLD

4: 11 Apr 16 15603 15817 HOLD

5: 27 Apr 16 15341 15817 HOLD

6: 10 May 16 14197 15817 HOLD

7: 01 Jun 16 13745 15817 HOLD

8: 12 Jul 16 14250 14050 HOLD

9: 28 Jul 16 14700 13900 HOLD

10: 19 Aug 16 16600 14000 FULLY VALUED

11: 22 Aug 16 17000 14000 FULLY VALUED12: 14 Sep 16 15450 14000 FULLY VALUED13: 10 Oct 16 15200 14000 FULLY VALUED14: 10 Nov 16 15425 18500 BUY

Note : Share price and Target price are adjusted for corporate actions. 15: 09 Dec 16 17450 18500 BUY16: 14 Dec 16 16900 18500 BUY17: 10 Jan 17 16875 18500 BUY18: 12 Jan 17 17175 18500 BUY19: 10 Feb 17 15800 18500 BUY

1

2

34

56

7

8

9

10

11

12

13

14

1516

17

18

19

12808

13808

14808

15808

16808

17808

Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17

Rp

Page 25

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: JC, PY

BUY Last Traded Price (14 Feb 2017): S$0.815 (STI : 3,072.47) Price Target 12-mth: S$0.99 (22% upside) (Prev S$0.95) Potential Catalyst: Strong 4Q16 and 1Q17 results Where we differ: Higher FY16F and FY17F earnings on higher CPO and PK price forecasts Analyst Ben SANTOSO +65 6682 3707 [email protected]

Price Relative

Forecasts and Valuation FY Dec (Rpbn) 2015A 2016F 2017F 2018F Revenue 5,542 6,196 7,504 7,890 EBITDA 1,445 1,863 2,382 2,449 Pre-tax Profit 1,209 1,419 1,893 1,894 Net Profit 891 955 1,266 1,267 Net Pft (ex. BA gains) 927 955 1,266 1,267 Net Pft (Pre Ex.) 891 955 1,266 1,267 Net Pft Gth (Pre-ex) (%) (22.8) 7.2 32.5 0.1 EPS (S cts) 5.40 5.79 7.67 7.68 EPS Pre Ex. (S cts) 5.40 5.79 7.67 7.68 EPS Gth Pre Ex (%) (23) 7 33 0 Diluted EPS (S cts) 5.40 5.79 7.67 7.68 Net DPS (S cts) 1.58 0.99 1.06 1.41 BV Per Share (S cts) 42.0 37.2 43.8 50.1 PE (X) 15.1 14.1 10.6 10.6 PE Pre Ex. (X) 15.1 14.1 10.6 10.6 P/Cash Flow (X) 10.5 6.3 5.8 6.7 EV/EBITDA (X) 13.2 9.7 7.1 6.6 Net Div Yield (%) 1.9 1.2 1.3 1.7 P/Book Value (X) 1.9 2.2 1.9 1.6 Net Debt/Equity (X) 0.6 0.5 0.3 0.2 ROAE (%) 13.3 14.6 18.9 16.3 Earnings Rev (%): 16 36 5 Consensus EPS (S cts): 5.00 6.70 8.50 Other Broker Recs: B: 6 S: 0 H: 2

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

Strong growth ahead Poised for strong earnings rebound. Anticipated rebound in the group’s fresh fruit bunches (FFB) yields should drive Bumitama Agri's (BAL) 4Q16 earnings 99% higher q-o-q. We expect the group’s earnings to expand at a 10% CAGR between FY16F and FY19F, driven by a 9% expansion in crude palm oil (CPO) production. We reiterate our BUY call with a significant c.22% potential upside to our revised TP. We believe there is currently excessive liquidity discount on the counter. FY16F/17F/18F earnings revised by +16%/+36%/+5%. Changes in our forecasts mainly reflected +6%/+10%/0% revisions to our CPO ASP (in Rupiah terms). We also adjusted FY17F/18F CPO output each 3% lower; as we impute 9% and 7% lower external FFB respectively, based on 3% lower mill utilisation rates vis-à-vis previous forecasts. Margins and free cash flow are hence forecast to improve over the long term – yielding a higher DCF valuation. Drop in planting not impacting medium-term volume growth. Aggressive expansion in FY05-13 has kept BAL’s tree-age profile younger relative to peers. This is forecast to deliver an 11% CAGR in FFB output (including smallholder estates) between FY16F and FY19F. Valuation:

We employed DCF valuation (FY17F base year) to arrive at BAL’s fair value of S$0.99/share (WACC: 10.4%, Rf: 8.4%, Rm: 13.3%, β: 0.8, TG: 3%) offering c.22% potential upside from current level. Key Risks to Our View:

There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take fails to live up to our expectations (3.7m MT) next year. CPO price could also move higher than forecast if there is significant yield deterioration in South American 1QCY17 soybean crop in the event of a strong La Nina. Changes in fund flows towards or out of emerging markets/commodities would also affect valuations of plantation counters. At A Glance Issued Capital (m shrs) 1,755 Mkt. Cap (S$bn/US$m) 1.43 / 1,007 Major Shareholders (%) Fortune Holdings Ltd 51.5 IOI Corp Bhd 31.7



Singapore Company Guide

Bumitama Agri Version 7 | Bloomberg: BAL SP | Reuters: BUMI.SI Refer to important disclosures at the end of this report

62

82

102

122

142

162

182

202

222

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4


Relative IndexS$

Bumitama Agri (LHS) Relative STI (RHS)


Company Guide

Bumitama Agri

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

CPO price. As a commodity producer, BAL is a price-taker. Movements in international CPO prices would directly impact the group’s profitability. We currently expect CPO prices (FOB Pasir Gudang) to average US$659/MT (+3% y-o-y) in CY17 and US$644/MT in CY18 (-2% y-o-y). Volume output. Changes in weather patterns will have a meaningful impact on BAL’s productivity with some lag time. It takes 5-6 months from flowering to harvesting of ripe fruits. Hence, a sustained water deficit would not have an immediate impact on yields, but would impact fruit formation through abortion of female flowers, delayed ripening, reduced fruit weight, as well as fruit abortion. Oil palm is a thirsty crop, requiring a minimum of 1,600mm of rainfall p.a. and is typically grown in areas with 2,000-2,500mm of rainfall p.a. Oil palm trees are best grown within 10° latitudes on either side of the equator. A drop in rainfall to below 100mm per month for three consecutive months would result in so called “tree-stress”, and a drop in productivity (i.e. Fresh Fruit Bunch yield) would ensue 12 and 24 months thereafter. Regulations. Tariff and non-tariff regulations are common practice in agriculture commodities, and palm oil is no exception. Any changes in export/import tariffs, various taxes and levies would therefore impact trade flows and prices. Biodiesel demand. Driven by high energy prices and climate change concerns, demand for vegetable oils for energy has multiplied since 2005, mainly supported by mandatory mixing of petroleum fuel with biodiesel. This demand has created a link between vegetable oil and energy prices. Oil World estimated that palm oil used for biodiesel accounted for c.16% of total demand – both mandatory and discretionary (driven by positive spread between diesel and biodiesel prices). Demand seasonality. As a major vegetable oil with 38% market share globally, palm oil is an important food staple. The next largest vegetable oil is soybean oil, with 29% market share; followed by rapeseed/canola oils and sunflower oils with 16% and 10% market shares respectively. There is generally demand substitutability between vegetable oils (high price elasticity of demand), although certain vegetable oils are more suitable than others for certain applications. Relative to other oil crops, palm oil has the highest productivity per hectare (i.e. c.5 MT/ha), while soybean oil’s productivity is typically 0.5 MT/ha. Demand for palm oil is dominant in Asia, where local festivities drive demand higher in certain months of the year. For example, Ramadan month, Chinese New Year, and Divali are typically high-demand periods in Asia.

CPO price (RM/MT)

Own mature oil palm hectarage



Avg. USD/IDR rate


2413

2168

2652

3040 3030

0.0

438.6

877.3

1315.9

1754.5

2193.1

2631.8

3070.4

2014A 2015A 2016F 2017F 2018F

77177

89211

110002

120614 121125

0.0

24709.5

49419.0

74128.5

98838.0

123547.5

2014A 2015A 2016F 2017F 2018F

624025

704859 701304

795967847059

0.00

172799.97

345599.93

518399.90

691199.87

863999.83

2014A 2015A 2016F 2017F 2018F

114162

137363 138175

154263164821

0.0

33293.8

66587.5

99881.3

133175.1

166468.9

2014A 2015A 2016F 2017F 2018F

11879

1371713237 13608 13764

0.0

2780.3

5560.7

8341.0

11121.3

13901.6

2014A 2015A 2016F 2017F 2018F

Page 27


Company Guide

Bumitama Agri

Balance Sheet:

Balance sheet can withstand downcycle. BAL’s net gearing ratio is forecast to settle at 59% by the end of FY16 and 39% at end-FY17. In our estimates, BAL’s borrowing costs should continue to remain lower than peers'. BAL’s interest coverage is forecast to average 6.1x in FY16 and 9.4x in FY17. Share Price Drivers:

No urgency to expand downstream. BAL’s own mature estates are due to expand by 13,600 ha in FY16F, followed by 10,600 ha in FY17F but decelerating to 500 ha in FY18F (reflecting the lack of new expansion in FY14 as the group had worked towards ensuring sustainable development). BAL’s milling capacity should nevertheless expand through FY21F, and we should see expansion of its workforce to process the exponential growth in harvested FFB. Until its CPO output reaches critical mass of 1m MT or more, we do not anticipate BAL to expand downstream. BAL’s relatively higher margins (even with export tax policies) – vis-à-vis integrated players – should maximise its shareholders’ return on equity, in our view. Steady expansion ahead. Having committed itself to a sustainable development programme, the group has slowed its expansion pace since FY14, and intends to undertake a more sustainable 5,000 ha p.a. expansion (including smallholder estates) from FY15 onwards. We expect BAL to maintain this planting pace through FY19F (subject to moratorium on new concessions and/or any opportunistic acquisitions). Key Risks:

Where we may go wrong Our earnings expectations and valuation are based on several key assumptions. Any setback in FFB yields (due to severe weather) or expansion (i.e. lower than 3,000 ha p.a.) would adversely impact our valuation. BAL’s share price is also linearly driven by CPO price expectations and partly by Rupiah movements. A drop in CPO prices may drag the share price lower than our fair value, and vice versa. Company Background

Fast-growing palm oil producer Bumitama Agri (BAL) was established in 1996 by Harita Group through the acquisition of 17,500 ha of land bank in Central Kalimantan. After aggressive new plantings and a string of subsequent acquisitions, BAL controlled an aggregate of c.207,778 ha of land as at end-2015 (including land under the smallholder schemes), of which 167,954 ha were planted as at end-June 2016. BAL was listed on the Singapore Exchange in April 2012.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.3

0.4

0.4

0.5

0.5

0.6

0.6

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

2014A 2015A 2016F 2017F 2018F


0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

1,800.0

2,000.0

2014A 2015A 2016F 2017F 2018F


Rpm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2014A 2015A 2016F 2017F 2018F

Avg: 15x

+1sd: 18.1x

+2sd: 21.1x

‐1sd: 12x

‐2sd: 9x8.0

10.0

12.0

14.0

16.0

18.0

20.0

22.0


(x)

Avg: 2.48x

+1sd: 2.92x

+2sd: 3.36x

‐1sd: 2.05x

‐2sd: 1.61x

1.4

1.9

2.4

2.9

3.4


(x)

Page 28


Company Guide

Bumitama Agri

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F CPO price (RM/MT) 2,413 2,168 2,652 3,040 3,030 Own mature oil palm 77,177 89,211 110,002 120,614 121,125 CPO sales volume (MT) 624,025 704,859 701,304 795,967 847,059 Palm kernel sales vol. (MT) 114,162 137,363 138,175 154,263 164,821 Avg. USD/IDR rate 11,879 13,717 13,237 13,608 13,764 Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (Rpbn) CPO 5,199 4,889 5,158 6,215 6,527 PK 559 580 846 1,088 1,163 Biodiesel 0.0 72.8 189 200 198 Glycerin 0.0 0.67 1.73 1.83 1.81 Total 5,757 5,542 6,196 7,504 7,890 Income Statement (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 5,757 5,542 6,196 7,504 7,890 Cost of Goods Sold (3,416) (3,726) (4,293) (5,057) (5,466) Gross Profit 2,342 1,816 1,903 2,447 2,424 Other Opng (Exp)/Inc (357) (399) (405) (448) (480) Operating Profit 1,984 1,417 1,497 1,999 1,944 Other Non Opg (Exp)/Inc (164) (131) 30.2 (51.8) (38.6) Associates & JV Inc (17.1) (67.4) (42.2) (38.0) (33.8) Net Interest (Exp)/Inc 1.29 (9.9) (66.6) (16.1) 22.7 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 1,805 1,209 1,419 1,893 1,894 Tax (433) (219) (318) (434) (434) Minority Interest (219) (98.7) (146) (193) (193) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 1,153 891 955 1,266 1,267 Net Profit before Except. 1,153 891 955 1,266 1,267 Net Pft (ex. BA gains) 1,182 927 955 1,266 1,267 EBITDA 1,987 1,445 1,863 2,382 2,449 EBITDA (ex. BA gains) 2,026 1,491 1,863 2,382 2,449 Growth Revenue Gth (%) 41.7 (3.7) 11.8 21.1 5.1 EBITDA Gth (%) 37.2 (27.3) 28.9 27.9 2.8 Opg Profit Gth (%) 47.7 (28.6) 5.7 33.5 (2.8) Net Profit Gth (Pre-ex) (%) 34.8 (22.8) 7.2 32.5 0.1 Margins & Ratio Gross Margins (%) 40.7 32.8 30.7 32.6 30.7 Opg Profit Margin (%) 34.5 25.6 24.2 26.6 24.6 Net Profit Margin (%) 20.0 16.1 15.4 16.9 16.1 ROAE (%) 19.0 13.3 14.6 18.9 16.3 ROA (%) 9.0 5.9 6.2 8.6 8.1 ROCE (%) 12.9 8.4 8.3 11.8 10.8 Div Payout Ratio (%) 18.3 29.3 17.1 13.8 18.3 Net Interest Cover (x) NM 143.0 22.5 124.4 NM


Page 29


Company Guide

Bumitama Agri


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 1,179 1,448 1,488 1,377 1,495 Cost of Goods Sold (823) (749) (1,075) (1,133) (1,070) Gross Profit 356 699 413 244 425 Other Oper. (Exp)/Inc (91.8) (109) (118) (70.7) (85.0) Operating Profit 264 590 295 173 340 Other Non Opg (Exp)/Inc (29.4) (56.5) 41.9 (8.0) (25.9) Associates & JV Inc (4.2) (27.1) (10.0) 2.63 3.82 Net Interest (Exp)/Inc 3.37 (3.4) 9.38 (9.2) (4.5) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 234 503 336 159 313 Tax (52.4) (26.6) (73.7) (34.0) (75.6) Minority Interest (21.6) (22.8) (32.9) (17.0) (31.3) Net Profit 160 453 229 108 206 Net profit bef Except. 160 453 229 108 206 EBITDA 230 506 327 168 318 Growth Revenue Gth (%) (25.4) 22.8 2.8 (7.5) 8.6 EBITDA Gth (%) (9.1) 119.6 (35.5) (48.6) 89.3 Opg Profit Gth (%) 2.8 123.3 (50.0) (41.2) 96.2 Net Profit Gth (Pre-ex) (%) (9.5) 183.6 (49.4) (53.1) 91.8 Margins Gross Margins (%) 30.2 48.2 27.7 17.7 28.4 Opg Profit Margins (%) 22.4 40.7 19.8 12.6 22.7 Net Profit Margins (%) 13.6 31.3 15.4 7.8 13.8 Balance Sheet (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 2,866 3,244 3,999 4,581 5,003 Invts in Associates & JVs 84.3 24.0 24.0 24.0 24.0 Other LT Assets 8,969 10,252 7,554 7,435 7,294 Cash & ST Invts 311 599 674 802 1,641 Inventory 527 651 678 799 864 Debtors 140 599 413 500 525 Other Current Assets 907 975 1,009 914 958 Total Assets 13,803 16,344 14,351 15,055 16,309 ST Debt 589 1,984 992 11.6 3,202 Creditor 773 935 984 1,159 1,253 Other Current Liab 561 357 499 564 584 LT Debt 3,691 3,547 3,446 3,335 102 Other LT Liabilities 1,081 1,932 1,485 1,756 1,712 Shareholder’s Equity 6,483 6,935 6,146 7,237 8,272 Minority Interests 625 653 799 992 1,185 Total Cap. & Liab. 13,803 16,344 14,351 15,055 16,309 Non-Cash Wkg. Capital 239 932 617 490 511 Net Cash/(Debt) (3,969) (4,932) (3,765) (2,545) (1,663) Debtors Turn (avg days) 7.7 24.3 29.8 22.2 23.7 Creditors Turn (avg days) 77.7 89.1 89.5 85.3 90.0 Inventory Turn (avg days) 51.1 61.4 61.9 58.8 62.1 Asset Turnover (x) 0.4 0.4 0.4 0.5 0.5 Current Ratio (x) 1.0 0.9 1.1 1.7 0.8 Quick Ratio (x) 0.2 0.4 0.4 0.8 0.4 Net Debt/Equity (X) 0.6 0.6 0.5 0.3 0.2 Net Debt/Equity ex MI (X) 0.6 0.7 0.6 0.4 0.2 Capex to Debt (%) 41.5 23.1 24.9 37.8 30.9 Z-Score (X) 2.6 2.0 2.5 2.8 2.5


Page 30


Company Guide

Bumitama Agri


FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 1,805 1,209 1,419 1,893 1,894 Dep. & Amort. 186 226 377 472 578 Tax Paid (433) (219) (318) (434) (434) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 48.6 (638) 349 32.7 22.7 Other Operating CF 453 703 298 349 (46.3) Net Operating CF 2,060 1,281 2,125 2,313 2,015 Capital Exp.(net) (1,778) (1,277) (1,106) (1,266) (1,020) Other Invts.(net) (53.2) 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 23.8 60.2 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (344) (547) 310 347 118 Net Investing CF (2,151) (1,763) (796) (920) (902) Div Paid (211) (261) (163) (175) (232) Chg in Gross Debt 136 1,250 (1,092) (1,091) (42.7) Capital Issues (55.2) 4.74 0.0 0.0 0.0 Other Financing CF 74.6 (44.3) 1.26 1.32 1.39 Net Financing CF (55.7) 950 (1,254) (1,265) (273) Currency Adjustments (24.4) (179) 0.0 0.0 0.0 Chg in Cash (171) 288 74.7 128 839 Opg CFPS (S cts) 12.2 11.6 10.8 13.8 12.1 Free CFPS (S cts) 1.71 0.02 6.17 6.34 6.03



Source: DBS Bank


S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 22 Feb 16 0.77 0.96 BUY

2: 10 Mar 16 0.81 0.96 BUY

3: 11 Apr 16 0.86 0.96 BUY

4: 10 May 16 0.76 0.96 BUY

5: 13 May 16 0.83 0.96 BUY

6: 12 Jul 16 0.75 0.91 HOLD

7: 05 Aug 16 0.69 0.81 BUY

8: 24 Oct 16 0.72 0.99 BUY

9: 10 Nov 16 0.73 0.99 BUY

10: 15 Nov 16 0.77 0.95 BUY

11: 17 Nov 16 0.76 0.95 BUY12: 14 Dec 16 0.80 0.95 BUY13: 10 Jan 17 0.81 0.95 BUY14: 10 Feb 17 0.82 0.95 BUY

Note : Share price and Target price are adjusted for corporate actions.

1

2 3

45

6

7

8

9

10

11

12

13

14

0.64

0.69

0.74

0.79

0.84

0.89

0.94


S$

Page 31

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:BC, PY

FULLY VALUED Last Traded Price ( 14 Feb 2017): RM1.90 (KLCI : 1,708.90) Price Target 12-mth: RM1.65 (-13% downside) (Prev RM1.50) Potential Catalyst: Consistent profitability improvements Where we differ: Slightly higher on stronger CPO pricing Analyst Regional Research Team Ben SANTOSO +65 6682 3707 [email protected]

Price Relative

Forecasts and Valuation FY Dec (RM m) 2015A 2016F 2017F 2018F Revenue 15,559 15,012 16,413 17,038 EBITDA 970 673 1,109 1,209 Pre-tax Profit 454 7.98 405 478 Net Profit 107 (82.0) 213 288 Net Pft (Pre Ex.) (190) (82.0) 213 288 Net Pft Gth (Pre-ex) (%) nm 56.9 nm 35.2 EPS (sen) 2.93 (2.2) 5.84 7.89 EPS Pre Ex. (sen) (5.2) (2.2) 5.84 7.89 EPS Gth Pre Ex (%) nm 57 nm 35 Diluted EPS (sen) 2.93 (2.2) 5.84 7.89 Net DPS (sen) 4.00 5.00 5.00 5.70 BV Per Share (sen) 177 169 170 173 PE (X) 64.8 nm 32.6 24.1 PE Pre Ex. (X) nm nm 32.6 24.1 P/Cash Flow (X) nm 8.4 13.2 9.6 EV/EBITDA (X) 12.6 18.8 11.8 11.0 Net Div Yield (%) 2.1 2.6 2.6 3.0 P/Book Value (X) 1.1 1.1 1.1 1.1 Net Debt/Equity (X) 0.4 0.5 0.6 0.6 ROAE (%) 1.7 (1.3) 3.4 4.6 Earnings Rev (%): 92 48 13 Consensus EPS (sen): 0.0 5.00 7.30 Other Broker Recs: B: 0 S: 9 H: 8


Expectations are set Year to deliver. FGV is set to conclude a loss-making FY16, as a c.16% decline in CPO production volume coincided with sugar unit MSM Malaysia’s poor performance, thus stymying chances of an FY16 turnaround. Given a more optimistic outlook for CPO prices, we think FY17 is the acid test for FGV’s ability to stay in the black. However, execution risks remain on further cost-trimming measures, plus a protracted weakness from MSM may negatively impact FGV’s bottomline. Maintain FULLY VALUED. Risk factors remain despite improvement efforts. Key sugar-manufacturing unit MSM Malaysia saw PBT decline (-51% in 9M16) from higher raw sugar costs, dragging FGV earnings as it previously contributed >100% of group pretax (due to losses in other aggregated divisions). The persistence of these conditions will stymie any chances of sustainable profitability. Also, while the group is continuing its cost-cutting drive from 2Q16, it remains to be seen if more progress can be made in FY17 as margins still lag behind its peers. More upside from buoyant prices. We have revised our CPO price forecasts to RM3,040/RM3,030 per MT for CY17/18F from RM2,610/RM2,720 before. For FGV, we also further cut FY16/17/18F CPO production by 8%/7%/7% to factor in stronger-than-expected weather impact. Even so, overall our FY17/18F forecasts are revised upwards by 48%/13% given the small base effect. Valuation:

Our DCF-based TP rises to RM1.65 after imputing changes to our earnings forecasts, which take into account our CY17/18 CPO price forecasts of RM3,040/RM3,030 per MT. Maintain FULLY VALUED. Key Risks to Our View:

A consistent showing of profitability above our forecasted levels may provide the fundamentals to support its share price. At A Glance Issued Capital (m shrs) 3,648 Mkt. Cap (RMm/US$m) 6,931 / 1,558 Major Shareholders (%) Lembaga Kemajuan Tanah Persekutuan 20.0 Federal Land Development Authority 12.4 Lembaga Tabung Haji 7.9



Regional Company Guide

Felda Global Ventures Version 10 | Bloomberg: FGV MK | Reuters: FGVH.KL Refer to important disclosures at the end of this report

24

44

64

84

104

124

144

164

184

204

1.1

1.6

2.1

2.6

3.1

3.6

4.1

4.6

5.1


Relative IndexRM

Felda Global Ventures (LHS) Relative KLCI (RHS)


Malaysia Company Guide



Earnings Drivers:

Vast, but relatively old hectarage. FGV has c.338k ha of oil palm planted land in Peninsular Malaysia, the bulk of which (c.300k ha) is held under the Land Lease Agreement (LLA) it has with the Federal Land Development Authority (FELDA). It also has c.13k ha of plantations in Sabah from its acquisition of Pontian United Plantations in 2013, 13.5k ha in Sarawak from Asian Plantations Ltd in 2014, and 8.5k ha from Golden Land in 2015. Its overall age profile is old/mature as >40% of trees are 20 years or older. To remedy the age issue, FGV had earlier committed to a replanting scheme of 15k ha per year. We otherwise do not expect much new planting to commence as replanting is a higher priority. Expect a dip in production. We expect FGV to process c.12.6m MT of FFB in FY17 from its own plantations, FELDA settlers and third parties. FY17F CPO production expectation of c.2.65m MT (+2% y-o-y) relies on the sustainability of FFB yields from these sources. We view this as an indicator to focus on, as production in 2016 had been severely impacted by the lack of rainfall in 2015. CPO prices. Over 50% FGV’s top-line comes from the sale of CPO and RBD (refined, bleached & deodorised) products. Growth in the ASP of CPO and the RBD products will be reflected in its revenue. Sugar arm contributions. FGV has a 51% stake in listed sugar manufacturer MSM Malaysia. It is its most profitable division as pretax contribution has been larger than group PBT, despite making up c.15% of revenues. However PBT had come down in 2016 due to higher raw sugar costs, which resulted in the group falling into the red. As conditions appear unlikely to change with global raw sugar prices, an increase in retail price ceiling by the government may be required to aid profitability. Rubber plantation exposure. FGV derives c.5% of revenue from the sale of rubber products, comprising latex concentrate, Standard Malaysian Rubber (SMR), Standard Indonesian Rubber (SIR) and Cambodian Standard Rubber (CSR). Over 110k MT of rubber products are processed per year at its seven assets across the region, though management estimates its total capacity at around 258k MT. FGV also owns 12.4k ha of planted rubber land in Malaysia, with 3.5k ha unplanted.

CPO price (RM/MT)

Mature palm oil hectarage

CPO produced (k MT)

Sugar revenue (RM m)

Average USD/MYR


2413

2168

2652

3040 3030

0.0

438.6

877.3

1315.9

1754.5

2193.1

2631.8

3070.4

2014A 2015A 2016F 2017F 2018F

265366 272805282553 285514 284923

0.0

58244.9

116489.7

174734.6

232979.4

291224.3

2014A 2015A 2016F 2017F 2018F

3106 3069

2611 26542783

0.00

633.62

1267.25

1900.87

2534.50

3168.12

2014A 2015A 2016F 2017F 2018F

2281 2307 22932433 2470

0.0

499.0

998.1

1497.1

1996.1

2495.1

2014A 2015A 2016F 2017F 2018F

3.31

4.08 4.1

4.62 4.71

0.0

1.0

1.9

2.9

3.8

4.8

2014A 2015A 2016F 2017F 2018F

Page 33




Balance Sheet:

Borrowings manageable for now but cash flows are pressured. FGV has is maintaining a net debt-to-equity of about 0.6x due to a cash pile of c.RM2.5bn at end-Sep 16. However given its poor operating profits, we forecast negative net cash flow which will cut into its liquidity. Thus, further deterioration in performance may require more debt to be taken on. Share Price Drivers:

Sustainably improving profitability. FGV’s fundamental performance is limited by its low margins relative to its peers despite its sizeable turnover. Management intends to look at various initiatives to manage its administrative cost base, including revising its procurement practices. If these efforts are successful, FGV may re-rate. Key Risks:

Volatility in commodity prices and exchange rates. Continued depressed CPO prices would hurt earnings, especially for primarily upstream planters. Additionally, low crude oil prices may affect CPO demand for biofuel. Finally, CPO prices in ringgit terms are also directly affected by the currency’s strength relative to the US dollar. Regulatory changes. Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact the demand for CPO/refined oils. Extreme changes in the weather. Sudden and significant changes in rainfall and humidity can affect FFB yields in the later quarters. Market sentiment. Changes in fund flows towards or out of emerging markets would affect the valuation of plantation counters. Weather. Changes in rainfall patterns (caused by either El Nino or La Nina) will affect FFB yields with some time lag. Company Background

FGV is an integrated agri-business player with significant palm oil hectarage in Peninsular Malaysia, involved in upstream and downstream palm oil operations, including harvesting, milling, processing, refining and distribution. It also has rubber plantations, and a 49% stake in major sugar manufacturer MSM Malaysia.


Capital Expenditure

ROE (%)

PB Band (x)


0.7

0.8

0.8

0.9

0.9

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

2014A 2015A 2016F 2017F 2018F


0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

2014A 2015A 2016F 2017F 2018F


RMm

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2014A 2015A 2016F 2017F 2018F

Avg: 1.67x

+1sd: 2.4x

+2sd: 3.12x

‐1sd: 0.95x

‐2sd: 0.23x0.2

0.7

1.2

1.7

2.2

2.7

3.2


(x)

Page 34




Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F CPO price (RM/MT) 2,413 2,168 2,652 3,040 3,030 Mature palm oil hectarage 265,366 272,805 282,553 285,514 284,923 CPO produced (k MT) 3,106 3,069 2,611 2,654 2,783 Sugar revenue (RM m) 2,281 2,307 2,293 2,433 2,470 Average USD/MYR 3.31 4.08 4.10 4.62 4.71

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (RMm) Plantations 5,864 5,983 5,528 6,239 6,541 Sugar 2,281 2,307 2,293 2,433 2,470 Downstream 1,343 5,268 5,386 5,896 6,127 Others 5,769 2,001 1,805 1,845 1,900 Total 15,258 15,559 15,012 16,413 17,038

Income Statement (RMm)

FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 15,258 15,559 15,012 16,413 17,038 Cost of Goods Sold (13,054) (13,697) (13,642) (14,646) (15,166) Gross Profit 2,204 1,862 1,371 1,767 1,873 Other Opng (Exp)/Inc (1,554) (1,647) (1,275) (1,274) (1,301) Operating Profit 651 215 95.9 492 571 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 30.7 69.4 70.8 72.4 74.6 Net Interest (Exp)/Inc (55.9) (128) (159) (160) (167) Exceptional Gain/(Loss) 204 297 0.0 0.0 0.0 Pre-tax Profit 829 454 7.98 405 478 Tax (291) (152) (13.8) (109) (129) Minority Interest (213) (194) (76.1) (82.4) (61.8) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 325 107 (82.0) 213 288 Net Profit before Except. 121 (190) (82.0) 213 288 EBITDA 1,214 970 673 1,109 1,209 Growth Revenue Gth (%) 21.4 2.0 (3.5) 9.3 3.8 EBITDA Gth (%) 57.4 (20.1) (30.6) 64.8 9.0 Opg Profit Gth (%) (43.3) (67.0) (55.4) 413.4 16.1 Net Profit Gth (Pre-ex) (%) (82.1) nm 56.9 nm 35.2 Margins & Ratio Gross Margins (%) 14.4 12.0 9.1 10.8 11.0 Opg Profit Margin (%) 4.3 1.4 0.6 3.0 3.4 Net Profit Margin (%) 2.1 0.7 (0.5) 1.3 1.7 ROAE (%) 5.0 1.7 (1.3) 3.4 4.6 ROA (%) 1.6 0.5 (0.4) 1.0 1.4 ROCE (%) 2.3 0.8 (0.4) 1.9 2.2 Div Payout Ratio (%) 112.1 136.4 N/A 85.7 72.2 Net Interest Cover (x) 11.6 1.7 0.6 3.1 3.4


Page 35




Quarterly / Interim Income Statement (RMm)

FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 4,510 4,259 3,755 4,140 4,192 Cost of Goods Sold (4,007) (3,793) (3,477) (3,708) (3,759) Gross Profit 503 466 278 432 433 Other Oper. (Exp)/Inc (475) (234) (382) (182) (437) Operating Profit 27.6 233 (104) 250 (4.1) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc (5.8) 32.6 75.5 (37.4) (58.5) Net Interest (Exp)/Inc (41.6) (26.8) (45.6) (54.6) (22.5) Exceptional Gain/(Loss) (25.2) (73.6) 4.10 (49.9) 62.2 Pre-tax Profit (44.9) 165 (70.0) 108 (22.9) Tax (23.2) (16.5) 11.3 (42.2) (16.0) Minority Interest (71.6) (61.3) (5.9) (2.9) (55.1) Net Profit (33.9) 101 (65.5) 62.2 (94.9) Net profit bef Except. (165) 13.4 (60.5) 13.2 (31.9) EBITDA 21.8 265 (28.5) 213 (62.6) Growth Revenue Gth (%) 7.6 (5.6) (11.8) 10.2 1.3 EBITDA Gth (%) (92.0) 1,116.0 nm nm nm Opg Profit Gth (%) (89.8) 743.6 nm nm nm Net Profit Gth (Pre-ex) (%) nm nm nm nm nm Margins Gross Margins (%) 11.1 10.9 7.4 10.4 10.3 Opg Profit Margins (%) 0.6 5.5 (2.8) 6.0 (0.1) Net Profit Margins (%) (0.8) 2.4 (1.7) 1.5 (2.3)

Balance Sheet (RMm)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 6,310 6,533 6,789 6,661 6,501 Invts in Associates & JVs 961 938 989 1,042 1,096 Other LT Assets 6,197 6,699 6,699 6,699 6,699 Cash & ST Invts 3,673 2,503 2,119 1,779 1,652 Inventory 1,764 2,078 1,913 2,054 2,127 Debtors 1,089 1,894 1,732 1,894 1,966 Other Current Assets 718 742 755 795 812 Total Assets 20,713 21,388 20,996 20,924 20,854 ST Debt 2,066 3,143 3,143 3,143 3,143 Creditor 1,418 1,282 1,344 1,443 1,494 Other Current Liab 888 770 791 797 802 LT Debt 2,415 2,092 2,092 2,092 2,092 Other LT Liabilities 5,103 5,115 4,828 4,539 4,245 Shareholder’s Equity 6,376 6,447 6,182 6,213 6,318 Minority Interests 2,448 2,539 2,615 2,697 2,759 Total Cap. & Liab. 20,713 21,388 20,996 20,924 20,854 Non-Cash Wkg. Capital 1,265 2,663 2,265 2,502 2,609 Net Cash/(Debt) (807) (2,732) (3,117) (3,456) (3,583) Debtors Turn (avg days) 29.2 35.0 44.1 40.3 41.3 Creditors Turn (avg days) 40.1 37.4 36.7 36.3 36.9 Inventory Turn (avg days) 50.7 53.3 55.8 51.6 52.5 Asset Turnover (x) 0.7 0.7 0.7 0.8 0.8 Current Ratio (x) 1.7 1.4 1.2 1.2 1.2 Quick Ratio (x) 1.1 0.8 0.7 0.7 0.7 Net Debt/Equity (X) 0.1 0.4 0.5 0.6 0.6 Net Debt/Equity ex MI (X) 0.1 0.4 0.5 0.6 0.6 Capex to Debt (%) 18.3 17.4 21.1 14.6 14.4 Z-Score (X) 1.6 1.5 1.4 1.5 1.5


Page 36




Cash Flow Statement (RMm)

FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 971 379 7.98 405 478 Dep. & Amort. 391 459 504 542 561 Tax Paid (277) (128) 10.1 (85.4) (105) Assoc. & JV Inc/(loss) (30.7) (69.4) (70.8) (72.4) (74.6) Chg in Wkg.Cap. 281 (1,284) 395 (241) (111) Other Operating CF 232 175 (23.9) (23.9) (23.9) Net Operating CF 1,566 (469) 823 523 725 Capital Exp.(net) (819) (912) (1,104) (762) (754) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV (11.5) 92.4 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (716) (463) 79.0 82.0 84.0 Net Investing CF (1,547) (1,283) (1,025) (680) (670) Div Paid (753) (219) (182) (182) (182) Chg in Gross Debt 850 1,050 0.0 0.0 0.0 Capital Issues 18.7 (23.6) 0.0 0.0 0.0 Other Financing CF (1,617) (625) 0.0 0.0 0.0 Net Financing CF (1,500) 183 (182) (182) (182) Currency Adjustments 14.0 16.0 0.0 0.0 0.0 Chg in Cash (1,467) (1,553) (384) (339) (127) Opg CFPS (sen) 35.2 22.3 11.7 21.0 22.9 Free CFPS (sen) 20.5 (37.8) (7.7) (6.5) (0.8)



Source: DBS Bank

Analyst: Regional Research Team

Ben SANTOSO

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 23 Feb 16 1.60 1.55 HOLD

2: 29 Feb 16 1.53 1.55 HOLD

3: 01 Mar 16 1.55 1.55 HOLD

4: 10 Mar 16 1.46 1.55 HOLD

5: 11 Apr 16 1.51 1.55 HOLD

6: 10 May 16 1.42 1.55 HOLD

7: 25 May 16 1.34 1.40 HOLD

8: 01 Jun 16 1.33 1.40 HOLD

9: 09 Jun 16 1.50 1.25 FULLY VALUED

10: 12 Jul 16 1.51 1.25 FULLY VALUED

11: 30 Aug 16 2.27 1.25 FULLY VALUED12: 10 Nov 16 1.93 1.55 FULLY VALUED13: 23 Nov 16 1.55 1.50 FULLY VALUED14: 14 Dec 16 1.71 1.50 FULLY VALUED

Note : Share price and Target price are adjusted for corporate actions. 15: 10 Jan 17 1.76 1.50 FULLY VALUED16: 10 Feb 17 1.95 1.50 FULLY VALUED

1

234

5

6

7

8 9

10

11

12

13

14

15

16

1.25

1.45

1.65

1.85

2.05

2.25

2.45


RM

Page 37


BUY (Upgraded from HOLD)

Last Traded Price (14 Feb 2017): S$1.98 (STI : 3,072.47) Price Target 12-mth: S$2.19 (11% upside) (Prev S$1.90) Potential Catalyst: Strong 4Q16 and 1Q17 results Where we differ: Higher FY17F and FY18F earnings on higher CPO and PK price forecasts Analyst Ben SANTOSO +65 6682 3707 [email protected]

Price Relative

Forecasts and Valuation FY Dec (US$m) 2015A 2016F 2017F 2018F

Turnover 454 523 632 668 EBITDA 219 250 328 353 Pre-tax Profit 161 171 253 280 Net Profit 108 120 181 203 Net Pft (Pre Ex.) 108 120 181 203 Net Pft (ex. BA gains) 109 120 181 203 Net Pft Gth (Pre-ex) (%) (37.8) 11.6 50.3 12.0 EPS (S cts) 9.66 10.8 16.2 18.2 EPS Pre Ex. (S cts) 9.66 10.8 16.2 18.2 EPS Gth Pre Ex (%) (38) 12 50 12 Diluted EPS (S cts) 9.66 10.8 16.2 18.2 Net DPS (S cts) 3.7 2.4 3.3 4.4 BV Per Share (S cts) 89.1 72.4 85.3 99.1 PE (X) 20.5 18.3 12.2 10.9 PE Pre Ex. (X) 20.5 18.3 12.2 10.9 P/Cash Flow (X) 24.9 8.5 8.9 7.9 EV/EBITDA (X) 11.6 9.3 6.7 5.8 Net Div Yield (%) 1.9 1.2 1.7 2.2 P/Book Value (X) 2.2 2.7 2.3 2.0 Net Debt/Equity (X) 0.3 0.1 CASH CASH ROAE (%) 10.5 13.4 20.6 19.7 Earnings Rev (%): 8 28 16 Consensus EPS (S cts): 9.3 13.7 17.1 Other Broker Recs: B: 13 S: 0 H: 5


Aggressive recovery Backloaded volume growth. We expect First Resources (FR) to book a strong 48% sequential recovery in 4Q16 earnings – premised on better ASP and seasonal yield uptick. We also expect relatively strong crude palm oil (CPO) and palm kernel (PK) average prices to continue this year; partly offset by slightly lower expected biodiesel output. In this report, we upgrade our rating to BUY on 11% potential upside.

FY16F/17F/18F earnings revised by +8%/+28%/+16%. We tweaked our earnings projections to account for higher CPO/PK price forecasts, as well as slightly faster recovery in FY17F FFB yield than previously anticipated. External FFB purchases were also revised higher from FY17F – on expectations of FFB yield recovery from adverse impact of 2015 El Nino – to optimise the group’s mill utilisation rate. FR’s CPO output is consequently raised by c.1% p.a. from previous forecasts

Volume growth to decelerate from 2019. FR’s aggressive planting in East and West Kalimantan between FY12 and FY14 will contribute to the group’s strong volume and earnings growth through FY18F. Subject to opportunistic acquisitions, we expect FR’s output growth to decelerate from FY19F, as new planting is forecast to moderate from FY16 onwards (excluding new acquisitions).

Valuation:

We employed DCF methodology (FY17F base year) to arrive at FR’s fair value of S$2.19/share (WACC 11.7%, Rf 8.4%; Rm 13.3%; β 1.0x; TG 3%) – raised from S$1.90 previously. We believe the counter’s strong expected earnings growth has not been priced in.


FR’s share price is linearly driven by CPO price expectations and partly by refining/biodiesel margins. There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take fails to live up to our expectations (3.7m MT) next year. CPO price could also move higher than forecast if there is significant yield deterioration in South American 1QCY17 soybean crop in the event of a strong La Nina. Changes in fund flows towards or out of emerging markets/commodities would also affect valuations of plantation counters.

At A Glance Issued Capital (m shrs) 1,584 Mkt. Cap (S$m/US$m) 3,136 / 2,207 Major Shareholders (%) Eight Capital Inc 64.1 King Fortune International Inc 5.6




First Resources Version 7 | Bloomberg: FR SP | Reuters: FRLD.SI Refer to important disclosures at the end of this report

73

93

113

133

153

173

193

213

1.3

1.5

1.7

1.9

2.1

2.3

2.5

2.7


Relative IndexS$

First Resources (LHS) Relative STI (RHS)


Company Guide

First Resources


CPO price. As a commodity producer, FR is a price-taker. Movements in international CPO prices would directly impact the group’s profitability. We currently expect CPO prices (FOB Pasir Gudang) to average US$659/MT (+3% y-o-y) in CY17 and US$644/MT in CY18 (-2% y-o-y). Volume output. Changes in weather patterns would have a meaningful impact on FR’s productivity with some lag time. It takes 5-6 months from flowering to harvesting of ripe fruits. Hence, a sustained water deficit would not have immediate impact on yields, but has an impact on fruit formation through abortion of female flowers, delayed ripening, reduced fruit weight, as well as fruit abortion. Palm oil is a thirsty crop, requiring a minimum of 1,600mm p.a. and is typically grown in areas with 2,000-2,500mm of rainfall p.a. Oil palm trees are best grown within 10° latitudes on either side of the equator. A drop in rainfall to below 100mm per month for three consecutive months would result in so called “tree-stress”, and a drop in productivity (i.e. Fresh Fruit Bunch yield) would ensue 12 and 24 months thereafter. Regulations. Tariff and non-tariff regulations are common practices in agriculture commodities, and palm oil is no exception. Any changes in export/import tariffs, as well as various taxes and levies would therefore impact trade flows and prices. Biodiesel demand. Driven by high energy prices and climate change concerns, demand for vegetable oils for energy has multiplied since 2005, mainly supported by mandatory mixing of petroleum fuel with biodiesel. This demand has created a link between vegetable oils and energy prices. Oil World estimates that palm oil used for biodiesel accounts for c.16% of total demand – both mandatory and discretionary (driven by positive spreads between diesel and biodiesel prices). Demand seasonality. As a major vegetable oil with c.38% market share globally, palm oil is an important food staple. The other major vegetable oils are soybean oil, with 29% market share, followed by rapeseed/canola oil and sunflower oil with 16% and 10% market shares respectively. There is generally demand substitutability between vegetable oils (high price elasticity of demand), although certain vegetable oils are more suitable than others for certain applications. Relative to other oil crops, palm oil has the highest productivity per hectare (i.e. c.5 MT/ha), while soybean oil’s productivity is typically 0.5 MT/ha. Demand for palm oil is dominant in Asia, where local festivities drive higher demand during certain months of the year. For example, Ramadan month, Chinese New Year, and Divali are typically high-demand periods in Asia.

CPO price (RM/MT)




Avg. USD/IDR rate


2413

2168

2652

3040 3030

0.0

438.6

877.3

1315.9

1754.5

2193.1

2631.8

3070.4

2014A 2015A 2016F 2017F 2018F

114377

128042140704

154992

172201

0.0

35129.0

70258.0

105387.0

140516.0

2014A 2015A 2016F 2017F 2018F

658803 669435634941

757688

826426

0.00

168590.88

337181.76

505772.64

674363.51

842954.39

2014A 2015A 2016F 2017F 2018F

142594

159610148270

176673

192701

0.0

38925.5

77851.1

116776.6

155702.1

194627.6

2014A 2015A 2016F 2017F 2018F

11879

1371713237 13608 13764

0.0

2780.3

5560.7

8341.0

11121.3

13901.6

2014A 2015A 2016F 2017F 2018F

Page 39


Company Guide

First Resources

Balance Sheet:

Net cash position next year. On our estimates, FR’s debts cost a paltry 3.9% p.a. The low cost comes primarily from Sukuk issuances between 2012 and 2014 – which were subsequently swapped into USD. This will translate into a decent 15x interest cover and net cash position in FY17F. At end-June 2016, FR’s 4-quarter rolling cash conversion cycle stood at 89 days (vs. 73 days at end-March 2016) – mainly representing higher receivable days. Strong free cash flow generation. We expect the group to spend c.US$7.8m on biological assets (c.2,000 ha on new planting and 50,000 ha immature) in FY16 and US$4.0m in FY17 (c.3,000 ha on new planting and 40,000 ha immature). This would translate into free cash flow generation of US$114m in FY16F and US$125m in FY17F – translating into free cash flow yield of c.6% relative to its intrinsic value. Share Price Drivers:

Improved outlook largely priced in. The stock is currently trading close to its average forward PE. We believe its current share price has more than reflected sequential earnings recovery in 2H16 – driven by strong volume recovery and stable prices. Key Risks:

Volatility in CPO prices and USD exchange rates Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from expansion of US shale gas would have adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect profitability of planters in general. Setback in expansion plans Our forecasts are based on assumed hectarage for new planting and replanting. Any setback on these plans would negatively affect our valuation due to slower volume growth. Regulatory changes Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact demand for CPO/refined oils. Market sentiment Changes in fund flows towards or out of emerging markets would affect valuations for plantation counters. Company Background

First Resources (FR) is a mid-sized planter with a strong balance sheet and decent growth outlook. FR has been aggressively planting since 2004, and is one of a few upstream planters that have successfully expanded downstream – albeit on a small scale.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.2

0.3

0.3

0.4

0.4

0.5

0.5

0.00

0.10

0.20

0.30

0.40

0.50

0.60

2014A 2015A 2016F 2017F 2018F


0.0

50,000.0

100,000.0

150,000.0

200,000.0

250,000.0

300,000.0

2014A 2015A 2016F 2017F 2018F


US$m

0.0%

5.0%

10.0%

15.0%

20.0%

2014A 2015A 2016F 2017F 2018F

Avg: 16.1x

+1sd: 19.9x

+2sd: 23.7x

‐1sd: 12.3x

‐2sd: 8.5x7.6

9.6

11.6

13.6

15.6

17.6

19.6

21.6

23.6

25.6


(x)

Avg: 2.35x

+1sd: 2.67x

+2sd: 2.99x

‐1sd: 2.03x

‐2sd: 1.71x

1.4

1.9

2.4

2.9

3.4


(x)

Page 40


Company Guide

First Resources

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F CPO price (RM/MT) 2,413 2,168 2,652 3,040 3,030 Mature oil palm 114,377 128,042 140,704 154,992 172,201 CPO sales volume (MT) 658,803 669,435 634,941 757,688 826,426 Palm kernel sales vol. (MT) 142,594 159,610 148,270 176,673 192,701 Avg. USD/IDR rate 11,879 13,717 13,237 13,608 13,764 Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (US$m) CPO 451 362 367 452 481 Palm kernel 60 53 69 92 99 Olein, RBDPO, biodesel 308 210 238 244 239 PKO 32 29 43 50 49 Elimination (234) (200) (194) (205) (201) Total 616 454 523 632 668 Income Statement (US$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 616 454 523 632 668 Cost of Goods Sold (292) (202) (255) (284) (295) Gross Profit 323 251 268 348 373 Other Opng (Exp)/Inc (52) (65) (77) (84) (88) Operating Profit 271 186 191 264 285 Other Non Opg (Exp)/Inc (1) (3) (2) (2) (2) Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (18) (22) (18) (9) (3) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 252 161 171 253 280 Tax (71) (49) (46) (66) (70) Minority Interest (7) (4) (4) (7) (7) Preference Dividend 0 0 0 0 0 Net Profit 173 108 120 181 203 Net Profit before Except. 173 108 120 181 203 EBITDA 302 219 250 328 353 Growth Revenue Gth (%) (1.8) (26.3) 15.3 20.9 5.7 EBITDA Gth (%) (16.5) (27.5) 13.9 31.5 7.6 Opg Profit Gth (%) (20.5) (31.3) 2.5 38.5 7.7 Net Profit Gth (%) (27.2) (37.8) 11.6 50.3 12.0 Margins & Ratio Gross Margins (%) 52.5 55.4 51.2 55.0 55.8 Opg Profit Margin (%) 44.0 41.0 36.5 41.8 42.6 Net Profit Margin (%) 28.2 23.8 23.0 28.6 30.3 ROAE (%) 16.9 10.5 13.4 20.6 19.7 ROA (%) 9.2 5.5 6.8 11.5 12.6 ROCE (%) 10.7 6.8 8.2 13.0 14.0 Div Payout Ratio (%) 32.9 38.3 21.9 20.5 24.0 Net Interest Cover (x) 15.2 8.6 10.4 28.9 100.8


Page 41


Company Guide

First Resources

Quarterly / Interim Income Statement (US$m)

FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 108 131 113 135 152 Cost of Goods Sold (42) (68) (78) (79) (71) Gross Profit 66 63 35 56 80 Other Oper. (Exp)/Inc (16) (23) (18) (17) (17) Operating Profit 49 39 16 40 64 Other Non Opg (Exp)/Inc (3) 3 (1) 1 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (6) (6) (6) (6) (7) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 40 37 10 35 57 Tax (11) (16) (4) (8) (19) Minority Interest (1) (1) 0 (1) (2) Net Profit 28 20 6 26 36 Net profit bef Except. 28 20 6 26 36 EBITDA 46 43 16 41 64 Growth Revenue Gth (%) (9.3) 21.4 (13.6) 19.7 11.9 EBITDA Gth (%) 12.8 (7.8) (62.7) 159.2 54.5 Opg Profit Gth (%) 17.6 (20.3) (58.2) 142.1 59.9 Net Profit Gth (%) 13.2 (30.2) (70.9) 353.2 37.2 Margins Gross Margins (%) 61.1 47.9 30.8 41.7 53.1 Opg Margins (%) 45.9 30.1 14.6 29.5 42.1 Net Profit Margins (%) 26.4 15.2 5.1 19.3 23.7

Balance Sheet (US$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 338 325 357 384 406 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 1,185 1,241 768 749 728 Cash & ST Invts 351 205 384 261 425 Inventory 49 68 47 52 54 Debtors 39 40 34 42 44 Other Current Assets 36 47 32 36 37 Total Assets 1,998 1,927 1,623 1,524 1,694 ST Debt 11 29 241 0 0 Creditor 59 51 53 59 61 Other Current Liab 18 12 14 17 18 LT Debt 572 466 210 190 194 Other LT Liabilities 222 324 241 243 245 Shareholder’s Equity 1,063 995 809 953 1,107 Minority Interests 53 50 54 61 69 Total Cap. & Liab. 1,998 1,927 1,623 1,524 1,694 Non-Cash Wkg. Capital 47 92 46 53 56 Net Cash/(Debt) (232) (290) (67) 70 231 Debtors Turn (avg days) 24.0 31.7 25.9 21.9 23.4 Creditors Turn (avg days) 85.4 120.8 97.5 93.6 97.8 Inventory Turn (avg days) 75.7 128.0 107.7 83.0 86.7 Asset Turnover (x) 0.3 0.2 0.3 0.4 0.4 Current Ratio (x) 5.4 3.9 1.6 5.1 7.0 Quick Ratio (x) 4.4 2.7 1.4 4.0 5.9 Net Debt/Equity (X) 0.2 0.3 0.1 CASH CASH Net Debt/Equity ex MI (X) 0.2 0.3 0.1 CASH CASH Capex to Debt (%) 42.2 15.6 16.1 36.4 35.3 Z-Score (X) 3.2 3.1 3.5 4.8 5.0


Page 42


Company Guide

First Resources

Cash Flow Statement (US$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 252 161 171 253 280 Dep. & Amort. 32 36 60 66 70 Tax Paid (71) (49) (46) (66) (70) Assoc. & JV Inc/(loss) 0 0 0 0 0 Chg in Wkg.Cap. 14 (46) 46 (7) (2) Other Operating CF 0 (14) 28 1 1 Net Operating CF 226 89 259 247 279 Capital Exp.(net) (246) (77) (73) (69) (68) Other Invts.(net) 0 0 0 0 0 Invts in Assoc. & JV (1) (7) 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 66 6 28 (4) (2) Net Investing CF (181) (78) (44) (74) (70) Div Paid (57) (41) (26) (37) (49) Chg in Gross Debt 93 (88) (10) (261) 3 Capital Issues (47) (136) 0 0 0 Other Financing CF 45 109 1 1 1 Net Financing CF 34 (156) (36) (297) (45) Currency Adjustments 0 0 0 0 0 Chg in Cash 79 (146) 179 (124) 164 Opg CFPS (S cts) 13 8 13 16 18 Free CFPS (S cts) (1) 1 12 11 13



Source: DBS Bank


S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 23 Feb 16 1.95 1.90 HOLD

2: 25 Feb 16 1.84 1.85 HOLD

3: 10 Mar 16 1.98 1.85 HOLD

4: 11 Apr 16 2.03 1.85 HOLD

5: 10 May 16 1.73 1.85 HOLD

6: 13 May 16 1.65 1.85 HOLD

7: 12 Jul 16 1.55 1.82 HOLD

8: 13 Aug 16 1.63 1.80 BUY

9: 24 Oct 16 1.77 1.90 HOLD

10: 10 Nov 16 1.85 1.90 HOLD

11: 14 Dec 16 1.95 1.90 HOLD12: 10 Jan 17 1.92 1.90 HOLD13: 10 Feb 17 1.97 1.90 HOLD


123

4

56

7

89

10 11

1213

1.43

1.53

1.63

1.73

1.83

1.93

2.03

2.13


S$

Page 43


HOLD (Downgraded from BUY)

Last Traded Price ( 14 Feb 2017): RM11.52 (KLCI : 1,708.90) Price Target 12-mth: RM12.35 (7% upside) (Prev RM12.40) Where we differ: Higher FY17F and FY18F earnings on higher CPO and PK price forecasts Analyst Ben SANTOSO +65 6682 3707 [email protected]

Price Relative

Forecasts and Valuation FY Dec (RM m) 2015A 2016F 2017F 2018F Revenue 1,375 1,403 1,844 1,995 EBITDA 302 421 661 734 Pre-tax Profit 247 390 640 701 Net Profit 190 287 472 517 Net Pft (Pre Ex.) 190 287 472 517 Net Pft Gth (Pre-ex) (%) (49.7) 51.4 64.2 9.6 EPS (sen) 24.2 36.7 60.3 66.1 EPS Pre Ex. (sen) 24.2 36.7 60.3 66.1 EPS Gth Pre Ex (%) (50) 51 64 10 Diluted EPS (sen) 24.2 36.7 60.3 66.1 Net DPS (sen) 5.48 8.29 13.6 14.9 BV Per Share (sen) 539 570 621 673 PE (X) 47.5 31.4 19.1 17.4 PE Pre Ex. (X) 47.5 31.4 19.1 17.4 P/Cash Flow (X) 61.1 23.1 18.7 15.7 EV/EBITDA (X) 32.0 22.6 14.5 13.0 Net Div Yield (%) 0.5 0.7 1.2 1.3 P/Book Value (X) 2.1 2.0 1.9 1.7 Net Debt/Equity (X) 0.1 0.0 0.1 0.0 ROAE (%) 4.7 6.6 10.1 10.2 Earnings Rev (%): 2 24 11 Consensus EPS (sen): 33.0 44.6 50.7 Other Broker Recs: B: 7 S: 2 H: 13


Low base effect Helped by depreciating Ringgit. Palm oil prices should remain well supported this year, given the resilient demand and weaker Ringgit. We expect GENP to book earnings CAGR of 21% between FY16F and FY19F. In this report we cut our rating to HOLD for limited potential return. Earnings and TP raised. Our FY16F/17F/18F earnings rises by +2%/+24%/+11%, as we raise PK ASP by +3%/+35%/+40%. We projected a 7% drop in GENP’s FFB output this year – mostly reflected in 9M16 – thus implying a 4Q16 earnings rebound towards RM121.8m (+78% y-o-y; +25% q-o-q). Between FY16F and FY19F, fresh fruit bunch (FFB) yield recoveries and new maturities should boost the group’s FFB and CPO output by 9% and 11% CAGR, respectively. Yet, a flatter Ringgit depreciation (vs. previous forecasts) from FY19F also works to lower free cash flow (vis-à-vis our previous forecasts), resulting in a minor change to our DCF valuation Securing volume, penetrating genome and venturing downstream. Having expanded aggressively in Indonesia since CY07, GENP has concurrently embarked upon improving its planting material through genome filtering and recently moved towards downstream projects through partnerships with Musim Mas Group and Elevance Renewable Sciences for its long-term strategy. From recent acquisitions the group also added c.9k ha of net plantable land bank for future growth. Valuation:

We trim GENP’s SOP-based TP (FY17F base year; Plantations segment is valued using DCF) to RM12.35 from RM12.40 previously. Key Risks to Our View:

A strong recovery in CPO prices (either data, weather or regulatory-driven) would lift the share price above our fair value, and vice versa. At A Glance Issued Capital (m shrs) 796 Mkt. Cap (RMm/US$m) 9,166 / 2,060 Major Shareholders (%) Genting Berhad 51.2 Employees Provident Fund 13.1




Genting Plantations Version 9 | Bloomberg: GENP MK | Reuters: GENP.KL Refer to important disclosures at the end of this report

85

105

125

145

165

185

205

7.6

8.6

9.6

10.6

11.6

12.6


Relative IndexRM

Genting Plantations (LHS) Relative KLCI (RHS)


Company Guide

Genting Plantations


Earnings Drivers:

CPO price. As a commodity producer, GENP is a price-taker. Movements in international CPO prices would directly impact the group’s profitability. We currently expect CPO prices (FOB Pasir Gudang) to average US$659/MT (+3% y-o-y) in CY17 and US$644/MT in CY18 (-2% y-o-y). In Ringgit terms, they were revised to RM3,040/MT (+16% y-o-y) and RM3,030 (+0% y-o-y) Volume output. Approximately 70% of GENP’s planted area in Malaysia is located in Sabah – representing c.35% of its total planted area. The remainder is primarily located in West and Central Kalimantan. The group’s Malaysian estates are 95% mature, while only half of GENP’s Indonesian estates have matured. Due to FY15 dry weather in Sabah, GENP’s Malaysian CPO output is forecast to drop to 289k MT in FY16 (vis-à-vis 7% y-o-y jump in Indonesian output to 129k MT). GENP has undertaken an aggressive new planting programme in Indonesia since CY07, and the group has started seeing significant increases in its FFB output from Indonesia – although Indonesia is estimated to contribute only 30% of total FFB output in FY16F (from 25% in FY15). GENP’s capex outlay in Indonesia would not only focus on new planting, but also on adding mills (from 135 MT/hour capacity currently). Beware of export levies in Indonesia. GENP has started supplying biodiesel in Sabah with the rollout of B7 programme since FY15 from its 300k MT p.a. biodiesel plant. 3Q16 volumes reached 7k MT. While the positive impact of B7 in Malaysia remains insignificant, Indonesia’s B20 programme would do more harm to GENP’s net ASP; as the US$50/MT CPO export levy works to lower Indonesia’s domestic CPO prices by roughly the same amount. The group currently does not have any biodiesel capacity in Indonesia. Demand seasonality. As a major vegetable oil with 38% market share globally, palm oil is an important food staple. The other major vegetable oils are soybean oil with 29% market share, followed by rapeseed/canola oil and sunflower oil with 16% and 10% market shares respectively. There is generally demand substitutability between vegetable oils (high price elasticity of demand), although certain vegetable oils are more suitable than others for certain applications. Relative to other oil crops, palm oil has the highest productivity per hectare (i.e. c.5 MT/ha), while soybean oil’s productivity is typically 0.5 MT/ha. Demand for palm oil is dominant in Asia where local festivities drive higher demand in certain months of the year, for example, Ramadan month, Chinese New Year, and Divali are typically high-demand periods in Asia.

CPO price


CPO sales volume

PK sales volume

Average MYR/USD


2413

2168

2652

3040 3030

0.0

438.6

877.3

1315.9

1754.5

2193.1

2631.8

3070.4

2014A 2015A 2016F 2017F 2018F

8748591117

107331 109864 112474

0.0

22944.7

45889.5

68834.2

91779.0

114723.7

2014A 2015A 2016F 2017F 2018F

399394

441261417860

492051

541709

0.00

110508.59

221017.18

331525.78

442034.37

552542.96

2014A 2015A 2016F 2017F 2018F

8797996120

90192

104977

114012

0.0

23030.4

46060.8

69091.1

92121.5

115151.9

2014A 2015A 2016F 2017F 2018F

3.31

4.08 4.1

4.62 4.71

0.0

1.0

1.9

2.9

3.8

4.8

2014A 2015A 2016F 2017F 2018F

Page 45


Company Guide

Genting Plantations

Balance Sheet:

Net cash position. As at end-September 2016, GENP had a net gearing ratio of 22%, including USD debts amounting to US$276m, which represented debts incurred by its Indonesian subsidiaries to fund its ongoing capex programme there (interest expense and FX losses are partly capitalised). The group’s 4-quarter rolling cash conversion cycle shortened to negative 15 days vs. 2 days at end June 2016, due to longer payable days.

Negative free cash flow in FY16F. GENP is forecast to book negative free cash flow in FY16F, reflecting relatively high capex outlay and reduced output (due to replanting and lagged impact of FY15 El Nino). However with a rebound in output and relatively strong ASP, CY17F free cash flow should improve to RM43m. GENP’s cash balances should remain sufficient for any opportunistic acquisitions – thanks to issuance of RM1bn sukuk in 2Q15. Share Price Drivers:

Offering growth, despite higher multiple. Among its upstream peers, GENP is trading at a relatively higher forward PE. We believe the market has incorporated the valuation of the group’s property land bank – in addition to its plantation segment’s 22% earnings CAGR (CY16F-18F) potential from favourable maturity pipeline in Indonesia and stable CPO prices. Key Risks:

Volatility in CPO prices and USD exchange rate. Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect the profitability of planters in general.

Setback in expansion plans. Our forecasts are based on assumed hectarage for new planting and replanting. Any setback on these plans would negatively affect our valuation due to slower volume growth.

Regulatory changes. Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/ Malaysian export taxes would impact the demand for CPO/refined oils.

Market sentiment. Changes in fund flows towards or out of emerging markets would affect the valuations of plantation counters.

Weather. Changes in rainfall pattern (caused by either El Nino or La Nina) would affect FFB yields with some time lag. Company Background

GENP is in the palm oil plantation business with over 220k ha of plantations in Malaysia and Indonesia, and nine palm oil mills currently. Its other/non-core businesses are biotechnology and property development.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.1

0.2

0.2

0.3

0.3

0.4

0.4

0.00

0.10

0.20

0.30

0.40

0.50

0.60

2014A 2015A 2016F 2017F 2018F


0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

2014A 2015A 2016F 2017F 2018F


RMm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2014A 2015A 2016F 2017F 2018F

Avg: 27.3x

+1sd: 33.4x

+2sd: 39.6x

‐1sd: 21.2x

‐2sd: 15x13.5

18.5

23.5

28.5

33.5

38.5

43.5


(x)

Avg: 2.05x

+1sd: 2.23x

+2sd: 2.41x

‐1sd: 1.87x

‐2sd: 1.69x

1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9


(x)

Page 46


Company Guide

Genting Plantations

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F CPO price 2,413 2,168 2,652 3,040 3,030 Mature palm oil hectarage 87,485 91,117 107,331 109,864 112,474 CPO sales volume 399,394 441,261 417,860 492,051 541,709 PK sales volume 87,979 96,120 90,192 104,977 114,012 Average MYR/USD 3.31 4.08 4.10 4.62 4.71 Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (RMm) Plantation 1,170 1,093 1,271 1,705 1,852 Property 372 189 132 139 143 Others 101 93.1 0.0 0.0 0.0 Total 1,643 1,375 1,403 1,844 1,995 EBIT (RMm)

Plantation 393 142 350 574 631 Property 155 61.1 43.9 46.3 47.9 Others (54.9) 78.7 2.10 2.21 2.32 Total 493 282 396 623 681 EBIT Margins (%) Plantation 33.6 13.0 27.6 33.7 34.0 Property 41.7 32.3 33.2 33.4 33.5 Others (54.1) 84.5 N/A N/A N/A Total 30.0 20.5 28.2 33.8 34.1 Income Statement (RMm)

FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 1,643 1,375 1,403 1,844 1,995 Cost of Goods Sold (960) (924) (868) (1,011) (1,091) Gross Profit 683 451 536 834 905 Other Opng (Exp)/Inc (201) (219) (195) (266) (280) Operating Profit 481 232 340 567 625 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 17.7 22.0 32.9 51.4 55.9 Net Interest (Exp)/Inc 20.7 (6.0) 16.4 21.5 20.4 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 520 247 390 640 701 Tax (136) (70.8) (97.4) (160) (175) Minority Interest (6.5) 13.2 (4.9) (8.0) (8.8) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 377 190 287 472 517 Net Profit before Except. 377 190 287 472 517 EBITDA 545 302 421 661 734 Growth Revenue Gth (%) 18.7 (16.3) 2.1 31.4 8.2 EBITDA Gth (%) 73.6 (44.7) 39.7 57.0 11.0 Opg Profit Gth (%) 85.4 (51.9) 47.1 66.6 10.2 Net Profit Gth (Pre-ex) (%) 65.6 (49.7) 51.4 64.2 9.6 Margins & Ratio Gross Margins (%) 41.6 32.8 38.2 45.2 45.4 Opg Profit Margin (%) 29.3 16.8 24.3 30.8 31.3 Net Profit Margin (%) 23.0 13.8 20.5 25.6 25.9 ROAE (%) 10.3 4.7 6.6 10.1 10.2 ROA (%) 7.2 3.0 3.9 6.2 6.4 ROCE (%) 7.3 2.7 3.6 5.8 6.1 Div Payout Ratio (%) 20.5 22.6 22.6 22.6 22.6 Net Interest Cover (x) NM 38.3 NM NM NM


Page 47


Company Guide

Genting Plantations


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 320 424 261 309 397 Cost of Goods Sold (220) (295) (170) (212) (213) Gross Profit 100 129 90.7 97.1 183 Other Oper. (Exp)/Inc (36.0) (38.8) (41.5) (33.8) (40.7) Operating Profit 64.1 90.2 49.2 63.3 143 Other Non Opg (Exp)/Inc (4.5) 9.10 9.13 (3.8) (3.1) Associates & JV Inc 5.28 6.40 6.18 5.36 5.78 Net Interest (Exp)/Inc (18.8) (17.3) (16.9) (16.5) (12.7) Exceptional Gain/(Loss) 4.50 (9.1) (9.1) 3.79 3.08 Pre-tax Profit 50.6 79.3 38.5 52.2 136 Tax (16.0) (18.8) (10.4) (14.7) (39.2) Minority Interest (1.4) 7.93 (1.1) 3.29 1.26 Net Profit 33.2 68.5 27.0 40.8 97.8 Net profit bef Except. 28.7 77.6 36.1 37.0 94.7 EBITDA 64.1 90.2 49.2 63.3 143 Growth Revenue Gth (%) 4.8 32.5 (38.5) 18.5 28.3 EBITDA Gth (%) (2.1) 40.8 (45.5) 28.7 125.3 Opg Profit Gth (%) (2.1) 40.8 (45.5) 28.7 125.3 Net Profit Gth (Pre-ex) (%) (43.4) 170.6 (53.5) 2.6 155.6 Margins Gross Margins (%) 31.2 30.4 34.8 31.4 46.2 Opg Profit Margins (%) 20.0 21.3 18.9 20.5 36.0 Net Profit Margins (%) 10.4 16.1 10.3 13.2 24.6 Balance Sheet (RMm)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 1,339 1,562 1,851 2,111 2,355 Invts in Associates & JVs 62.4 70.2 103 154 210 Other LT Assets 2,532 3,131 2,992 3,085 3,171 Cash & ST Invts 1,177 1,925 2,061 2,031 2,062 Inventory 105 98.1 87.1 101 108 Debtors 265 334 211 276 297 Other Current Assets 110 125 126 127 128 Total Assets 5,590 7,246 7,431 7,885 8,331 ST Debt 27.4 56.9 56.9 56.9 56.9 Creditor 324 361 290 339 368 Other Current Liab 18.0 6.33 13.5 15.7 17.0 LT Debt 1,000 2,233 2,233 2,233 2,233 Other LT Liabilities 68.3 84.0 84.0 84.0 84.0 Shareholder’s Equity 3,898 4,219 4,464 4,858 5,266 Minority Interests 255 285 290 298 307 Total Cap. & Liab. 5,590 7,246 7,431 7,885 8,331 Non-Cash Wkg. Capital 139 190 121 149 148 Net Cash/(Debt) 149 (365) (228) (259) (228) Debtors Turn (avg days) 55.4 79.6 70.9 48.2 52.4 Creditors Turn (avg days) 129.3 146.4 150.9 125.2 131.4 Inventory Turn (avg days) 39.6 43.4 42.9 37.4 38.9 Asset Turnover (x) 0.3 0.2 0.2 0.2 0.2 Current Ratio (x) 4.5 5.8 6.9 6.2 5.9 Quick Ratio (x) 3.9 5.3 6.3 5.6 5.3 Net Debt/Equity (X) CASH 0.1 0.0 0.1 0.0 Net Debt/Equity ex MI (X) CASH 0.1 0.1 0.1 0.0 Capex to Debt (%) 39.6 17.3 26.1 19.1 19.0 Z-Score (X) 5.4 3.3 3.4 3.4 3.5


Page 48


Company Guide

Genting Plantations


FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 520 247 390 640 701 Dep. & Amort. 64.1 70.1 80.8 94.1 109 Tax Paid (136) (70.8) (97.4) (160) (175) Assoc. & JV Inc/(loss) (17.7) (22.0) (32.9) (51.4) (55.9) Chg in Wkg.Cap. (34.5) (24.3) 62.6 (29.4) 0.07 Other Operating CF 95.7 (52.8) (12.4) (10.0) (3.0) Net Operating CF 491 148 390 483 576 Capital Exp.(net) (407) (395) (599) (436) (436) Other Invts.(net) 0.0 (400) 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 17.9 11.5 387 0.0 0.0 Net Investing CF (389) (784) (211) (436) (436) Div Paid (23.1) (73.5) (42.9) (77.4) (110) Chg in Gross Debt 138 1,233 0.0 0.0 0.0 Capital Issues 93.1 198 0.14 0.0 0.0 Other Financing CF (64.7) (373) 0.0 0.0 0.0 Net Financing CF 144 984 (42.7) (77.4) (110) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 246 348 136 (30.3) 30.9 Opg CFPS (sen) 68.2 22.0 41.9 65.5 73.6 Free CFPS (sen) 10.9 (31.6) (26.6) 6.02 18.0



Source: DBS Bank


S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 08 Mar 16 11.00 10.75 HOLD

2: 10 Mar 16 11.00 10.75 HOLD

3: 11 Apr 16 11.00 10.75 HOLD

4: 10 May 16 10.56 10.75 HOLD

5: 24 May 16 10.50 10.55 HOLD

6: 01 Jun 16 10.40 10.55 HOLD

7: 09 Jun 16 10.58 9.45 FULLY VALUED

8: 28 Jun 16 10.50 9.45 FULLY VALUED

9: 12 Jul 16 10.60 9.45 FULLY VALUED

10: 26 Aug 16 10.62 9.35 FULLY VALUED

11: 10 Nov 16 10.58 11.60 HOLD12: 24 Nov 16 10.54 12.40 BUY13: 14 Dec 16 10.76 12.40 BUY14: 10 Jan 17 10.96 12.40 BUY

Note : Share price and Target price are adjusted for corporate actions. 15: 10 Feb 17 11.52 12.40 BUY

1

2

34

5

67

8

9

10

11

1213

14

15

9.84

10.34

10.84

11.34

11.84


RM

Page 49


HOLD (Downgraded from BUY)

Last Traded Price (14 Feb 2017): S$0.545 (STI : 3,072.47) Price Target 12-mth: S$0.57 (5% upside) (Prev S$0.58) Where we differ: Higher FY17F and FY18F earnings on higher CPO and PK price forecasts Analyst Ben SANTOSO +65 6682 3707 [email protected]

Price Relative

Forecasts and Valuation FY Dec (Rpbn) 2015A 2016F 2017F 2018F Revenue 13,835 15,154 17,456 18,140 EBITDA 2,092 2,840 4,102 4,252 Pre-tax Profit 698 946 2,084 2,225 Net Profit 57.9 391 874 933 Net Pft (ex. BA gains) 59.5 391 874 933 Net Pft (Pre Ex.) 57.9 391 874 933 Net Pft Gth (Pre-ex) (%) (92.4) 574.7 123.8 6.8 EPS (S cts) 0.43 2.92 6.53 6.98 EPS Pre Ex. (S cts) 0.43 2.92 6.53 6.98 EPS Gth Pre Ex (%) (92) 575 124 7 Diluted EPS (S cts) 0.43 2.92 6.53 6.98 Net DPS (S cts) 0.0 0.0 0.0 0.0 BV Per Share (S cts) 108 69.4 75.9 82.9 PE (X) 125.8 18.6 8.3 7.8 PE Pre Ex. (X) 125.8 18.6 8.3 7.8 P/Cash Flow (X) 9.9 3.4 2.7 2.4 EV/EBITDA (X) 12.1 9.0 6.3 6.0 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 0.5 0.8 0.7 0.7 Net Debt/Equity (X) 0.3 0.4 0.4 0.3 ROAE (%) 0.4 3.3 9.0 8.8 Earnings Rev (%): 5 69 15 Consensus EPS (S cts): 2.60 4.20 6.10 Other Broker Recs: B: 4 S: 4 H: 3


Fairly valued Strong earnings outlook priced in. Since its acquisition of London Sumatra (Lonsum) in November 2007, Indofood Agri (IndoAgri) has been mostly self-sufficient in its crude palm oil (CPO) requirements, benefitting from higher upstream margin, while still enjoying major downstream market share (c.40-45% in branded cooking oil) in Indonesia. While the integrated model allows the group to mitigate volatility in each commodity, it also requires significant capex outlay to develop capacities and markets over the next several years. In this report, we cut our rating to HOLD on limited upside potential.

FY16F/17F/18F earnings revised by +5%/+69%/+15%. Changes in our forecasts reflected +23%/+42%/+35% revisions to our palm kernel (PK) ASP (in Rupiah terms). We expect IndoAgri’s 4Q16 core earnings to sequentially recover – thanks to anticipated recovery in FFB yields, maturing estates and rebound in palm oil prices as well as seasonal sugar contribution. Yet, flatter depreciation in Rupiah (vs. previous forecasts) from FY19F works to lower free cash flow (vis-à-vis our previous forecasts), resulting in minor change to our DCF valuation.

Refining margins recovering. IndoAgri’s refining margins should recover in line with higher CPO prices, which should help lift RBD Olein, RBD Stearin and PFAD prices – thus minimising the impact of export levies on domestic selling prices. Valuation: Having imputed the above changes, our DCF-based TP (FY17F base year) is adjusted to S$0.57/share (WACC 11.7%, Rf 8.4%, Rm 13.3%, β 1.1x, TG 3%) from S$0.58 previously. In view of the limited upside, we downgraded our rating to HOLD Key Risks to Our View:

IndoAgri’s share price is driven by CPO price expectations and to a certain extent by refining margin and sugar prices. There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take fails to live up to our expectations (3.7m MT) next year. CPO price could also move higher than forecast if there is significant yield deterioration in South American 1QCY17 soybean crop in the event of a strong La Nina. Changes in fund flows towards or out of emerging markets/commodities would also affect valuations of plantation counters. At A Glance Issued Capital (m shrs) 1,396 Mkt. Cap (S$bn/US$m) 0.76 / 535 Major Shareholders (%) Indofood Singapore Holdings Pte Ltd 71.5




Indofood Agri Resources Version 9 | Bloomberg: IFAR SP | Reuters: IFAR.SI Refer to important disclosures at the end of this report

35

55

75

95

115

135

155

175

195

215

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4


Relative IndexS$

Indofood Agri Resources (LHS) Relative STI (RHS)


Company Guide

Indofood Agri Resources


Earnings Drivers:

CPO price. As a commodity producer, IndoAgri is a price-taker. Movements in international CPO prices would directly impact the group’s profitability. We currently expect CPO prices (FOB Pasir Gudang) to average US$659/MT (+3% y-o-y) in CY17 and US$644/MT in CY18 (-2% y-o-y). Adverse impact from El Nino. As at end of FY15, IndoAgri’s oil palm trees (excluding smallholder estates) had an estimated average age of 12 years. Based on its age profile, approximately 29,000 ha will mature between FY16F and FY18F – representing c.16% of its own mature hectarage at the end of FY15. This should keep the average age of its trees at 14 years by end-FY18F. Geographically, the group’s North, Central and South Sumatra estates, as well as Kalimantan estates saw lagged adverse impact on FFB yields from dry weather in FY15. We expect FY16 FFB yields to decline by 17% y-o-y – reflecting the impact from El Nino and dilution from newly matured estates. However, coming off from a low base, own FFB output is forecast to expand at a 7% CAGR in FY16F-19F. No participation in Indonesia’s biodiesel policy. IndoAgri does not have a biodiesel production facility – hence, it is not a direct beneficiary of the government’s biodiesel programme. However, the group has 1.425m MT of refining capacity – which benefits from lower feedstock (CPO) cost as a result of the biodiesel export levies. Under the programme, Indonesian refiners have differentiated export levies between CPO (US$50/MT) and RBD Olein (US$30/MT). This spread should more than cover the refining cost. However, on a consolidated basis, the group would also suffer from lower domestic CPO selling prices. We estimate that the net impact from the proposed policy would be insignificant on IndoAgri – unlike other pure upstream planters. But persistent weakness in crude oil prices would continue to have a negative short-term impact on its sugar and rubber ASPs. Demand seasonality. As a major vegetable oil with 38% global market share, palm oil is an important food staple. The other major vegetable oils are soybean oil, with 29% market share, followed by rapeseed/canola oil and sunflower oil with 16% and 10% market shares respectively. There is generally demand substitutability between vegetable oils (high price elasticity of demand), although certain vegetable oils are more suitable than others for certain applications. Relative to other oil crops, palm oil has the highest productivity per hectare (i.e. c.5 MT/ha), while soybean oil’s productivity is typically 0.5 MT/ha. Demand for palm oil is dominant in Asia, where local festivities drive higher demand in certain months of the year. For example, the Ramadan month, Chinese New Year, and Divali are typically high-demand periods in Asia.

CPO price (RM/MT)



Cooking oil sales vol. (MT)

Avg. USD/IDR rate


2.41

2.17

2.65

3.04 3.03

0.0

0.4

0.9

1.3

1.8

2.2

2.6

3.1

2014A 2015A 2016F 2017F 2018F

185 187201

210 214

0.0

43.6

87.2

130.7

174.3

217.9

2014A 2015A 2016F 2017F 2018F

404384

337

377398

0.00

82.41

164.83

247.24

329.65

2014A 2015A 2016F 2017F 2018F

566593

638670

702

0.0

141.9

283.7

425.6

567.4

709.3

2014A 2015A 2016F 2017F 2018F

11.9

13.713.2 13.6 13.8

0.0

2.8

5.6

8.3

11.1

13.9

2014A 2015A 2016F 2017F 2018F

Page 51


Company Guide


Balance Sheet:

High capex. We expect IndoAgri to incur capex outlay of Rp1.9-2.0tr p.a. over the next three years – to maintain its vast immature estates and to expand its palm oil milling capacity – as maturity rates ramp up. Based on our forecast, total interest-bearing debt will reach Rp9,242bn by end-FY16F – of which 30% is USD-denominated. This translates into a net debt-to-total equity ratio of 42%. Blended borrowing cost is estimated at 7.6% and interest cover should be 4.0x in FY17F. At the end of September 2016, IndoAgri’s 4-quarter rolling cash conversion cycle stood at 39 days (vs. 23 days at end-December 2015) – representing higher receivable and inventory days.

Rising free cash flow. We expect IndoAgri to generate positive free cash flow of Rp195bn in FY16F. This would be followed by free cash flow of Rp1,003bn in FY17F – thanks to anticipated FFB yield recovery and rising output from maturing estates. Share Price Drivers:

Execution is key. Historically, IndoAgri's quarterly results have, more often than not, underperformed consensus forecasts since 2013 (based on Bloomberg data). The counter’s P/BV ratio has likewise been trading below 1.0x since 2013 – thus underperforming its own subsidiary, Lonsum. For this reason, we believe execution is key to its share price performance. Key Risks:

Volatility in CPO prices and USD exchange rates. Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from the expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect profitability of planters in general.

Setback in expansion plans. Our forecasts are based on assumed hectarage for new planting/replanting. Any setback would adversely affect our valuation on slower volume growth.

Regulatory changes. Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact demand for CPO/refined oils.

Market sentiment. Changes in fund flows in or out of emerging markets would affect valuations of planters.

Weather. Changes in rainfall patterns (caused by either El Nino or La Nina) would affect FFB yields with some lag time. Company Background

Indofood Agri Resources (IndoAgri) is an integrated agribusiness company. The company and its subsidiaries are involved in sugarcane and oil palm cultivation and milling, research and development, and seed breeding. IndoAgri also refines, brands and markets its cooking oil, margarine, shortening and other palm oil products. As at end-June 2016 its own oil palm planted area stood at 246,345 ha; while sugarcane estates stood at 13,555 ha.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.3

0.4

0.4

0.5

0.5

0.6

0.6

0.00

0.10

0.20

0.30

0.40

0.50

2014A 2015A 2016F 2017F 2018F


0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

2014A 2015A 2016F 2017F 2018F


Rpm

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2014A 2015A 2016F 2017F 2018F

Avg: 30.4x

+1sd: 58.8x

+2sd: 87.3x

‐1sd: 2x

-23.8

26.2

76.2

126.2

176.2


(x)

Avg: 0.71x

+1sd: 0.86x

+2sd: 1.01x

‐1sd: 0.56x

‐2sd: 0.41x

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2


(x)

Page 52


Company Guide


Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F CPO price (RM/MT) 2.41 2.17 2.65 3.04 3.03 Mature oil palm 185 187 201 210 214 CPO sales volume (MT) 404 384 337 377 398 Cooking oil sales vol. (MT) 566 593 638 670 702 Avg. USD/IDR rate 11.9 13.7 13.2 13.6 13.8 Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (Rpbn) Plantations 5,750 4,830 4,997 6,036 6,197 Edible Oil & Fats 9,213 9,006 10,157 11,420 11,942 Total 14,963 13,835 15,154 17,456 18,140 Income Statement (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 14,963 13,835 15,154 17,456 18,140 Cost of Goods Sold (10,595) (10,485) (12,177) (13,081) (13,762) Gross Profit 4,368 3,350 2,977 4,376 4,378 Other Opng (Exp)/Inc (1,711) (1,867) (1,512) (1,770) (1,723) Operating Profit 2,657 1,483 1,465 2,605 2,655 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc (121) (232) 74.3 106 115 Net Interest (Exp)/Inc (529) (553) (593) (627) (545) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 2,007 698 946 2,084 2,225 Tax (679) (399) (262) (554) (591) Minority Interest (569) (241) (294) (656) (700) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 759 57.9 391 874 933 Net Profit before Except. 759 57.9 391 874 933 Net Pft (ex. BA gains) 734 59.5 391 874 933 EBITDA 3,329 2,092 2,840 4,102 4,252 EBITDA (ex. BA gains) 3,390 2,344 2,367 3,598 3,739 Growth Revenue Gth (%) 12.7 (7.5) 9.5 15.2 3.9 EBITDA Gth (%) 37.4 (37.2) 35.8 44.4 3.7 Opg Profit Gth (%) 56.5 (44.2) (1.2) 77.8 1.9 Net Profit Gth (Pre-ex) (%) 45.0 (92.4) 574.7 123.8 6.8 Margins & Ratio Gross Margins (%) 29.2 24.2 19.6 25.1 24.1 Opg Profit Margin (%) 17.8 10.7 9.7 14.9 14.6 Net Profit Margin (%) 5.1 0.4 2.6 5.0 5.1 ROAE (%) 5.3 0.4 3.3 9.0 8.8 ROA (%) 1.9 0.1 1.1 2.6 2.6 ROCE (%) 4.8 1.7 3.0 6.1 6.0 Div Payout Ratio (%) 0.0 0.0 0.0 0.0 0.0 Net Interest Cover (x) 5.0 2.7 2.5 4.2 4.9


Page 53


Company Guide



FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 3,268 3,775 3,147 3,568 3,552 Cost of Goods Sold (2,572) (2,795) (2,613) (2,849) (2,725) Gross Profit 696 980 534 720 827 Other Oper. (Exp)/Inc (805) (279) (225) (489) (269) Operating Profit (109) 701 309 230 558 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (148) (135) (142) (146) (151) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit (257) 566 167 83.9 407 Tax 9.88 (225) (70.9) (61.3) (225) Minority Interest 34.3 (246) (0.9) 7.26 (22.6) Net Profit (213) 95.7 95.0 29.9 159 Net profit bef Except. (213) 95.7 95.0 29.9 159 EBITDA (85.2) 910 612 618 1,055 Growth Revenue Gth (%) (20.9) 15.5 (16.6) 13.4 (0.5) EBITDA Gth (%) nm nm (32.8) 1.0 70.8 Opg Profit Gth (%) nm nm (56.0) (25.4) 142.4 Net Profit Gth (Pre-ex) (%) (538.3) nm (0.7) (68.6) 433.0 Margins Gross Margins (%) 21.3 26.0 17.0 20.2 23.3 Opg Profit Margins (%) (3.3) 18.6 9.8 6.5 15.7 Net Profit Margins (%) (6.5) 2.5 3.0 0.8 4.5 Balance Sheet (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 11,027 11,496 12,278 12,991 13,652 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 22,316 23,848 16,476 16,452 16,483 Cash & ST Invts 3,586 1,969 1,044 1,304 1,704 Inventory 1,773 1,937 2,133 2,268 2,362 Debtors 1,056 1,099 1,169 1,333 1,371 Other Current Assets 397 370 426 472 488 Total Assets 40,155 40,720 33,526 34,819 36,060 ST Debt 4,749 4,399 4,564 4,636 4,614 Creditor 1,854 1,803 2,124 2,281 2,400 Other Current Liab 348 249 350 380 404 LT Debt 5,068 5,742 4,679 4,268 3,833 Other LT Liabilities 4,418 4,282 2,378 2,293 2,215 Shareholder’s Equity 14,629 14,390 9,281 10,156 11,089 Minority Interests 9,088 9,856 10,150 10,806 11,507 Total Cap. & Liab. 40,155 40,720 33,526 34,819 36,060 Non-Cash Wkg. Capital 1,024 1,354 1,254 1,412 1,418 Net Cash/(Debt) (6,232) (8,172) (8,199) (7,600) (6,742) Debtors Turn (avg days) 26.8 28.4 27.3 26.2 27.2 Creditors Turn (avg days) 66.5 69.2 65.9 68.8 69.6 Inventory Turn (avg days) 62.2 70.2 68.3 68.7 68.8 Asset Turnover (x) 0.4 0.3 0.4 0.5 0.5 Current Ratio (x) 1.0 0.8 0.7 0.7 0.8 Quick Ratio (x) 0.7 0.5 0.3 0.4 0.4 Net Debt/Equity (X) 0.3 0.3 0.4 0.4 0.3 Net Debt/Equity ex MI (X) 0.4 0.6 0.9 0.7 0.6 Capex to Debt (%) 26.2 30.6 21.3 21.3 23.5 Z-Score (X) 1.2 1.1 1.3 1.4 1.5


Page 54


Company Guide



FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 2,007 698 946 2,084 2,225 Dep. & Amort. 792 841 1,300 1,391 1,482 Tax Paid (679) (399) (262) (554) (591) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 96.5 (330) 100 (158) (6.0) Other Operating CF (143) (95.5) 72.3 (18.4) (18.5) Net Operating CF 2,014 734 2,157 2,744 3,091 Capital Exp.(net) (2,576) (3,100) (1,966) (1,899) (1,983) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (669) 329 (112) (144) (154) Net Investing CF (3,245) (2,771) (2,078) (2,043) (2,137) Div Paid 0.0 0.0 0.0 0.0 0.0 Chg in Gross Debt 1,023 323 (898) (339) (457) Capital Issues 0.0 (152) 0.0 0.0 0.0 Other Financing CF (9.6) 248 (107) (102) (96.6) Net Financing CF 1,013 420 (1,005) (441) (553) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (217) (1,617) (925) 260 401 Opg CFPS (S cts) 14.3 7.95 15.4 21.7 23.2 Free CFPS (S cts) (4.2) (17.7) 1.43 6.32 8.28



Source: DBS Bank


S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 22 Feb 16 0.46 0.54 BUY

2: 29 Feb 16 0.44 0.54 BUY

3: 10 Mar 16 0.49 0.52 BUY

4: 11 Apr 16 0.56 0.52 BUY

5: 03 May 16 0.53 0.54 HOLD

6: 10 May 16 0.48 0.54 HOLD

7: 12 Jul 16 0.48 0.50 HOLD

8: 12 Aug 16 0.47 0.48 HOLD

9: 28 Oct 16 0.49 0.58 BUY

10: 10 Nov 16 0.48 0.58 BUY

11: 14 Dec 16 0.56 0.58 BUY12: 10 Jan 17 0.55 0.58 BUY13: 10 Feb 17 0.54 0.58 BUY


12

3

4

56

7

89

10

11

12

13

0.41

0.46

0.51

0.56

0.61

0.66


S$

Page 55


HOLD Last Traded Price ( 14 Feb 2017): RM4.70 (KLCI : 1,708.90) Price Target 12-mth: RM4.70 (0%) (Prev RM4.30) Where we differ: Lower profit forecasts on higher FX losses Analyst Regional Research Team Ben SANTOSO +65 6682 3707 [email protected]

Price Relative

Forecasts and Valuation FY Jun (RM m) 2016A 2017F 2018F 2019F Revenue 11,739 13,599 14,637 14,805 EBITDA 1,589 1,934 2,206 2,367 Pre-tax Profit 966 1,150 1,408 1,538 Net Profit 630 800 1,040 1,168 Net Pft (Pre Ex.) 630 800 1,040 1,168 Net Pft Gth (Pre-ex) (%) 1,113.3 27.0 30.1 12.3 EPS (sen) 10.0 12.8 16.6 18.7 EPS Pre Ex. (sen) 10.0 12.8 16.6 18.7 EPS Gth Pre Ex (%) 1,127 28 30 12 Diluted EPS (sen) 9.90 12.6 16.4 18.4 Net DPS (sen) 7.97 6.35 8.26 9.27 BV Per Share (sen) 113 118 127 137 PE (X) 46.9 36.8 28.3 25.2 PE Pre Ex. (X) 46.9 36.8 28.3 25.2 P/Cash Flow (X) 18.1 43.7 23.6 18.5 EV/EBITDA (X) 22.2 18.3 15.8 14.5 Net Div Yield (%) 1.7 1.4 1.8 2.0 P/Book Value (X) 4.1 4.0 3.7 3.4 Net Debt/Equity (X) 0.7 0.7 0.6 0.5 ROAE (%) 8.9 11.0 13.5 14.0 Earnings Rev (%): 8 20 17 Consensus EPS (sen): 17.6 19.6 20.6 Other Broker Recs: B: 4 S: 11 H: 11


On steadier ground Core outlook improving. We think IOI’s medium-term prospects are improving alongside higher price levels of CPO and its derivatives; while the resumption of Malaysian export taxes can help improve refining margins. That said, we think nearer-term headline earnings will likely to continue being hamstrung by adverse translation effects due to its high USD-denominated debt. Maintain HOLD. Moving past sustainability issues. Risks relating to sustainability concerns have eased with the lifting of suspension on its RSPO certificates, and joint-statement on closure of the ‘Ketapang Complaint’ with NGO Aidenvironment. While this resulted in some restrictions of the affected areas in Indonesia, we think the risk in terms of overall group sales volume have eased. More upside from buoyant prices. We have revised our CPO price forecasts to RM3,040/RM3,030 per MT for CY17/18F from RM2,610/RM2,720 before. Our average CY17/18F USDMYR forecasts are also adjusted to 4.62/4.71 from 4.22/4.37 before. Netting the effects, our FY17/18/19F profit forecasts are revised upwards by 8%/20%/17%.

Valuation:

Our DCF-based TP is RM4.70, which takes into account revised CY17/18 CPO price forecasts of RM3,040/RM3,030 per MT. Key Risks to Our View:

A strong recovery in CPO prices (either data, weather or regulatory-driven) would boost the share price higher than our fair value. As IOI is a FBMKLCI component, any changes in its weightings would also make it vulnerable to price swings, resulting in its share price coming in significantly above or below our target price. At A Glance Issued Capital (m shrs) 6,288 Mkt. Cap (RMm/US$m) 29,553 / 6,641 Major Shareholders (%) Vertical Capacity Sdn Bhd 47.1 Employees Provident Fund 6.8




IOI Corporation Version 7 | Bloomberg: IOI MK | Reuters: IOIB.KL Refer to important disclosures at the end of this report

81

101

121

141

161

181

201

221

2.9

3.4

3.9

4.4

4.9

5.4


Relative IndexRM

IOI Corporation (LHS) Relative KLCI (RHS)



IOI Corporation


Earnings Drivers:

CPO price. IOI is a vertically integrated producer, processor and merchandiser of palm oil products. More than half of its EBIT comes from sales of CPO and PK, while a third comes from downstream products. Movements in CPO prices will affect the group’s plantations segment profits more so than its manufacturing segment. With rising contribution from its 31% associate Bumitama Agri (BAL), IOI’s earnings are therefore increasingly influenced by CPO price movements. Volume output. We estimate IOI’s trees to have a weighted age of 13 years as at end-FY17. This categorises the group’s age profile as prime. To manage its tree age composition, the group plans to replant up to 6-9k ha p.a. going forward. As a result, we expect FFB volume growth to remain flat over the coming years, as rising contribution from its younger Indonesia hectarage would be offset by the slowing output from its larger area in Malaysia. Manufacturing segment margins. Indonesia’s B15 export tax levy would result in lower CPO ASP relative to its Malaysian counterparts. This means rising contribution from its Indonesian estates would offer less compensation to lower output from replanting in Malaysia. The levy also works to give Indonesian refiners higher margins, due to the differentiated levies between CPO and its downstream products. Malaysian CPO export taxes also play a similar role in supporting margins, and it scales alongside the calculated average CPO spot price which is adjusted monthly. Higher export taxes would help Malaysian refiners such as IOI in terms of feedstock costs. Prospective increase in biodiesel production in Indonesia may also cause oversupply in glycerine (by-product of biodiesel output) and thinner margins in IOI’s oleochemical unit. For this reason, IOI’s earnings should be driven by specialty fats units, higher contribution from BAL, as well as cost containment. Exposure to developed markets. IOI’s consolidated revenue is globally distributed, with external sales in Malaysia contributing only 20% in FY16. Europe accounted for a sizeable 35%, while North America contributed 17% of revenue and the rest of Asia accounted for 24%. While the largest palm oil consumers are in Asia, IOI’s downstream products are less associated with Asia’s demand seasonality compared to other planters. This means economic recoveries in the developed markets should also improve IOI’s earnings outlook. Hence, sustainability is important for IOI.

CPO price (RM/MT)



Oleochem revenue (RMm)

Average MYR/USD

Source: Company, DBS >]jg

22912410

28463035 3000

0.0

437.9

875.8

1313.7

1751.6

2189.5

2627.4

3065.4

2015A 2016A 2017F 2018F 2019F

149749 148166 150616 154549160470

0.0

32735.8

65471.7

98207.5

130943.3

163679.1

2015A 2016A 2017F 2018F 2019F

781625

697334741294 743801 765248

0.00

159451.50

318903.00

478354.50

637806.00

797257.50

2015A 2016A 2017F 2018F 2019F

2679

2434 2403 2465 2466

0.0

541.1

1082.2

1623.2

2164.3

2705.4

2015A 2016A 2017F 2018F 2019F

3.62

4.134.29

4.72 4.69

0.0

1.0

1.9

2.9

3.8

4.8

2015A 2016A 2017F 2018F 2019F

Page 57



IOI Corporation

Balance Sheet:

High USD debt exposure. As at end-Sep 2016, the group had exposure of US$1.5bn in USD-denominated debts, which poses risks via adverse forex translation movements. With the restatements following the adoption of MFRS, the group’s net gearing was lowered to 0.7x from 1.0x before. We expect the group to slowly reduce this gearing level, assuming no major capex outlays in the coming financial years. Share Price Drivers:

Improvement of core profitability. The improvement in pricing of CPO and its derivatives are expected to benefit IOI in addition to the upliftment of sustainability-related risks on its sales. However, a remaining risk point is the impact of adverse FX translations, given the historically large impact it had on headline earnings. Key Risks:

Volatility in CPO prices and USD exchange rates. Continued strength in CPO prices may lead to better-than-expected earnings, while lower energy prices from expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect the profitability of planters in general. Setback to expansion plans. Our forecasts are based on assumed hectarage for new planting and replanting. Any setback to these plans would negatively affect our valuation due to slower volume growth. Regulatory changes. Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact the demand for CPO/refined oils. Weather. Changes in rainfall pattern (caused by either El Nino or La Nina) would affect FFB yields with some time lag. Company Background

IOI Corporation (IOI) is an integrated plantation company, with one of the highest yields in Malaysia and one of the largest oleochemical manufacturing capacities in the world.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.6

0.6

0.6

0.7

0.7

0.7

0.7

0.7

0.8

0.8

0.8

0.00

0.20

0.40

0.60

0.80

1.00

2015A 2016A 2017F 2018F 2019F


0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

1,000.0

2015A 2016A 2017F 2018F 2019F


RMm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2015A 2016A 2017F 2018F 2019F

Avg: 66.1x

+1sd: 150.7x

+2sd: 235.3x

‐1sd: ‐18.6x

-92.8

7.2

107.2

207.2

307.2

407.2

507.2

607.2


(x)

Avg: 3.34x

+1sd: 4.2x

+2sd: 5.07x

‐1sd: 2.48x

‐2sd: 1.61x1.3

1.8

2.3

2.8

3.3

3.8

4.3

4.8

5.3


(x)

Page 58



IOI Corporation

Key Assumptions

FY Jun 2015A 2016A 2017F 2018F 2019F CPO price (RM/MT) 2,291 2,410 2,846 3,035 3,000 Mature palm oil hectarage 149,749 148,166 150,616 154,549 160,470 CPO sales volume (MT) 781,625 697,334 741,294 743,801 765,248 Oleochem revenue (RMm) 2,679 2,434 2,403 2,465 2,466 Average MYR/USD 3.62 4.13 4.29 4.72 4.69

Segmental Breakdown

FY Jun 2015A 2016A 2017F 2018F 2019F Revenues (RMm) Plantation 186 167 37.6 108 175 Resource-based 11,338 11,551 13,540 14,508 14,608 Others 17.9 20.9 21.3 21.7 22.2 Total 11,542 11,739 13,599 14,637 14,805 EBIT (RMm)

Plantation 789 764 959 1,012 1,013 Resource-based 508 469 484 458 459 Others (890) (197) (144) 43.0 165 Total 406 1,037 1,299 1,512 1,638 EBIT Margins (%) Plantation 39.0 39.3 43.2 42.8 42.0 Resource-based 4.5 4.1 3.6 3.2 3.1 Total 3.5 8.8 9.5 10.3 11.1


FY Jun 2015A 2016A 2017F 2018F 2019F Revenue 11,542 11,739 13,599 14,637 14,805 Cost of Goods Sold (10,166) (9,665) (11,679) (12,456) (12,490) Gross Profit 1,375 2,074 1,920 2,182 2,315 Other Opng (Exp)/Inc (969) (1,037) (622) (669) (677) Operating Profit 406 1,037 1,299 1,512 1,638 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 98.8 94.5 123 147 149 Net Interest (Exp)/Inc (189) (165) (271) (250) (249) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 316 966 1,150 1,408 1,538 Tax (262) (320) (340) (357) (359) Minority Interest (2.9) (16.6) (10.8) (11.3) (11.4) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 51.9 630 800 1,040 1,168 Net Profit before Except. 51.9 630 800 1,040 1,168 EBITDA 945 1,589 1,934 2,206 2,367 Growth Revenue Gth (%) (3.1) 1.7 15.8 7.6 1.1 EBITDA Gth (%) (62.2) 68.2 21.7 14.0 7.3 Opg Profit Gth (%) (80.8) 155.1 25.3 16.5 8.3 Net Profit Gth (Pre-ex) (%) (96.5) 1,113.3 27.0 30.1 12.3 Margins & Ratio Gross Margins (%) 11.9 17.7 14.1 14.9 15.6 Opg Profit Margin (%) 3.5 8.8 9.5 10.3 11.1 Net Profit Margin (%) 0.4 5.4 5.9 7.1 7.9 ROAE (%) 0.7 8.9 11.0 13.5 14.0 ROA (%) 0.3 3.7 4.4 5.5 5.9 ROCE (%) 0.4 4.4 5.5 6.4 6.8 Div Payout Ratio (%) 1,098.1 79.7 50.0 50.0 50.0 Net Interest Cover (x) 2.2 6.3 4.8 6.0 6.6


Page 59



IOI Corporation


FY Jun 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 Revenue 3,087 2,969 2,866 2,818 3,291 Operating Profit 375 443 266 150 446 Associates & JV Inc 35.7 23.4 25.4 21.7 16.2 Net Interest (Exp)/Inc (44.8) (41.5) (40.0) (39.0) (44.3) Exceptional Gain/(Loss) (1,057) 488 618 (247) (229) Pre-tax Profit (691) 913 869 (24.5) 189 Tax (51.2) (151) (118) (35.1) (87.6) Minority Interest (2.6) (12.0) (2.6) 0.60 (7.2) Net Profit (744) 750 748 (59.0) 94.4 Net profit bef Except. 312 262 131 188 323 EBITDA 507 505 354 261 462 Growth Revenue Gth (%) 5.3 (3.8) (3.5) (1.7) 16.8 EBITDA Gth (%) 74.4 (0.4) (29.9) (26.1) 76.8 Opg Profit Gth (%) 42.0 18.2 (40.0) (43.8) 197.8 Net Profit Gth (Pre-ex) (%) 64.8 (16.0) (50.2) 43.8 71.9 Margins Opg Profit Margins (%) 12.2 14.9 9.3 5.3 13.5 Net Profit Margins (%) (24.1) 25.3 26.1 (2.1) 2.9

Balance Sheet (RMm)

FY Jun 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 9,766 9,985 9,850 9,706 9,540 Invts in Associates & JVs 848 969 1,094 1,242 1,393 Other LT Assets 664 736 736 737 737 Cash & ST Invts 1,789 1,938 2,429 3,039 3,640 Inventory 2,083 2,284 2,639 2,814 2,822 Debtors 1,106 1,191 1,301 1,400 1,416 Other Current Assets 194 452 456 461 465 Total Assets 16,449 17,556 18,505 19,399 20,014 ST Debt 813 2,478 2,478 2,478 2,478 Creditor 925 1,130 1,071 1,143 1,146 Other Current Liab 128 217 217 217 217 LT Debt 5,836 4,903 5,576 5,771 5,722 Other LT Liabilities 1,404 1,412 1,440 1,469 1,498 Shareholder’s Equity 7,069 7,138 7,433 8,021 8,641 Minority Interests 274 279 290 301 312 Total Cap. & Liab. 16,449 17,556 18,505 19,399 20,014 Non-Cash Wkg. Capital 2,330 2,582 3,108 3,316 3,341 Net Cash/(Debt) (4,860) (5,443) (5,625) (5,211) (4,561) Debtors Turn (avg days) 34.9 35.7 33.4 33.7 34.7 Creditors Turn (avg days) 35.0 40.7 36.0 33.9 35.1 Inventory Turn (avg days) 79.5 86.6 80.5 83.6 86.4 Asset Turnover (x) 0.7 0.7 0.8 0.8 0.8 Current Ratio (x) 2.8 1.5 1.8 2.0 2.2 Quick Ratio (x) 1.6 0.8 1.0 1.2 1.3 Net Debt/Equity (X) 0.7 0.7 0.7 0.6 0.5 Net Debt/Equity ex MI (X) 0.7 0.8 0.8 0.6 0.5 Capex to Debt (%) 8.2 11.8 5.1 4.9 5.1 Z-Score (X) 3.4 3.2 3.3 3.3 3.4


Page 60



IOI Corporation


FY Jun 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 316 966 1,150 1,408 1,538 Dep. & Amort. 440 458 512 547 580 Tax Paid (262) (320) (340) (357) (359) Assoc. & JV Inc/(loss) (98.8) (94.5) (123) (147) (149) Chg in Wkg.Cap. 50.9 (81.3) (522) (204) (20.7) Other Operating CF 1,000 704 (4.4) (4.4) (4.5) Net Operating CF 1,447 1,632 673 1,244 1,585 Capital Exp.(net) (546) (871) (408) (403) (414) Other Invts.(net) 1.30 0.10 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 152 67.7 (2.0) (2.1) (2.2) Net Investing CF (393) (803) (410) (406) (416) Div Paid (1,049) (504) (457) (453) (548) Chg in Gross Debt (875) 733 673 196 (48.9) Capital Issues (106) (85.7) (16.5) 0.0 0.0 Other Financing CF (1,226) (822) 28.2 28.8 29.4 Net Financing CF (3,256) (679) 227 (228) (568) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (2,202) 150 491 610 601 Opg CFPS (sen) 22.0 27.3 19.1 23.1 25.7 Free CFPS (sen) 14.2 12.1 4.24 13.4 18.7



Source: DBS >]jg

Analyst: Nacekj]hĂNaoa]n_dĂPa]i

Ben SANTOSO

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 22 Feb 16 4.71 3.40 FULLY VALUED

2: 10 Mar 16 4.82 3.70 FULLY VALUED

3: 11 Apr 16 4.51 3.70 FULLY VALUED

4: 10 May 16 4.18 3.70 FULLY VALUED





9: 12 Jul 16 4.36 3.60 FULLY VALUED

10: 03 Aug 16 4.24 3.60 FULLY VALUED

11: 24 Aug 16 4.42 3.60 FULLY VALUED12: 10 Nov 16 4.39 4.30 HOLD13: 21 Nov 16 4.36 4.30 HOLD14: 14 Dec 16 4.40 4.30 HOLD

Note : Share price and Target price are adjusted for corporate actions. 15: 10 Jan 17 4.50 4.30 HOLD16: 10 Feb 17 4.64 4.30 HOLD

1

2

3

4

56 7

8

910 11

12

13

1415

16

3.91

4.11

4.31

4.51

4.71

4.91

5.11


RM

Page 61

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: BC, PY

HOLD Last Traded Price (14 Feb 2017): RM25.10 (KLCI : 1,708.90) Price Target 12-mth: RM22.75 (-9% downside) (Prev RM22.50) Where we differ: Higher FY17F and FY18F earnings on higher CPO and PK price forecasts Analyst Ben SANTOSO +65 6682 3707 [email protected]

Price Relative

Forecasts and Valuation FY Sep (RM m) 2016A 2017F 2018F 2019F Revenue 16,506 22,314 24,868 25,100 EBITDA 1,829 2,285 2,511 2,538 Pre-tax Profit 1,712 1,736 1,929 1,943 Net Profit 1,592 1,297 1,437 1,442 Net Pft (Pre Ex.) 1,106 1,297 1,437 1,442 Net Pft Gth (Pre-ex) (%) 27.2 17.2 10.8 0.4 EPS (sen) 149 121 135 135 EPS Pre Ex. (sen) 104 121 135 135 EPS Gth Pre Ex (%) 27 17 11 0 Diluted EPS (sen) 149 121 135 135 Net DPS (sen) 50.0 60.7 67.3 67.6 BV Per Share (sen) 978 1,046 1,118 1,186 PE (X) 16.8 20.7 18.6 18.6 PE Pre Ex. (X) 24.2 20.7 18.6 18.6 P/Cash Flow (X) 20.7 58.3 17.5 13.8 EV/EBITDA (X) 16.5 13.6 12.3 11.9 Net Div Yield (%) 2.0 2.4 2.7 2.7 P/Book Value (X) 2.6 2.4 2.2 2.1 Net Debt/Equity (X) 0.2 0.3 0.2 0.2 ROAE (%) 15.8 12.0 12.4 11.7 Earnings Rev (%): 7 14 9 Consensus EPS (sen): 110 120 127 Other Broker Recs: B: 8 S: 3 H: 13


A steady dividend play Mild growth prospects. We expect significant improvement in Kuala Lumpur Kepong’s (KLK) FY17 core earnings growth prospects; as we take into account crude palm oil (CPO) and palm kernel (PK) price upgrades. Yet, we expect KLK’s CPO output to expand 2% CAGR between FY16 and FY19F, tamer than its higher-growth peers. Following capacity expansions and acquisitions in 2015, the group’s Manufacturing segment is likewise expected to maintain its FY16 operating margins.

FY17F/18F earnings raised by +7%/+14%. We adjusted FY17F/18F PK ASP by +59%/+71% and CPO ASP by +1%/+4% – as we do not expect any significant near-term downside. Compared to our previous forecasts, KLK’s Plantation segment FY17F/18F operating profits were thus raised 17%/20%. The improved free cashflow helped to raise our DCF valuation on the group’s Plantations segment – although we believe the market has more than priced this in.

Established, but lacking growth drivers. KLK is one of the signatories of the Sustainable Palm Oil Manifesto (launched in CY14) – which aims to tackle deforestation by establishing the High Carbon Stock (HCS) threshold established on 11 December 2015. Yet, due to the lack of clarity on the moratorium of oil palm concession, we assumed no expansion in Indonesia. We assume replanting of 3,300-3.900ha in Malaysia.

Valuation:

Our DCF-based TP for the counter is RM22.75 (WACC 8.5%; TG 3%). We maintain our HOLD rating for the counter in view of its 2.4% dividend yield.


CPO price could move higher than forecast if there is significant yield deterioration in South American 1QCY17 soybean crop in the event of strong La Nina. Changes in fund flows towards or out of emerging markets/commodities would also affect the valuations of plantation counters. As KLK is a KLCI Index component, changes in its weightings would also make it vulnerable to significant price swings, resulting in its share price coming in significantly above or below our TP.

At A Glance Issued Capital (m shrs) 1,065 Mkt. Cap (RMm/US$m) 26,731 / 6,008 Major Shareholders (%) Batu Kawan Bhd 46.6 Employees Provident Fund 14.0




KL Kepong Version 8 | Bloomberg: KLK MK | Reuters: KLKK.KL Refer to important disclosures at the end of this report

76

96

116

136

156

176

196

216

17.9

19.9

21.9

23.9

25.9

27.9


Relative IndexRM

KL Kepong (LHS) Relative KLCI (RHS)


Company Guide

KL Kepong


Earnings Drivers:

CPO price. KLK is a vertically integrated producer, processor and merchandiser of palm oil products. More than two-thirds of its EBIT comes from sales of CPO, PK and CPO trading, while around 20% comes from downstream products. Given its plantations segment’s dominant contribution, movements in CPO prices would generally affect the group’s profits more so than other integrated players. Volume output. KLK’s oil palm tree age profile is considered prime. Through consistent replanting in Malaysia and past expansions in Indonesia, KLK should see c.25,600ha maturing in CY17F through CY19F – representing c.14% of the group’s mature hectarage as at end-September 2016. This should maintain KLK’s weighted age at 13 years by end-FY17F. Yet, FFB volume growth is likely to remain flat over the next three years, as rising contribution from maturing estates would be offset by lost output from replanted areas. Our assumptions are primarily for replanting in Malaysia (assumed at over 3k ha p.a.), but no new planting in Indonesia given the indications of a moratorium. Downstream margins. A significant share of KLK’s manufacturing segment’s products deal with industrialised oleochemicals, which compete with the now cheaper petrochemicals, given the drop in crude oil prices. This, together with slower Chinese economic growth and prospective oversupply in glycerine (due to Indonesia’s B20 programme), may lead to thin margins in KLK’s oleochemicals unit. At the same time, Indonesia’s export tax levy would result in lower CPO ASP relative to Malaysian counterparts. This means less contribution from the group’s Indonesian estates. The levy also works to give Indonesian refiners higher margins, due to the differentiated levies between CPO and its downstream products. Geographic diversity. KLK’s consolidated revenue is globally distributed, with Malaysia contributing only 14% in FY16. Europe accounted for 23%, while the rest of Asia contributed a sizeable 57% of revenue. This means demand for KLK’s products is driven predominantly by economic growth in the Asian markets, while economic recovery in developed markets such as the US would have a small impact, in our view. We should also note that competing processors such as Wilmar, IOI and Emery are also vying for the same Asian markets – which we believe would make competition more challenging, given aggressive capacity expansions in various sectors of oleochemicals.

CPO price


CPO sales volume

PKO sales volume

Average MYR/USD


21062270

25132656 2599

0.0

383.2

766.4

1149.6

1532.8

1916.0

2299.2

2682.4

2015A 2016A 2017F 2018F 2019F

173313 179016 178540189718 193728

0.0

39520.4

79040.8

118561.3

158081.7

197602.1

2015A 2016A 2017F 2018F 2019F

788662 800397 801516831399 855384

0.00

174498.35

348996.70

523495.05

697993.41

872491.76

2015A 2016A 2017F 2018F 2019F

107453 108859 108820112683 115736

0.0

23378.7

46757.4

70136.1

93514.8

116893.6

2015A 2016A 2017F 2018F 2019F

3.884.1

4.494.69 4.69

0.0

0.9

1.9

2.8

3.8

4.7

2015A 2016A 2017F 2018F 2019F

Page 63

ASIAN INSIGHTS VICKERS SECURITIES

Company Guide

KL Kepong

Balance Sheet:

Relatively low gearing. At the end of September 2016, KLK’s net debt-to-total equity settled at 23% – easing slightly from 30% at end-June 2016 (primarily from rising cash balance). Its cash-conversion cycle shortened to 51 days (from 54 days at end June 2016) on faster receivable days. Strong free-cash-flow generation. While not as sizeable as its global peers, KLK is forecast to generate steady free cash flow of between RM444m and RM1,176m in FY17F and FY18F, respectively; with capex outlay forecast to be maintained between RM676m and RM731m p.a.), as we expect CPO/PK prices to recover over the same period. The group has historically maintained a positive WACC-ROE spread and is expected to maintain a 4-5% spread over the next three years. Share Price Drivers:

Demanding valuation. At 21x forward PE, the counter is trading at close to +2SD of its mean PE (calculated from 2007), which we believe is expensive relative to historical data and peers. Key Risks:

Volatility in CPO prices and USD exchange rates. Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect the profitability of planters in general. Setback in expansion plans. Our forecasts are based on assumed hectarage for new planting and replanting. Any setback on these plans would negatively affect our valuation due to slower volume growth. Regulatory changes. Any further increase in Indian import duty of palm oil or changes in the structure of Indonesian/Malaysian export taxes would impact the demand for CPO/refined oils. Market sentiment. Changes in fund flows towards or out of emerging markets would affect the valuations of plantation counters. Weather Changes in rainfall pattern (caused by either El Nino or La Nina) would affect FFB yields with some time lag. Company Background

KL Kepong (KLK)'s core business is in plantations, with over 270,000ha of palm oil and rubber plantations in Malaysia, Indonesia, and Liberia. Its other businesses are manufacturing (mainly oleochemicals) and property development.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.9

1.0

1.0

1.1

1.1

1.2

1.2

1.3

1.3

0.00

0.10

0.20

0.30

0.40

0.50

2015A 2016A 2017F 2018F 2019F


0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

1,000.0

2015A 2016A 2017F 2018F 2019F


RMm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2015A 2016A 2017F 2018F 2019F

Avg: 23.5x

+1sd: 26.5x

+2sd: 29.4x

‐1sd: 20.6x

‐2sd: 17.6x

15.8

17.8

19.8

21.8

23.8

25.8

27.8

29.8

31.8


(x)

Avg: 2.83x

+1sd: 3.2x

+2sd: 3.56x

‐1sd: 2.46x

‐2sd: 2.1x

1.8

2.3

2.8

3.3

3.8


(x)

Page 64


Company Guide

KL Kepong

Key Assumptions

FY Sep 2015A 2016A 2017F 2018F 2019F CPO price 2,106 2,270 2,513 2,656 2,599 Mature palm oil hectarage 173,313 179,016 178,540 189,718 193,728 CPO sales volume 788,662 800,397 801,516 831,399 855,384 PKO sales volume 107,453 108,859 108,820 112,683 115,736 Average MYR/USD 3.88 4.10 4.49 4.69 4.69 Segmental Breakdown

FY Sep 2015A 2016A 2017F 2018F 2019F Revenues (RMm) Plantation 7,086 8,455 9,729 10,693 10,780 Manufacturing 6,241 7,739 12,391 14,014 14,145 Property 123 111 116 122 128 Others 199 201 77.0 39.0 46.2 Total 13,650 16,506 22,314 24,868 25,100 EBIT (RMm)

Plantation 780 827 1,354 1,454 1,446 Manufacturing 219 371 372 433 450 Property 49.5 25.2 32.2 33.8 35.5 Others 193 156 158 159 161 Total 1,241 1,379 1,916 2,080 2,092 EBIT Margins (%)

Plantation 11.0 9.8 13.9 13.6 13.4 Manufacturing 3.5 4.8 3.0 3.1 3.2 Property 40.1 22.8 27.7 27.7 27.7 Others 96.8 77.7 204.9 409.2 348.5 Total 9.1 8.4 8.6 8.4 8.3 Income Statement (RMm)

FY Sep 2015A 2016A 2017F 2018F 2019F Revenue 13,650 16,506 22,314 24,868 25,100 Cost of Goods Sold (11,684) (14,397) (19,127) (21,329) (21,554) Gross Profit 1,966 2,109 3,186 3,539 3,546 Other Opng (Exp)/Inc (768) (786) (1,348) (1,498) (1,500) Operating Profit 1,198 1,323 1,839 2,041 2,046 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc (2.4) 5.00 5.10 5.20 5.31 Net Interest (Exp)/Inc (61.2) (101) (108) (117) (109) Exceptional Gain/(Loss) 0.0 486 0.0 0.0 0.0 Pre-tax Profit 1,135 1,712 1,736 1,929 1,943 Tax (251) (29.1) (387) (435) (442) Minority Interest (14.1) (91.0) (52.1) (57.9) (58.3) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 870 1,592 1,297 1,437 1,442 Net Profit before Except. 870 1,106 1,297 1,437 1,442 EBITDA 1,638 1,829 2,285 2,511 2,538 Growth Revenue Gth (%) 22.6 20.9 35.2 11.4 0.9 EBITDA Gth (%) (3.1) 11.6 25.0 9.9 1.1 Opg Profit Gth (%) (11.7) 10.4 39.0 11.0 0.2 Net Profit Gth (Pre-ex) (%) (11.8) 27.2 17.2 10.8 0.4 Margins & Ratio Gross Margins (%) 14.4 12.8 14.3 14.2 14.1 Opg Profit Margin (%) 8.8 8.0 8.2 8.2 8.2 Net Profit Margin (%) 6.4 9.6 5.8 5.8 5.7 ROAE (%) 10.0 15.8 12.0 12.4 11.7 ROA (%) 5.8 8.9 6.9 7.3 7.0 ROCE (%) 6.9 8.1 8.4 8.9 8.5 Div Payout Ratio (%) 55.2 33.5 50.0 50.0 50.0 Net Interest Cover (x) 19.6 13.1 17.1 17.4 18.8


Page 65


Company Guide

KL Kepong


FY Sep 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 Revenue 4,338 3,703 3,922 4,543 5,496 Cost of Goods Sold (3,891) (3,437) (3,585) (4,270) (4,996) Gross Profit 447 266 337 273 501 Other Oper. (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Operating Profit 447 266 337 273 501 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.78 1.45 3.74 (1.0) 0.0 Net Interest (Exp)/Inc (22.1) (24.6) (26.8) (27.9) (28.2) Exceptional Gain/(Loss) 486 0.0 0.0 0.0 0.0 Pre-tax Profit 911 243 314 244 472 Tax (80.8) (55.5) (50.6) 158 (96.3) Minority Interest (35.1) (18.8) (10.3) (26.8) (15.4) Net Profit 795 169 253 375 361 Net profit bef Except. 310 169 253 375 361 EBITDA 448 267 341 272 501 Growth Revenue Gth (%) 10.3 (14.6) 5.9 15.8 21.0 EBITDA Gth (%) 77.7 (40.2) 27.6 (20.3) 84.2 Opg Profit Gth (%) 74.2 (40.5) 26.8 (19.2) 83.5 Net Profit Gth (Pre-ex) (%) 66.1 (45.5) 50.4 48.0 (3.8) Margins Gross Margins (%) 10.3 7.2 8.6 6.0 9.1 Opg Profit Margins (%) 10.3 7.2 8.6 6.0 9.1 Net Profit Margins (%) 18.3 4.6 6.5 8.3 6.6 Balance Sheet (RMm)

FY Sep 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 7,210 7,615 7,907 8,120 8,286 Invts in Associates & JVs 299 312 317 322 328 Other LT Assets 2,958 4,041 3,953 3,866 3,782 Cash & ST Invts 2,083 2,000 1,199 1,421 2,039 Inventory 1,614 1,898 2,333 2,601 2,629 Debtors 2,651 2,166 3,256 3,629 3,662 Other Current Assets 444 305 305 305 305 Total Assets 17,260 18,337 19,269 20,264 21,030 ST Debt 1,913 1,572 1,533 1,495 1,457 Creditor 1,418 1,342 1,833 2,044 2,066 Other Current Liab 392 297 0.0 0.0 0.0 LT Debt 2,681 2,968 2,968 2,968 2,968 Other LT Liabilities 728 870 870 870 870 Shareholder’s Equity 9,666 10,445 11,170 11,934 12,658 Minority Interests 462 843 896 953 1,012 Total Cap. & Liab. 17,260 18,337 19,269 20,264 21,030 Non-Cash Wkg. Capital 2,899 2,729 4,060 4,490 4,530 Net Cash/(Debt) (2,511) (2,540) (3,302) (3,041) (2,386) Debtors Turn (avg days) 56.7 53.3 44.3 50.5 53.0 Creditors Turn (avg days) 39.2 36.3 31.0 33.9 35.6 Inventory Turn (avg days) 49.6 46.1 41.3 43.2 45.3 Asset Turnover (x) 0.9 0.9 1.2 1.3 1.2 Current Ratio (x) 1.8 2.0 2.1 2.2 2.5 Quick Ratio (x) 1.3 1.3 1.3 1.4 1.6 Net Debt/Equity (X) 0.2 0.2 0.3 0.2 0.2 Net Debt/Equity ex MI (X) 0.3 0.2 0.3 0.3 0.2 Capex to Debt (%) 19.3 18.6 16.3 15.1 14.7 Z-Score (X) 4.1 4.3 4.5 4.6 4.6


Page 66


Company Guide

KL Kepong


FY Sep 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 1,135 1,712 1,736 1,929 1,943 Dep. & Amort. 440 506 447 470 492 Tax Paid (251) (29.1) (387) (435) (442) Assoc. & JV Inc/(loss) 2.37 (5.0) (5.1) (5.2) (5.3) Chg in Wkg.Cap. (813) 126 (1,034) (430) (39.7) Other Operating CF (46.7) (1,013) (297) 0.0 0.0 Net Operating CF 466 1,297 460 1,529 1,948 Capital Exp.(net) (886) (845) (731) (676) (651) Other Invts.(net) (984) 119 53.0 51.7 50.4 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 1,132 (488) 28.3 27.6 26.9 Net Investing CF (738) (1,213) (650) (596) (574) Div Paid (586) (479) (572) (672) (719) Chg in Gross Debt 1,684 (54.0) (39.3) (38.3) (37.4) Capital Issues 1,539 (262) 0.0 0.0 0.0 Other Financing CF (1,574) 615 0.0 0.0 0.0 Net Financing CF 1,063 (180) (611) (710) (757) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 791 (96.6) (801) 223 618 Opg CFPS (sen) 120 110 140 184 186 Free CFPS (sen) (39.3) 42.4 (25.4) 80.0 121



Source: DBS Bank


S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 10 Mar 16 23.98 23.85 HOLD

2: 11 Apr 16 24.02 23.85 HOLD

3: 10 May 16 22.96 23.85 HOLD

4: 17 May 16 23.00 23.85 HOLD

5: 01 Jun 16 23.04 23.85 HOLD

6: 12 Jul 16 23.18 21.35 HOLD

7: 17 Aug 16 23.22 20.35 HOLD

8: 18 Aug 16 23.36 20.35 HOLD

9: 26 Oct 16 24.20 22.40 HOLD

10: 10 Nov 16 23.46 22.40 HOLD

11: 17 Nov 16 23.90 22.50 HOLD12: 14 Dec 16 23.88 22.50 HOLD13: 10 Jan 17 24.10 22.50 HOLD14: 10 Feb 17 25.08 22.50 HOLD

Note : Share price and Target price are adjusted for corporate actions. 15: 15 Feb 17 25.00 22.50 HOLD

1

2

3

4

5

6 78

9 1011

12

13

14

15

21.71

22.21

22.71

23.21

23.71

24.21

24.71

25.21

25.71

26.21


RM

Page 67

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:MA, PY

HOLD Last Traded Price (14 Feb 2017): Rp1,590 (JCI : 5,380.67) Price Target 12-mth: Rp1,650 (4% upside) (Prev Rp1,580) Where we differ: Higher FY17F and FY18F earnings on higher CPO and PK price forecasts Analyst Ben SANTOSO +65 6682 3707 [email protected]

Price Relative

Forecasts and Valuation FY Dec (Rp m) 2015A 2016F 2017F 2018F Revenue 4,190 3,889 4,660 4,964 EBITDA 775 654 1,065 1,212 Pre-tax Profit 828 680 1,117 1,285 Net Profit 623 510 837 964 Net Pft (Pre Ex.) 623 510 837 964 Net Pft Gth (Pre-ex) (%) (32.9) (18.2) 64.1 15.1 EPS (Rp) 91.4 74.8 123 141 EPS Pre Ex. (Rp) 91.4 74.8 123 141 EPS Gth Pre Ex (%) (33) (18) 64 15 Diluted EPS (Rp) 91.4 74.8 123 141 Net DPS (Rp) 53.0 37.2 30.5 50.0 BV Per Share (Rp) 1,074 1,106 1,198 1,289 PE (X) 17.4 21.3 13.0 11.3 PE Pre Ex. (X) 17.4 21.3 13.0 11.3 P/Cash Flow (X) 13.1 11.1 8.4 7.5 EV/EBITDA (X) 13.1 15.1 8.8 7.2 Net Div Yield (%) 3.3 2.3 1.9 3.1 P/Book Value (X) 1.5 1.4 1.3 1.2 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 8.7 6.9 10.7 11.4 Earnings Rev (%): 7 18 12 Consensus EPS (Rp): 75.1 112 130 Other Broker Recs: B: 16 S: 1 H: 7


A CPO price proxy Proxy to CPO price. With relatively flat volume growth, London Sumatra’s (Lonsum) earnings should broadly reflect ASP movements in crude palm oil (CPO), palm kernel (PK) and rubber. The bulk of the group’s earnings are driven by CPO sales to its parent Indofood Agri Resources. In this report, we reiterate our HOLD rating given the limited 4% potential upside to our revised TP. FY16F/17F/18F earnings revised by +7%/+18%/+12%. We lift our earnings projections to reflect +23%/+42%/+35% revisions in our PK ASP (in rupiah terms). We maintain our CPO and PK production volumes, implying 12% rebound each in FY17F – thanks to recovery in fresh fruit bunch (FFB) yield as the El Nino impact dissipates. Our revised FY16 earnings forecast imply 4Q16 earnings of Rp237.8bn (+55% y-o-y; +49% q-o-q). Earnings recovery priced in. We expect Lonsum’s earnings CAGR to expand by 24% over FY16-19F (low base effect). This will be primarily driven by FFB yield recovery next year – following the steep c.20% drop in FY16F due to the lagged El Nino impact and haze in 2015. However, at the current price, we believe the market has mostly priced in the prospective earnings recovery. Valuation:

We employed DCF methodology (FY17F base year) to arrive at Lonsum’s fair value of Rp1,650/share (WACC 12.9%, Rf 8.4%, Rm 13.3%, β: 0.9x, TG 3%) – raised from Rp1,580 previously. Key Risks to Our View:

There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take fails to live up to our expectations (3.7m MT) next year. CPO price could also move higher than forecast if there is significant yield deterioration in South American 1QCY17 soybean crop in the event of a strong La Nina. Changes in fund flows towards or out of emerging markets/commodities would also affect the valuations of plantation counters. At A Glance Issued Capital (m shrs) 6,823 Mkt. Cap (Rpbn/US$m) 10,848 / 814 Major Shareholders (%) SIMP 59.5



Indonesia Company Guide

London Sumatra Indonesia Version 10 | Bloomberg: LSIP IJ | Reuters: LSIP.JK Refer to important disclosures at the end of this report

41

61

81

101

121

141

161

181

201

221

841.5

1,041.5

1,241.5

1,441.5

1,641.5

1,841.5

2,041.5

2,241.5

2,441.5

2,641.5


Relative IndexRp

London Sumatra Indonesia (LHS) Relative JCI (RHS)


Company Guide



Earnings Drivers:

CPO price. As a commodity producer, Lonsum is a price-taker. Movements in international CPO prices would directly impact the group’s profitability. We currently expect CPO prices (FOB Pasir Gudang) to average US$659/MT (+3% y-o-y) in CY17 and US$644/MT in CY18 (-2% y-o-y). Adverse impact from Indonesia’s biodiesel policy. Lonsum sells more than half of its CPO output to its parent company, Salim Ivomas Pratama (SIMP), while the remainder is sold locally. While the group is not subject to biodiesel export levies (US$50/MT on CPO) on all of its CPO sales volumes, local ASP would nevertheless roughly reflect the same discount, given increased domestic supply as a result of the export levies. We have already imputed this in our forecasts. Volume output. As at end-December 2015, Lonsum’s trees were estimated to have an average age of 12 years. Approximately 10,500ha will mature in FY16F through FY17F – representing 13% of its own mature hectarage at the end of FY15 – but not enough to keep its average age from rising towards 14 years by end-FY18F. On its lack of aggressive expansion since 2009, Lonsum’s FFB output is forecast to expand by a 2% CAGR between FY15 and FY18F. Hence, no capex outlay is expected to expand its milling capacity in the medium term. We imputed a 5% y-o-y lower FY16F FFB yield, principally on account of FY15 El Nino. Demand seasonality. As a major vegetable oil with 38% market share globally, palm oil is an important food staple. The other major vegetable oils are soybean oil, with 29% market share, followed by rapeseed/canola oil and sunflower oil with 16% and 10% market shares respectively. There is generally demand substitutability between vegetable oils, although certain vegetable oils are more suitable than others for certain applications. Relative to other oil crops, palm oil has the highest productivity per hectare (i.e. c.5 MT/ha), while soybean oil’s productivity is typically 0.5 MT/ha. Demand for palm oil is dominant in Asia, where local festivities drive higher demand in certain months of the year. For example, Ramadan month, Chinese New Year and Divali are typically high-demand periods in Asia.

CPO price (RM/MT)




Avg. USD/IDR rate


2413

2168

2652

3040 3030

0.0

438.6

877.3

1315.9

1754.5

2193.1

2631.8

3070.4

2014A 2015A 2016F 2017F 2018F

76652 7865683141

86391 87860

0.0

17923.5

35846.9

53770.4

71693.9

89617.4

2014A 2015A 2016F 2017F 2018F

449021471827

398496

446821 459743

0.00

96252.71

192505.42

288758.12

385010.83

481263.54

2014A 2015A 2016F 2017F 2018F

109280

122601

100429

112608 115864

0.0

24765.4

49530.8

74296.2

99061.6

123827.0

2014A 2015A 2016F 2017F 2018F

11879

1371713237 13608 13764

0.0

2780.3

5560.7

8341.0

11121.3

13901.6

2014A 2015A 2016F 2017F 2018F

Page 69


Company Guide


Balance Sheet:

Clean balance sheet. As at end-September 2016, Lonsum remained debt-free. This reflects the group’s lack of major expansion projects on both its biological assets and its processing capacity. As at end-September 2016, the group’s 4-quarter rolling cash conversion cycle stood at 51 days – up from 27 days in December 2015 on longer receivable and inventory days. Room for leverage. Amid strict sustainability standards, we expect more private estates to be on offer. Given its net cash position, we believe Lonsum is in a strong position to acquire more brownfields to boost its flattish output growth outlook. Failing this, we believe the group should be able to increase its dividend payout to enhance ROE. Share Price Drivers:

No near-term catalysts. The stock is currently close to average forward PE. We believe the market has already priced in stronger CPO/PK prices, and that there are limited near-term upside catalysts beyond our TP. Key Risks:

Volatility in CPO prices and USD exchange rates. Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from the expansion of US shale gas would have an adverse impact on the demand for vegetable oils for biofuels. Likewise, volatility in USD would affect the profitability of planters in general. Setback in expansion plans. Our forecasts are based on assumed hectarage for new planting and replanting. Any setback on these plans would negatively affect our valuation due to slower volume growth. Regulatory changes. Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/ Malaysian export taxes would impact the demand for CPO/refined oils. Weather. Changes in rainfall pattern (caused by either El Nino or La Nina) would affect FFB yields with some lag time. Company Background

London Sumatra Indonesia (Lonsum) is the second largest listed upstream player in Indonesia and is a subsidiary of Indofood Agri Resources (IFAR SP). Besides palm oil, Lonsum has rubber, cocoa and seed businesses.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.4

0.4

0.4

0.5

0.5

0.5

0.5

0.5

0.6

0.6

0.6

0.00

0.01

0.01

0.02

0.02

0.03

0.03

0.04

0.04

0.05

0.05

2014A 2015A 2016F 2017F 2018F


0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

2014A 2015A 2016F 2017F 2018F


Rpm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2014A 2015A 2016F 2017F 2018F

Avg: 16.4x

+1sd: 19.5x

+2sd: 22.6x

‐1sd: 13.2x

‐2sd: 10.1x

7.0

9.0

11.0

13.0

15.0

17.0

19.0

21.0

23.0


(x)

Avg: 1.67x

+1sd: 2.03x

+2sd: 2.4x

‐1sd: 1.31x

‐2sd: 0.95x

0.7

1.2

1.7

2.2

2.7


(x)

Page 70


Company Guide


Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F CPO price (RM/MT) 2,413 2,168 2,652 3,040 3,030 Mature oil palm 76,652 78,656 83,141 86,391 87,860 CPO sales volume (MT) 449,021 471,827 398,496 446,821 459,743 Palm kernel sales vol. (MT) 109,280 122,601 100,429 112,608 115,864 Avg. USD/IDR rate 11,880 13,717 13,237 13,608 13,764 Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (Rpbn) Crude palm oil 3,712 3,223 2,887 3,436 3,708 Palm kernel 560 562 615 794 818 Rubber 276 247 228 265 267 Seeds 95.0 96.2 104 114 119 Others 83.8 60.9 54.6 50.8 52.4 Total 4,727 4,190 3,889 4,660 4,964 Income Statement (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 4,727 4,190 3,889 4,660 4,964 Cost of Goods Sold (3,191) (3,074) (2,780) (3,155) (3,302) Gross Profit 1,536 1,116 1,109 1,505 1,662 Other Opng (Exp)/Inc (279) (280) (400) (391) (406) Operating Profit 1,258 836 709 1,114 1,256 Other Non Opg (Exp)/Inc (116) (60.9) (54.9) (49.4) (44.4) Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 80.4 52.9 26.4 51.8 72.9 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 1,222 828 680 1,117 1,285 Tax (293) (205) (170) (279) (321) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 929 623 510 837 964 Net Profit before Except. 929 623 510 837 964 EBITDA 1,142 775 654 1,065 1,212 Growth Revenue Gth (%) 14.3 (11.4) (7.2) 19.8 6.5 EBITDA Gth (%) 19.8 (32.1) (15.6) 62.9 13.8 Opg Profit Gth (%) 22.6 (33.5) (15.2) 57.2 12.8 Net Profit Gth (Pre-ex) (%) 20.8 (32.9) (18.2) 64.1 15.1 Margins & Ratio Gross Margins (%) 32.5 26.6 28.5 32.3 33.5 Opg Profit Margin (%) 26.6 20.0 18.2 23.9 25.3 Net Profit Margin (%) 19.7 14.9 13.1 18.0 19.4 ROAE (%) 13.9 8.7 6.9 10.7 11.4 ROA (%) 11.1 7.1 5.7 8.8 9.4 ROCE (%) 12.6 7.7 6.3 9.4 9.9 Div Payout Ratio (%) 33.8 58.0 49.8 24.8 35.4 Net Interest Cover (x) NM NM NM NM NM


Page 71


Company Guide



FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 997 1,113 804 849 965 Cost of Goods Sold (639) (898) (643) (669) (658) Gross Profit 358 215 161 179 307 Other Oper. (Exp)/Inc (141) 3.50 (85.7) (84.5) (77.0) Operating Profit 217 218 75.6 94.6 230 Other Non Opg (Exp)/Inc (12.0) (18.2) (15.4) (21.4) (16.6) Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 2.90 14.8 7.40 6.60 6.00 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 208 215 67.6 79.8 220 Tax (47.2) (61.3) (17.2) (17.6) (60.0) Minority Interest 0.0 0.0 0.0 0.10 0.10 Net Profit 161 154 50.5 62.2 160 Net profit bef Except. 161 154 50.5 62.2 160 EBITDA 244 217 159 155 226 Growth Revenue Gth (%) (16.3) 11.7 (27.8) 5.5 13.7 EBITDA Gth (%) (13.9) (11.0) (26.9) (2.2) 45.6 Opg Profit Gth (%) 1.6 0.6 (65.4) 25.2 143.4 Net Profit Gth (Pre-ex) (%) 3.2 (4.5) (67.2) 23.3 156.8 Margins Gross Margins (%) 35.9 19.3 20.1 21.1 31.8 Opg Profit Margins (%) 21.8 19.6 9.4 11.1 23.9 Net Profit Margins (%) 16.1 13.8 6.3 7.3 16.5 Balance Sheet (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 3,239 3,428 3,619 3,682 3,642 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 3,611 4,152 4,039 4,124 4,206 Cash & ST Invts 1,357 737 1,006 1,537 2,171 Inventory 380 398 352 400 418 Debtors 84.6 112 91.4 110 117 Other Current Assets 42.0 20.7 28.6 33.0 34.7 Total Assets 8,713 8,849 9,136 9,885 10,589 ST Debt 0.0 0.0 0.0 0.0 0.0 Creditor 444 309 341 387 405 Other Current Liab 302 262 270 298 311 LT Debt 0.0 0.0 0.0 0.0 0.0 Other LT Liabilities 964 940 974 1,019 1,070 Shareholder’s Equity 7,003 7,331 7,544 8,174 8,796 Minority Interests (0.1) 6.90 6.90 6.90 6.90 Total Cap. & Liab. 8,713 8,849 9,136 9,885 10,589 Non-Cash Wkg. Capital (240) (39.7) (138) (143) (146) Net Cash/(Debt) 1,357 737 1,006 1,537 2,171 Debtors Turn (avg days) 7.8 8.6 9.6 7.9 8.3 Creditors Turn (avg days) 44.6 44.7 42.7 42.1 43.7 Inventory Turn (avg days) 43.2 46.2 49.3 43.5 45.2 Asset Turnover (x) 0.6 0.5 0.4 0.5 0.5 Current Ratio (x) 2.5 2.2 2.4 3.0 3.8 Quick Ratio (x) 1.9 1.5 1.8 2.4 3.2 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) N/A N/A N/A N/A N/A Z-Score (X) 5.8 6.1 5.8 5.7 5.6


Page 72


Company Guide



FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 1,222 828 680 1,117 1,285 Dep. & Amort. 298 342 361 399 437 Tax Paid (293) (205) (170) (279) (321) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 138 (197) 96.2 2.20 0.90 Other Operating CF 115 86.1 (20.9) 2.40 2.40 Net Operating CF 1,602 831 981 1,286 1,455 Capital Exp.(net) (1,154) (497) (580) (537) (479) Other Invts.(net) 119 (577) 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (299) (29.3) 163 (9.9) (0.7) Net Investing CF (1,335) (1,103) (416) (546) (480) Div Paid (314) (362) (254) (208) (341) Chg in Gross Debt 0.0 0.0 0.0 0.0 0.0 Capital Issues 1.90 14.3 (42.6) 0.0 0.0 Other Financing CF 0.0 0.0 0.0 0.0 0.0 Net Financing CF (312) (347) (297) (208) (341) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (44.9) (619) 269 531 634 Opg CFPS (Rp) 214 151 130 188 213 Free CFPS (Rp) 65.6 48.9 58.9 110 143



Source: DBS Bank


S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 22 Feb 16 1450 1360 HOLD

2: 29 Feb 16 1430 1360 HOLD

3: 10 Mar 16 1665 1490 HOLD

4: 11 Apr 16 1695 1490 HOLD

5: 02 May 16 1495 1490 HOLD

6: 10 May 16 1465 1490 HOLD

7: 12 Jul 16 1400 1430 HOLD

8: 12 Aug 16 1465 1340 HOLD

9: 22 Aug 16 1650 1340 FULLY VALUED

10: 31 Oct 16 1525 1580 HOLD

11: 10 Nov 16 1465 1580 HOLD12: 14 Dec 16 1720 1580 HOLD13: 10 Jan 17 1720 1580 HOLD14: 10 Feb 17 1590 1580 HOLD


1

2

3

4

5

6

7

8

910

11

12

1314

1282

1382

1482

1582

1682

1782

1882

1982


Rp

Page 73

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: BC, PY

HOLD Last Traded Price (14 Feb 2017): RM9.21 (KLCI : 1,708.90) Price Target 12-mth: RM8.05 (-13% downside) (Prev RM7.40) Where we differ: Higher FY17F and FY18F earnings on higher CPO and PK price forecasts Analyst Ben SANTOSO +65 6682 3707 [email protected]

Price Relative

Forecasts and Valuation FY Jun (RM m) 2016A 2017F 2018F 2019F Revenue 43,963 49,239 52,496 53,917 EBITDA 4,340 5,370 6,100 6,257 Pre-tax Profit 2,798 3,617 4,333 4,443 Net Profit 2,391 2,578 3,113 3,195 Net Pft (Pre Ex.) 2,391 2,578 3,113 3,195 Net Pft Gth (Pre-ex) (%) (1.6) 7.8 20.7 2.6 EPS (sen) 37.8 38.8 46.9 48.1 EPS Pre Ex. (sen) 37.8 38.8 46.9 48.1 EPS Gth Pre Ex (%) (3) 3 21 3 Diluted EPS (sen) 37.8 38.8 46.9 48.1 Net DPS (sen) 27.0 24.2 28.8 30.1 BV Per Share (sen) 513 540 563 581 PE (X) 24.4 23.7 19.7 19.2 PE Pre Ex. (X) 24.4 23.7 19.7 19.2 P/Cash Flow (X) 15.7 24.1 16.5 15.1 EV/EBITDA (X) 17.0 14.1 12.4 12.1 Net Div Yield (%) 2.9 2.6 3.1 3.3 P/Book Value (X) 1.8 1.7 1.6 1.6 Net Debt/Equity (X) 0.3 0.3 0.3 0.2 ROAE (%) 7.4 7.2 8.3 8.3 Earnings Rev (%): 14 22 16 Consensus EPS (sen): 34.4 39.2 43.4 Other Broker Recs: B: 11 S: 2 H: 9


Unlocking value? Mixed outlook. Lacklustre demand for new equipment, new cars, and property has resulted in slower-than-expected earnings growth. This will dampen the earnings rebound in the Plantations segment, fuelled by a fresh fruit bunch (FFB) yield recovery post El Nino, weaker ringgit and better prices. We expect 8% earnings CAGR for Sime Darby (Sime) between FY16 and FY19F and maintain our HOLD call.

FY17F/18F earnings revised. We lift FY17F and FY18F earnings by +14% and +22%, respectively, mainly to reflect better contributions from Plantations – as we upgrade benchmark CPO prices (in ringgit terms) by 17% and 16%, respectively. We kept our assumptions for Motor, Industrial and Property segments unchanged.

Breaking up the business. The group had recently announced plan to de-merge into three separate entities: Plantations, Property (each to be separately listed on Bursa Malaysia) and Trading & Logistics (including Motor and Industrials – to remain listed under Sime Darby Bhd). We understand Sime’s current shareholders will receive shares of Plantations and Property businesses by way of distribution in specie. While the de-merger exercise could unlock some value in the Property segment, we believe much of the upside from the strength in palm oil prices has already been priced in. We expect the corporate actions to be completed by 2018, although no details of any capital raising have been disclosed.

Valuation:

Sime’s SOP-based TP is estimated at RM8.05 (raised from RM7.40 to impute a higher Plantations segment DCF valuation). This implies 13% potential downside from the current level, excluding c.3% FY17F dividend yield.


A strong recovery in commodity prices and a rebound in China’s economy would boost Sime’s earnings, potentially trumping our estimates. As Sime is a KLCI Index component, changes in its weightings would also make it vulnerable to significant price swings, resulting in its share price coming in above or below our target price. At A Glance Issued Capital (m shrs) 6,801 Mkt. Cap (RMm/US$m) 62,636 / 14,079 Major Shareholders (%) Skim Amanah Saham Bumiputera 40.6 Employees Provident Fund 10.5 Yayasan Pelaburan Bumiputra 5.6

Free Float (%) 43.3 3m Avg. Daily Val (US$m) 16.7 ICB Industry : Industrials / General Industrials



Sime Darby Version 9 | Bloomberg: SIME MK | Reuters: SIME.KL Refer to important disclosures at the end of this report

69

89

109

129

149

169

189

209

6.3

6.8

7.3

7.8

8.3

8.8

9.3

9.8

10.3


Relative IndexRM

Sime Darby (LHS) Relative KLCI (RHS)


Company Guide

Sime Darby


Plantation contribution. Movements in CPO prices would directly impact the group’s profitability. While Sime’s sheer size (i.e. having planted oil palm estates totalling 604,000ha) should mitigate regional differences in FFB yields, the group’s relatively higher average age of oil palm trees (i.e. c.17.4 years) also limits growth potential relative to younger peers. Sime’s Plantation segment is therefore relatively more prone to CPO price/ currency volatilities and weather vagaries. The group’s large planted area also means that operational efficiency may lag behind smaller-sized peers. Following the New Britain Palm Oil (NBPOL) acquisition, Sime’s average age is expected to come down to 15.6 years by the end of FY17. This would be further improved through aggressive replanting. Given its large size and relatively older trees, Sime’s FFB output is forecast to expand by 1.2% CAGR between FY17 and FY19. Property contribution. Excluding gains, we expect the group’s Property segment to contribute c.19% of its operating profit in FY17F. The segment has seen steady growth over the past few years and this has helped to offset volatility in Plantation and Industrial segments' contributions. While seeing headwinds from tighter lending in Malaysia this year, we believe that property still offers marginal growth from the development of investment properties, while benefiting from its sizeable land bank for further launches. We believe disclosure of its gross development value per project and ongoing asset monetisation would help to unlock value in this segment. Industrial contribution. The group’s Industrial segment is engaged in sales and rental of heavy equipment (mainly Caterpillar and Bucyrus brands), as well as after-sales servicing and maintenance. Profit for this segment is driven by capex-spend principally undertaken by coal/iron ore miners, in addition to construction companies. Volatility in the underlying commodity prices and bank lending, as well as construction activities would influence the demand for Sime’s heavy equipment products. While underlying commodity prices have recovered, this is mainly driven by output scale-back by some of the smaller miners – which may not yet necessarily translate into any positive impact on Sime’s Industrial segment. Motor contribution. To a large extent, Sime’s Motor segment depends on banks' lending policies, government regulations on taxes and consumer purchasing power. With roughly half of its profit contribution coming from Malaysia and the other half from China/HK, the group will continue to face challenges in FY17F, in our view. Tighter lending has pushed back appetite for new cars in Malaysia, while the crackdown on corruption and intense competition in China have also dampened China/HK sales contribution over the past few years. We believe an eventual listing of this segment could offer some cashflow reprieve for the group.

CPO price (RM/MT)


HK & PRC Motor rev.(RMm)

Australasia Industrial rev. (RMm)

Average MYR/USD


2193 2242

29353064 3033

0.0

442.1

884.3

1326.4

1768.5

2210.7

2652.8

3094.9

2015A 2016A 2017F 2018F 2019F

514959 510148 507156 505696 509527

0.0

105051.6

210103.3

315154.9

420206.5

525258.2

2015A 2016A 2017F 2018F 2019F

77588146

85138857

9180

0.00

1872.78

3745.56

5618.35

7491.13

9363.91

2015A 2016A 2017F 2018F 2019F

61275667 5809

60996406

0.0

1293.9

2587.9

3881.8

5175.7

6469.7

2015A 2016A 2017F 2018F 2019F

3.62

4.134.29

4.72 4.69

0.0

1.0

1.9

2.9

3.8

4.8

2015A 2016A 2017F 2018F 2019F

Page 75


Company Guide

Sime Darby

Balance Sheet:

Managing its gearing ratio. The group’s gross debt is maintained at c.RM16.4bn as at end-September 2016 (translating to gross and net gearing ratios of 45% and 35% respectively). We expect Sime’s gross gearing to come down to 38% by end-June 2017 and to 33% by end-June 2018. Share Price Drivers:

Subject to corporate actions. We do not expect significant catalysts in the near term, as the group is expected to focus its efforts on reducing debt and strengthening its capital in FY17F. Yet, there could be some upside to the sum of parts through the de-merger exercise – subject to each entity’s strategy. Key Risks:

Volatility in commodity prices and USD exchange rates Continued weakness in CPO prices may lead to lower-than-expected earnings, while lower energy prices from the expansion of US shale gas would have an adverse impact on the demand for vegetable oils for biofuels. Likewise, volatility in USD would affect the profitability of planters in general. The group's Industrial division has significant exposure to demand for coal. Continued weakness in coal prices would have adverse consequences on demand for the group's Caterpillar equipment in Australia. Regulatory changes Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact the demand for CPO/refined oils. Market sentiment Changes in fund flows towards or out of emerging markets would affect the valuations of plantation counters. Weather Changes in rainfall pattern (caused by either El Nino or La Nina) would affect FFB yields with some time lag. Company Background

Sime Darby (Sime) is a GLC conglomerate. The group's principal activities include plantations, property development, heavy equipment and motor vehicle distribution, as well as utilities.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.6

0.6

0.6

0.7

0.7

0.7

0.7

0.7

0.8

0.8

0.8

0.00

0.10

0.20

0.30

0.40

0.50

0.60

2015A 2016A 2017F 2018F 2019F


0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

8,000.0

9,000.0

2015A 2016A 2017F 2018F 2019F


RMm

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2015A 2016A 2017F 2018F 2019F

Avg: 21.5x

+1sd: 23.5x

+2sd: 25.5x

‐1sd: 19.6x

‐2sd: 17.6x

15.8

17.8

19.8

21.8

23.8

25.8

27.8


(x)

Avg: 1.82x

+1sd: 2.06x

+2sd: 2.29x

‐1sd: 1.58x

‐2sd: 1.35x

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6


(x)

Page 76


Company Guide

Sime Darby

Key Assumptions

FY Jun 2015A 2016A 2017F 2018F 2019F CPO price (RM/MT) 2,193 2,242 2,935 3,064 3,033 Mature palm oil hectarage 514,959 510,148 507,156 505,696 509,527 HK & PRC Motor rev.(RMm) 7,758 8,146 8,513 8,857 9,180 Australasia Industrial rev. 6,127 5,667 5,809 6,099 6,406 Average MYR/USD 3.62 4.13 4.29 4.72 4.69 Segmental Breakdown

FY Jun 2015A 2016A 2017F 2018F 2019F Revenues (RMm) Plantations 10,269 11,877 14,657 16,135 15,794 Property 3,455 2,865 3,137 3,420 3,713 Industrial 10,558 9,766 10,010 10,511 11,039 Motor 18,646 19,708 20,721 21,682 22,589 Others 801 (253) 713 748 782 Total 43,729 43,963 49,239 52,496 53,917 EBIT (RMm)

Plantations 1,181 1,040 2,115 2,535 2,375 Property 929 1,041 648 692 739 Industrial 512 326 436 481 530 Motor 467 493 547 602 656 Others 454 167 109 116 122 Total 3,542 3,067 3,855 4,425 4,421 EBIT Margins (%)

Plantations 11.5 8.8 14.4 15.7 15.0 Property 26.9 36.3 20.6 20.2 19.9 Industrial 4.9 3.3 4.4 4.6 4.8 Motor 2.5 2.5 2.6 2.8 2.9 Others 56.7 (66.0) 15.3 15.5 15.6 Total 8.1 7.0 7.8 8.4 8.2 Income Statement (RMm)

FY Jun 2015A 2016A 2017F 2018F 2019F Revenue 43,729 43,963 49,239 52,496 53,917 Cost of Goods Sold (41,465) (42,400) (46,829) (49,551) (51,013) Gross Profit 2,264 1,563 2,411 2,945 2,904 Other Opng (Exp)/Inc 1,278 1,504 1,444 1,481 1,518 Operating Profit 3,542 3,067 3,855 4,425 4,421 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc (122) 48.4 187 308 429 Net Interest (Exp)/Inc (274) (317) (425) (400) (408) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 3,145 2,798 3,617 4,333 4,443 Tax (597) (216) (739) (886) (908) Minority Interest (119) (158) (176) (211) (216) Preference Dividend 0.0 (33.7) (124) (124) (124) Net Profit 2,430 2,391 2,578 3,113 3,195 Net Profit before Except. 2,430 2,391 2,578 3,113 3,195 EBITDA 4,555 4,340 5,370 6,100 6,257 Growth Revenue Gth (%) (0.4) 0.5 12.0 6.6 2.7 EBITDA Gth (%) (15.3) (4.7) 23.7 13.6 2.6 Opg Profit Gth (%) (14.0) (13.4) 25.7 14.8 (0.1) Net Profit Gth (Pre-ex) (%) (21.3) (1.6) 7.8 20.7 2.6 Margins & Ratio Gross Margins (%) 5.2 3.6 4.9 5.6 5.4 Opg Profit Margin (%) 8.1 7.0 7.8 8.4 8.2 Net Profit Margin (%) 5.6 5.4 5.2 5.9 5.9 ROAE (%) 7.9 7.4 7.2 8.3 8.3 ROA (%) 3.9 3.7 3.8 4.5 4.5 ROCE (%) 5.4 5.1 5.3 6.0 5.9 Div Payout Ratio (%) 63.9 71.4 62.5 61.5 62.7 Net Interest Cover (x) 12.9 9.7 9.1 11.1 10.8


Page 77


Company Guide

Sime Darby


FY Jun 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 Revenue 10,173 11,829 10,233 11,728 10,099 Cost of Goods Sold (9,847) (11,388) (9,986) (11,179) (9,818) Gross Profit 326 441 246 549 281 Other Oper. (Exp)/Inc 134 146 603 526 329 Operating Profit 590 532 836 1,109 670 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 17.0 18.9 20.4 (7.9) 3.00 Net Interest (Exp)/Inc (146) (77.3) (64.4) (12.0) (44.0) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 461 474 792 1,089 629 Tax (106) (145) (99.2) 128 (131) Minority Interest (32.0) (50.3) (26.3) (49.1) (24.0) Net Profit 323 279 664 1,137 443 Net profit bef Except. 323 279 664 1,137 443 EBITDA 1,021 808 1,491 1,494 1,092 Growth Revenue Gth (%) (20.9) 16.3 (13.5) 14.6 (13.9) EBITDA Gth (%) (38.0) (20.8) 84.5 0.2 (26.9) Opg Profit Gth (%) (48.8) (9.8) 57.1 32.7 (39.6) Net Profit Gth (Pre-ex) (%) (67.8) (13.7) 138.1 71.4 (61.0) Margins Gross Margins (%) 3.2 3.7 2.4 4.7 2.8 Opg Profit Margins (%) 5.8 4.5 8.2 9.5 6.6 Net Profit Margins (%) 3.2 2.4 6.5 9.7 4.4 Balance Sheet (RMm)

FY Jun 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 23,027 24,465 25,175 25,780 26,255 Invts in Associates & JVs 3,820 4,192 4,380 4,688 5,117 Other LT Assets 9,589 11,098 10,902 11,017 11,135 Cash & ST Invts 4,201 3,521 4,621 3,048 3,131 Inventory 9,702 9,362 10,528 11,140 11,469 Debtors 7,273 6,639 7,791 8,306 8,531 Other Current Assets 4,626 4,882 5,004 5,129 5,258 Total Assets 62,238 64,159 68,400 69,107 70,896 ST Debt 6,324 4,427 6,062 4,371 4,338 Creditor 8,519 8,198 9,232 9,768 10,056 Other Current Liab 658 758 766 773 781 LT Debt 11,885 11,539 9,425 9,489 9,473 Other LT Liabilities 3,281 3,592 3,556 3,521 3,486 Shareholder’s Equity 30,568 34,709 38,248 39,864 41,224 Minority Interests 1,003 936 1,111 1,322 1,538 Total Cap. & Liab. 62,238 64,159 68,400 69,107 70,896 Non-Cash Wkg. Capital 12,424 11,927 13,326 14,034 14,420 Net Cash/(Debt) (14,008) (12,446) (10,866) (10,811) (10,680) Debtors Turn (avg days) 60.7 55.1 57.8 57.8 57.8 Creditors Turn (avg days) 77.1 72.7 74.1 74.0 74.0 Inventory Turn (avg days) 87.8 83.0 84.5 84.4 84.4 Asset Turnover (x) 0.7 0.7 0.7 0.8 0.8 Current Ratio (x) 1.7 1.8 1.7 1.9 1.9 Quick Ratio (x) 0.7 0.8 0.8 0.8 0.8 Net Debt/Equity (X) 0.4 0.3 0.3 0.3 0.2 Net Debt/Equity ex MI (X) 0.5 0.4 0.3 0.3 0.3 Capex to Debt (%) 46.7 16.9 12.8 13.9 13.3 Z-Score (X) 2.8 2.9 3.0 3.1 3.1


Page 78


Company Guide

Sime Darby


FY Jun 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 3,145 2,798 3,617 4,333 4,443 Dep. & Amort. 1,135 1,224 1,328 1,367 1,407 Tax Paid (597) (216) (739) (886) (908) Assoc. & JV Inc/(loss) 122 (48.4) (187) (308) (429) Chg in Wkg.Cap. (1,411) 497 (1,398) (708) (386) Other Operating CF 971 (551) (80.1) (81.2) (82.3) Net Operating CF 3,367 3,705 2,540 3,717 4,044 Capital Exp.(net) (8,501) (2,698) (1,989) (1,921) (1,833) Other Invts.(net) (23.5) (18.2) (27.1) (27.7) (28.4) Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 910 550 227 (81.7) (83.7) Net Investing CF (7,614) (2,167) (1,788) (2,031) (1,945) Div Paid (2,192) (1,560) (1,535) (1,622) (1,958) Chg in Gross Debt 6,882 (2,243) (480) (1,628) (49.1) Capital Issues 1,897 3,301 2,497 124 124 Other Financing CF (2,775) (1,835) (134) (134) (133) Net Financing CF 3,811 (2,337) 348 (3,259) (2,017) Currency Adjustments 255 119 0.0 0.0 0.0 Chg in Cash (181) (680) 1,100 (1,573) 82.7 Opg CFPS (sen) 76.9 50.7 59.3 66.6 66.7 Free CFPS (sen) (82.7) 15.9 8.30 27.0 33.3



Source: DBS Bank


S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 25 Feb 16 7.60 7.45 HOLD

2: 10 Mar 16 7.85 7.45 HOLD

3: 11 Apr 16 7.90 7.65 HOLD

4: 28 Apr 16 7.81 7.65 HOLD

5: 10 May 16 7.54 7.65 HOLD




9: 12 Jul 16 7.57 6.30 FULLY VALUED

10: 24 Aug 16 7.81 6.30 FULLY VALUED

11: 10 Nov 16 8.24 7.40 HOLD12: 28 Nov 16 8.16 7.40 HOLD13: 14 Dec 16 8.15 7.40 HOLD14: 10 Jan 17 8.45 7.40 HOLD

Note : Share price and Target price are adjusted for corporate actions. 15: 27 Jan 17 9.23 7.40 HOLD16: 10 Feb 17 8.99 7.40 HOLD

1

2

3

4

5

6

7

8

9

10 11

12

13

14

1516

6.89

7.39

7.89

8.39

8.89

9.39


RM

Page 79


BUY Last Traded Price ( 14 Feb 2017): RM1.93 (KLCI : 1,708.90) Price Target 12-mth: RM2.25 (17% upside) (Prev RM2.20) Potential Catalyst: Core earnings growth and higher CPO prices Where we differ: Higher forward volume growth assumption than consensus Analyst Regional Research Team Ben SANTOSO +65 6682 3707 [email protected]

Price Relative

Forecasts and Valuation FY Dec (RM m) 2015A 2016F 2017F 2018F Revenue 800 832 976 1,111 EBITDA 174 188 251 308 Pre-tax Profit (85.8) 122 184 239 Net Profit (106) 92.3 140 181 Net Pft (Pre Ex.) 88.7 92.3 140 181 Net Pft Gth (Pre-ex) (%) (28.1) 4.1 51.7 29.2 EPS (sen) (7.8) 6.86 10.4 13.4 EPS Pre Ex. (sen) 6.59 6.86 10.4 13.4 EPS Gth Pre Ex (%) (28) 4 52 29 Diluted EPS (sen) (7.8) 6.86 10.4 13.4 Net DPS (sen) 2.00 1.72 2.60 3.36 BV Per Share (sen) 101 106 114 125 PE (X) nm 28.1 18.5 14.4 PE Pre Ex. (X) 29.3 28.1 18.5 14.4 P/Cash Flow (X) nm 14.7 15.7 12.3 EV/EBITDA (X) 23.4 21.9 16.3 13.2 Net Div Yield (%) 1.0 0.9 1.3 1.7 P/Book Value (X) 1.9 1.8 1.7 1.5 Net Debt/Equity (X) 0.9 0.9 0.8 0.7 ROAE (%) (8.1) 6.6 9.5 11.2 Earnings Rev (%): (3) 15 15 Consensus EPS (sen): 7.40 9.80 12.3 Other Broker Recs: B: 5 S: 0 H: 7


At an inflection point

Key factors are aligned. Going into FY17, we expect both the 1) rebound in CPO prices, and 2) y-o-y improvement in fresh fruit bunch (FFB) yields to result in a strong earnings uptick, after two years of lukewarm profitability. As an upstream focused player, TSH is set to be a prime beneficiary of these broader positive trends for the industry. With our revised spot CPO price forecasts, we expect TSH’s core earnings to post a CAGR of c.40% from FY16 to FY18. Maintain BUY. Maturity pipeline is key differentiator. Over 60% of TSH’s planted area is made up of young and immature oil palms, and thus, its mature planted area is projected to rise 33% to c.40k ha by 2018 from an estimated c.30k ha at end-FY16. This will support its growth in own FFB, which we estimate to grow at a CAGR of c.15% over 2016-2018. This organic growth pipeline is a positive given the current environment of slow-to-negligible new planting by the larger groups in the region. More upside from buoyant prices. We have revised our CPO price forecasts to RM3,040/RM3,030 per MT for CY17/18F from RM2,610/RM2,720 before. For TSH, we also further cut FY16/17/18F CPO production volumes by 13%/11%/4% to factor in more severe El Nino aftereffects. Even so, overall our FY17/18F forecasts are revised upwards by 15.5%/14.6%.

Valuation:

Our DCF-based TP is revised to RM2.25 after imputing changes to our earnings forecasts, taking into account our CY17/18F CPO price forecasts of RM3,040/RM3,030 per MT. Key Risks to Our View:

TSH’s share price is driven by CPO price expectations. Hence, a strong recovery in CPO prices (either data or regulatory-driven) could lift its share price above our fair value, and vice versa. A severe El Nino could also affect TSH’s productivity, cash generation, and ultimately its share price performance. At A Glance Issued Capital (m shrs) 1,356 Mkt. Cap (RMm/US$m) 2,617 / 588 Major Shareholders (%) Aik Pen Tan 12.4 Tunas Lestari Sdn Bhd 6.3 Embun Yakin Sdn Bhd 5.6




TSH Resources Version 8 | Bloomberg: TSH MK | Reuters: TSHR.KL Refer to important disclosures at the end of this report

84

104

124

144

164

184

204

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8


Relative IndexRM

TSH Resources (LHS) Relative KLCI (RHS)


Company Guide

TSH Resources


Earnings Drivers:

CPO prices. As a commodity producer, TSH is a price-taker. Movements in international CPO prices would directly impact the group’s profitability. We are expecting spot CPO prices (FOB Pasir Gudang) to average US$659 (RM3,040) in CY17 – representing an increase of 15% y-o-y in ringgit terms from 2016, primarily from the effects of a weaker ringgit against the US Dollar, plus lower stockpiles following the weaker supply in 2016. Size of mature plantations. Due to its aggressive planting over the past few years, TSH is expected to see a steady climb in mature hectarage, which currently makes up 70% of 42.8k ha of total planted area. We expect the mature planted area to grow by 33% over the next two years to c.40k ha in 2018, and total planted area to grow by 6% to 45.5k ha. All these will support its internal FFB output, which we expect to register a CAGR of 15%. Production volume. TSH has six palm oil mills: three in Sabah, one in Sumatra, and two in Kalimantan. The Sabah mills currently process the bulk of FFB from external sources, and so its overall CPO production trend also depends on FFB production at nearby plantations. TSH’s oil extraction rate has been decent, averaging 21% in Sabah and 21.5% in Indonesia. Currently, >50% of its overall CPO production comes from Sabah, but that ratio will drop as FFB production at its Indonesian plantations picks up. Regulations. Tariff and non-tariff regulations are common in the agricultural commodity sector, and palm oil is no exception. Any changes in export/import tariffs, as well as various taxes and levies, would affect trade flows and prices. The USD50/MT export levy implemented by Indonesia since August 2015 impacts the CPO sales from Indonesia-based operations. Seasonal demand. As a major vegetable oil with 36% global market share, palm oil is an important food staple. The next largest is soybean oil, with 27% market share. These two vegetable oils are direct substitutes (suggesting high price elasticity of demand), although certain vegetable oils are more suitable than others for certain applications. Demand for palm oil is dominant in Asia, where local festivities result in seasonal demand during different months of the year. The Ramadan month, Chinese New Year, and Divali are typically high-demand periods in Asia.

CPO price


CPO sales volume

PK sales volume

Average MYR/USD

Source: Company, @>OĂ>]jg

2413

2168

2652

3040 3030

0.0

438.6

877.3

1315.9

1754.5

2193.1

2631.8

3070.4

2014A 2015A 2016F 2017F 2018F

2569226990

29990

33179

39978

0.0

8155.5

16311.0

24466.5

32622.0

40777.6

2014A 2015A 2016F 2017F 2018F

345293

288333

235825

269090

312172

0.00

70439.77

140879.54

211319.32

281759.09

352198.86

2014A 2015A 2016F 2017F 2018F

74364

62474

5212857371

66556

0.0

15021.5

30043.1

45064.6

60086.1

75107.6

2014A 2015A 2016F 2017F 2018F

3.31

4.08 4.1

4.62 4.71

0.0

1.0

1.9

2.9

3.8

4.8

2014A 2015A 2016F 2017F 2018F

Page 81


Company Guide

TSH Resources

Balance Sheet:

Gearing elevated from previous aggressive planting. TSH’s net gearing is c.1x primarily due to aggressive planting in previous years, particularly at its Indonesian estates. Of its overall debt, 30-40% is denominated in US Dollar terms. Management aims to reduce gearing to near the 0.8x level. We think its leverage will ease naturally from improving earnings, though this may be accelerated by other means such as divestments. Share Price Drivers:

Look for signs of output and earnings recovery. We expect TSH to see steady production growth over the coming years from the young age profile of its estates and rising maturities, which should translate into earnings growth given favourable CPO prices. The stock may be re-rated once macro issues (such as weather impact) dissipate and it delivers earnings growth. Key Risks:

Volatility in CPO prices and USD exchange rate. Continued depressed CPO prices would hurt earnings, especially for upstream planters. Additionally, low crude oil prices may affect CPO demand for biofuel. Finally, CPO prices in ringgit would also be directly affected by the currency’s strength relative to the US Dollar. Setback in expansion plans. Our forecasts are based on assumed hectarage for new planting and replanting. A setback to these plans could hurt our valuation through slower volume growth. Market sentiment. Changes in fund flows towards or out of emerging markets would affect the valuation of plantation counters. Extreme changes in the weather. Sudden and significant changes in rainfall and humidity, such as in the case of a strong El Nino event (prolonged dryness), can affect FFB yields. Company Background

TSH Resources (TSH) is an upstream planter, owning over 100k ha of plantation land in Sabah and Kalimantan and six palm oil mills, of which around 43k ha is planted. It also has a 50:50 JV refinery with Wilmar International. Non-core businesses include wood flooring, cocoa processing, and palm waste integration.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.2

0.3

0.3

0.4

0.4

0.5

0.5

0.00

0.20

0.40

0.60

0.80

1.00

2014A 2015A 2016F 2017F 2018F


0.0

50.0

100.0

150.0

200.0

250.0

300.0

2014A 2015A 2016F 2017F 2018F


RMm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2014A 2015A 2016F 2017F 2018F

Avg: 25.1x

+1sd: 31.4x

+2sd: 37.8x

‐1sd: 18.7x

‐2sd: 12.4x11.1

16.1

21.1

26.1

31.1

36.1

41.1


(x)

Avg: 2.19x

+1sd: 2.49x

+2sd: 2.8x

‐1sd: 1.89x

‐2sd: 1.58x

1.4

1.9

2.4

2.9

3.4


(x)

Page 82


Company Guide

TSH Resources

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F CPO price 2,413 2,168 2,652 3,040 3,030 Mature palm oil hectarage 25,692 26,990 29,990 33,179 39,978 CPO sales volume 345,293 288,333 235,825 269,090 312,172 PK sales volume 74,364 62,474 52,128 57,371 66,556 Average MYR/USD 3.31 4.08 4.10 4.62 4.71

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (RMm) Oil Palm Plantation 967 723 756 901 1,036 Wood Products 43.0 42.9 41.6 40.4 39.3 Cocoa 61.4 33.8 34.5 35.2 35.8 Total 1,071 800 832 976 1,111 EBIT (RMm)

Oil Palm Plantation 178 125 145 207 262 Wood Products (6.1) (2.1) (2.8) (2.6) (2.5) Cocoa 15.6 1.69 1.72 1.76 1.79 Total 187 125 144 206 261 EBIT Margins (%) Oil Palm Plantation 18.4 17.3 19.1 23.0 25.3 Wood Products (14.2) (4.9) (6.6) (6.5) (6.3) Cocoa 25.4 5.0 5.0 5.0 5.0 Total 17.5 15.6 17.3 21.1 23.5


FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 1,071 800 832 976 1,111 Cost of Goods Sold (712) (531) (539) (612) (691) Gross Profit 359 269 293 365 420 Other Opng (Exp)/Inc (179) (155) (168) (179) (181) Operating Profit 180 113 125 186 239 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 6.91 11.4 18.8 20.6 22.1 Net Interest (Exp)/Inc (15.0) (16.3) (21.4) (22.3) (22.9) Exceptional Gain/(Loss) 15.4 (194) 0.0 0.0 0.0 Pre-tax Profit 187 (85.8) 122 184 239 Tax (37.2) (19.5) (22.6) (34.7) (45.9) Minority Interest (11.5) (0.3) (7.3) (9.1) (11.7) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 139 (106) 92.3 140 181 Net Profit before Except. 123 88.7 92.3 140 181 EBITDA 232 174 188 251 308 Growth Revenue Gth (%) 5.2 (25.4) 4.1 17.4 13.8 EBITDA Gth (%) 25.6 (25.1) 8.2 33.7 22.4 Opg Profit Gth (%) 33.0 (37.0) 10.1 48.6 29.0 Net Profit Gth (Pre-ex) (%) (3.7) (28.1) 4.1 51.7 29.2 Margins & Ratio Gross Margins (%) 33.6 33.6 35.3 37.3 37.8 Opg Profit Margin (%) 16.8 14.2 15.0 19.0 21.5 Net Profit Margin (%) 13.0 (13.2) 11.1 14.3 16.3 ROAE (%) 12.0 (8.1) 6.6 9.5 11.2 ROA (%) 5.5 (3.6) 2.8 4.1 5.0 ROCE (%) 6.1 4.1 3.3 4.6 5.6 Div Payout Ratio (%) 24.2 N/A 25.0 25.0 25.0 Net Interest Cover (x) 12.0 6.9 5.8 8.3 10.5


Page 83


Company Guide

TSH Resources


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 181 205 202 212 213 Cost of Goods Sold (122) (119) (128) (144) (138) Gross Profit 59.2 86.3 74.5 68.7 75.8 Other Oper. (Exp)/Inc (43.0) (50.8) (44.5) (43.9) (43.1) Operating Profit 16.2 35.5 30.1 24.9 32.7 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 5.51 6.16 1.21 6.22 7.19 Net Interest (Exp)/Inc (2.9) (5.5) (4.9) (5.8) (7.4) Exceptional Gain/(Loss) (70.0) (90.6) 38.0 (8.5) (10.1) Pre-tax Profit (51.2) (54.5) 64.4 16.7 22.4 Tax 1.74 (8.8) (7.3) (1.4) (8.5) Minority Interest 1.29 (1.0) (2.4) (1.5) (2.8) Net Profit (48.2) (64.3) 54.7 13.8 11.1 Net profit bef Except. 21.8 26.3 16.7 22.4 21.2 EBITDA 21.7 41.6 31.3 31.1 39.9 Growth Revenue Gth (%) (12.0) 13.2 (1.5) 5.0 0.4 EBITDA Gth (%) (20.9) 92.0 (24.9) (0.6) 28.4 Opg Profit Gth (%) (43.7) 119.3 (15.3) (17.3) 31.6 Net Profit Gth (Pre-ex) (%) 51.7 20.8 (36.6) 34.0 (5.3) Margins Gross Margins (%) 32.6 42.0 36.8 32.3 35.5 Opg Profit Margins (%) 8.9 17.3 14.9 11.7 15.3 Net Profit Margins (%) (26.6) (31.3) 27.1 6.5 5.2

Balance Sheet (RMm)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 1,824 2,211 2,350 2,394 2,467 Invts in Associates & JVs 147 144 162 183 205 Other LT Assets 285 391 384 376 369 Cash & ST Invts 59.1 57.5 90.7 171 253 Inventory 191 217 155 177 199 Debtors 146 122 128 150 171 Other Current Assets 21.5 35.4 35.4 35.4 35.4 Total Assets 2,674 3,177 3,305 3,486 3,700 ST Debt 569 910 910 910 910 Creditor 121 125 104 118 133 Other Current Liab 16.0 2.48 2.48 2.48 2.48 LT Debt 467 475 553 594 634 Other LT Liabilities 148 162 162 162 162 Shareholder’s Equity 1,247 1,357 1,422 1,539 1,685 Minority Interests 106 145 152 161 173 Total Cap. & Liab. 2,674 3,177 3,305 3,486 3,700 Non-Cash Wkg. Capital 221 246 213 242 270 Net Cash/(Debt) (976) (1,328) (1,372) (1,333) (1,292) Debtors Turn (avg days) 51.1 61.0 54.7 52.0 52.7 Creditors Turn (avg days) 71.6 95.6 87.9 73.9 73.4 Inventory Turn (avg days) 110.1 158.2 142.8 110.9 110.1 Asset Turnover (x) 0.4 0.3 0.3 0.3 0.3 Current Ratio (x) 0.6 0.4 0.4 0.5 0.6 Quick Ratio (x) 0.3 0.2 0.2 0.3 0.4 Net Debt/Equity (X) 0.7 0.9 0.9 0.8 0.7 Net Debt/Equity ex MI (X) 0.8 1.0 1.0 0.9 0.8 Capex to Debt (%) 27.0 15.3 13.3 6.8 8.7 Z-Score (X) 2.0 1.3 1.3 1.4 1.5


Page 84


Company Guide

TSH Resources


FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 187 (85.8) 122 184 239 Dep. & Amort. 51.8 60.3 63.0 65.6 68.2 Tax Paid (37.2) (19.5) (22.6) (34.7) (45.9) Assoc. & JV Inc/(loss) (6.9) (11.4) (18.8) (20.6) (22.1) Chg in Wkg.Cap. 7.95 2.68 33.2 (29.3) (28.4) Other Operating CF (84.2) 30.9 0.0 0.0 0.0 Net Operating CF 119 (22.8) 177 165 210 Capital Exp.(net) (280) (211) (195) (102) (134) Other Invts.(net) 88.6 0.27 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 (31.2) 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 15.7 32.2 0.0 0.0 0.0 Net Investing CF (175) (210) (195) (102) (134) Div Paid (31.4) (33.6) (26.9) (23.1) (35.0) Chg in Gross Debt 98.5 269 77.9 41.0 40.3 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (3.6) (1.8) 0.0 0.0 0.0 Net Financing CF 63.5 233 51.0 17.9 5.27 Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 6.85 0.10 33.3 80.4 81.4 Opg CFPS (sen) 8.24 (1.9) 10.7 14.4 17.7 Free CFPS (sen) (12.0) (17.4) (1.3) 4.65 5.66



Source: @>OĂ>]jg

Analyst: Nacekj]hĂNaoa]n_dĂPa]i

Ben SANTOSO

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 26 Feb 16 1.90 2.30 BUY

2: 10 Mar 16 2.04 2.30 BUY

3: 11 Apr 16 2.13 2.30 BUY

4: 10 May 16 1.97 2.30 BUY

5: 26 May 16 1.95 2.20 BUY

6: 01 Jun 16 1.92 2.20 BUY

7: 09 Jun 16 1.94 2.05 HOLD

8: 12 Jul 16 1.82 2.05 HOLD

9: 30 Aug 16 1.90 2.00 HOLD

10: 10 Nov 16 1.91 2.20 BUY

11: 01 Dec 16 1.91 2.20 BUY12: 14 Dec 16 1.90 2.20 BUY13: 10 Jan 17 1.88 2.20 BUY14: 10 Feb 17 1.92 2.20 BUY


1

2 3

4

5

6

78

9 10

11

12

13

14

1.72

1.82

1.92

2.02

2.12

2.22


RM

Page 85


HOLD Last Traded Price (14 Feb 2017): S$3.87 (STI : 3,072.47) Price Target 12-mth: S$3.90 (1% upside) (Prev S$3.39) Where we differ: Lower FY17F and FY18F earnings on conservative Oilseeds and Grains pretax margins Analyst Ben SANTOSO +65 6682 3707 [email protected]

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2015A 2016F 2017F 2018F Revenue 38,777 43,124 46,401 47,700 EBITDA 2,234 2,104 2,716 2,782 Pre-tax Profit 1,429 1,213 1,601 1,650 Net Profit 1,056 898 1,184 1,219 Net Pft (Pre Ex.) 1,151 921 1,184 1,219 Net Pft (ex. BA gains) 1,075 898 1,184 1,219 Net Pft Gth (Pre-ex) (%) (5.7) (20.0) 28.5 2.9 EPS (S cts) 23.4 19.9 26.2 27.0 EPS Pre Ex. (S cts) 25.5 20.4 26.2 27.0 EPS Gth Pre Ex (%) (6) (20) 29 3 Diluted EPS (S cts) 23.4 19.9 26.2 27.0 Net DPS (S cts) 8.4 8.6 9.2 9.5 BV Per Share (S cts) 335.2 329.7 347.1 364.9 PE (X) 16.5 19.4 14.7 14.3 PE Pre Ex. (X) 15.2 18.9 14.7 14.3 P/Cash Flow (X) 5.6 nm 14.1 9.7 EV/EBITDA (X) 13.7 15.3 11.8 11.4 Net Div Yield (%) 2.2 2.2 2.4 2.4 P/Book Value (X) 1.2 1.2 1.1 1.1 Net Debt/Equity (X) 0.8 0.9 0.8 0.7 ROAE (%) 6.9 6.0 7.8 7.6 Earnings Rev (%): 6 9 8 Consensus EPS (S cts): 18.7 28.4 30.2 Other Broker Recs: B: 5 S: 3 H: 11


Focus on margins Navigating volatility. China’s decelerating economic growth means that Wilmar is focused on expanding margins within its product portfolio. Over the long term, we expect Wilmar to gradually extend penetration of well-established brands through its vast existing distribution networks in Asia’s growing markets. In this report, we reiterate our HOLD call on the counter.

Earnings and TP adjusted slightly. Revisions to our CPO/soybean price forecasts and currencies positively impacts Wilmar’s earnings. We adjusted Wilmar’s FY16F/17F/18F net earnings by +6%/+9%/+8%. We expect the group’s oilseed crushing sub-segment pretax to remain firm in 4Q16 – backed by record US harvests. Wilmar’s 4Q16 Tropical Oils segment pretax contribution should likewise sequentially improve on the back of both higher ASP and volume. Given delayed harvesting in 3Q16; we also expect part of sugar seasonal pretax peak to spill over into 4Q16.

Lacking catalysts. We do not anticipate catalysts that would move the stock significantly higher in the near term. We believe the sequential recovery in 3Q16 earnings is already priced in. Notwithstanding continued biodiesel allocation in Indonesia; expansion of India presence (through Adani-Wilmar’s proposed JV with Ruchi); and gradual penetration of well-established brands – including that of Goodman Fielder – in China; Wilmar’s FY16F-19F earnings are expected to expand at a c.11% CAGR (low-base effect).

Valuation:

We employed DCF methodology (FY17F base year) to arrive at our TP of S$3.90 (WACC 7%, TG 3%) – revised up from S$3.39 previously


Wilmar’s share price is influenced by palm oil refining/soybean crushing margins on top of CPO/sugar price expectations. There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take fails to live up to our expectations (3.7m MT) next year. As Wilmar is an index component, changes in its weightings would also make it vulnerable to swings significantly above or below our TP. At A Glance Issued Capital (m shrs) 6,317 Mkt. Cap (S$m/US$m) 24,447 / 17,203 Major Shareholders (%) Archer-Daniels-Midland Co 23.9 Longhlin Asia Limited 5.3 Kerry Group Ltd 4.6




Wilmar International Version 8 | Bloomberg: WIL SP | Reuters: WLIL.SI Refer to important disclosures at the end of this report

72

92

112

132

152

172

192

212

2.3

2.8

3.3

3.8

4.3


Relative IndexS$

Wilmar International (LHS) Relative STI (RHS)


Company Guide



CPO and soybean prices. Approximately 20% of its EBIT comes from sales of CPO and Palm Kernel. Movements in CPO prices hence directly affect the group’s Plantations segment profit. As one of the largest processors of both CPO and soybeans globally, the group holds varying amounts of inventory. Abrupt changes in prices would expose unhedged inventories, if any. Generally, changes in commodity prices would also affect the group’s Consumer segment with some lag. Capacity utilisation and volume output. Wilmar continually assesses its capacity utilisation. Changes in soybean imports by competitors into China and in soybean prices may prompt Wilmar to adjust its crushing volumes as well as margins. Weather and supply chain congestion. We have imputed some impact from CY15 El Nino conditions in our forecasts. However, a worse-than-expected drop in FFB yields would still adversely impact our forecasts this year, in view of continued dry weather in some parts of Malaysia and Indonesia. Wilmar continually assesses its (origination) supply chain to avoid delays in deliveries to customers. Changes in export tax policy. Prospective increase in biodiesel production in Indonesia may cause an oversupply and lower prices of glycerin (by-product of biodiesel output) in Wilmar’s Oleochemicals unit – although this may make up only a small share of the group’s downstream operations. Zero export taxes instituted for much of CY15 in both Malaysia and Indonesia had an adverse impact on palm oil refining margins. Changes in tax policy should therefore have a direct impact on Wilmar’s refining operations. Movements in crude oil prices. Global demand for both ethanol and biodiesel are subject to certain crude oil price thresholds. Below this level, demand for both products would be adversely affected, and would influence sugarcane, corn and palm oil prices. Wilmar’s sugar milling segment is exposed to volatility in sugar prices if unhedged. Geographic exposure. Wilmar’s consolidated revenue is globally distributed, with China contributing over 50% in FY15. Southeast Asia accounted for 20%, while Europe contributed 6% of revenue. This means that currency movements in China and Southeast Asia would affect Wilmar’s earnings. Prospective economic recoveries in these markets should also improve Wilmar’s earnings outlook. Yet, we should also note that competing processors are also vying for the same markets – which would make recoveries not unique to Wilmar. The group also requires a significant amount of working capital, which would affect its borrowing costs should US dollar interest rates start to rise again.

CPO price (RM/MT)

Tropical oils pretax (US$/MT)

Oilseeds & grains pretax (US$/MT)

Sugar pretax (US$/MT)

Oil palm planted area (Ha)


2413

2168

2652

3040 3030

0.0

438.6

877.3

1315.9

1754.5

2193.1

2631.8

3070.4

2014A 2015A 2016F 2017F 2018F

4.38

14.9

0

9.44 9.43

0.0

3.0

6.1

9.1

12.2

15.2

2014A 2015A 2016F 2017F 2018F

22.3

10.69.47 9.64 9.64

0.00

4.55

9.10

13.65

18.20

22.75

2014A 2015A 2016F 2017F 2018F

13.8

6.35

12.211.3 11.1

0.0

2.8

5.6

8.4

11.2

14.0

2014A 2015A 2016F 2017F 2018F

238287 240956 245956 250956 255956

0.0

51703.1

103406.2

155109.3

206812.4

258515.6

2014A 2015A 2016F 2017F 2018F

Page 87


Company Guide


Balance Sheet:

Decent balance sheet. Adjusted for liquid working capital, the group’s net debt-to-total equity ratio was reported at 39% as at end of September 2016. We forecast FY17 EBITDA/interest ratio at 6.4x, while FY17 current ratio is forecast at 1.2x. Slightly positive ROE-WACC. We expect the group to earn an ROE-WACC spread of 0.6-0.8% in FY17F-18F. With forecast capex outlay of c.US$804-855m p.a. in FY17F-18F, we expect Wilmar to maintain positive free cash flow throughout our forecast period, yielding 3.4-6.9% of intrinsic value in FY17F-18F. Share Price Drivers: Near-term challenges. The stock is currently trading close to +1 SD above average PE, principally reflecting stronger contribution from Oilseeds & Grains segment. We believe consistent earnings delivery would drive Wilmar’s share price. Key Risks:

Volatility in CPO prices and USD exchange rates Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect profitability of planters in general. Reputation Emergence of food safety scandals is one of the risks for food producers. Lapses in the supply chain could heighten this risk. Regulatory changes Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact demand for CPO/refined oils. Market sentiment Changes in fund flows towards or out of emerging markets would affect valuations of plantation counters. Company Background

Wilmar International (Wilmar) is an integrated agribusiness company. It is involved in oil palm cultivation, edible oil refining, oilseed crushing, consumer pack edible oil processing and merchandising, specialty fats, oleochemical and biodiesel manufacturing, and grain processing and merchandising. Wilmar also manufactures and distributes fertilisers and owns a fleet of vessels.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.9

1.0

1.0

1.1

1.1

1.2

1.2

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2014A 2015A 2016F 2017F 2018F


0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

2014A 2015A 2016F 2017F 2018F


US$m

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2014A 2015A 2016F 2017F 2018F

Avg: 14x

+1sd: 14.8x

+2sd: 15.7x

‐1sd: 13.1x

‐2sd: 12.2x

10.3

11.3

12.3

13.3

14.3

15.3

16.3

17.3

18.3

19.3


(x)

Avg: 1.04x

+1sd: 1.15x

+2sd: 1.25x

‐1sd: 0.94x

‐2sd: 0.84x

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5


(x)

Page 88


Company Guide


Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F CPO price (RM/MT) 2,413 2,168 2,652 3,040 3,030 Tropical oils pretax (US$/MT) 4.38 14.9 0.00 9.44 9.43 Oilseeds & grains pretax 22.3 10.6 9.47 9.64 9.64 Sugar pretax (US$/MT) 13.8 6.35 12.2 11.3 11.1 Oil palm planted area (Ha) 238,287 240,956 245,956 250,956 255,956

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (US$ m) Tropical oils 20,009 15,607 19,202 20,152 20,058 Oilseeds & grains 17,986 17,623 18,546 20,398 21,494 Sugar 3,795 4,441 5,909 6,406 6,722 Others 2,377 2,252 2,349 2,351 2,354 Elimination (1,083) (1,147) (2,881) (2,906) (2,928) Total 43,085 38,777 43,124 46,401 47,700 Pretax (US$ m) Tropical oils 1,134 969 547 737 765 Oilseeds & grains 451 348 687 298 606 Sugar 127 134 83 160 162 Others (21) 20 17 15 15 Unallocated costs (153) (43) (122) 391 102 Total 1,538 1,429 1,213 1,601 1,650 Pretax Margins (%) Tropical oils 5.7 6.2 2.8 3.7 3.8 Oilseeds & grains 2.5 2.0 3.7 1.5 2.8 Sugar 3.3 3.0 1.4 2.5 2.4 Others (0.9) 0.9 0.7 0.6 0.6 Total 3.6 3.7 2.8 3.4 3.5 Income Statement (US$ m)

FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 43,085 38,777 43,124 46,401 47,700 Cost of Goods Sold (39,268) (34,819) (39,058) (41,597) (42,797) Gross Profit 3,817 3,957 4,066 4,805 4,903 Other Opng (Exp)/Inc (2,373) (2,561) (2,845) (3,065) (3,148) Operating Profit 1,444 1,396 1,221 1,739 1,755 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 81 101 40 82 85 Net Interest (Exp)/Inc 77 26 (26) (221) (190) Exceptional Gain/(Loss) (65) (95) (23) 0 0 Pre-tax Profit 1,538 1,429 1,213 1,601 1,650 Tax (314) (294) (256) (339) (349) Minority Interest (68) (79) (58) (78) (82) Preference Dividend 0 0 0 0 0 Net Profit 1,156 1,056 898 1,184 1,219 Net Profit before Except. 1,221 1,151 921 1,184 1,219 Net Pft (ex. BA gains) 1,162 1,075 898 1,184 1,219 EBITDA 2,185 2,234 2,104 2,716 2,782 Growth Revenue Gth (%) (2.3) (10.0) 11.2 7.6 2.8 EBITDA Gth (%) (7.8) 2.2 (5.8) 29.1 2.4 Opg Profit Gth (%) (13.0) (3.3) (12.6) 42.5 0.9 Net Profit Gth (%) (12.3) (8.7) (14.9) 31.8 2.9 Margins & Ratio Gross Margins (%) 8.9 10.2 9.4 10.4 10.3 Opg Profit Margin (%) 3.4 3.6 2.8 3.7 3.7 Net Profit Margin (%) 2.7 2.7 2.1 2.6 2.6 ROAE (%) 7.6 6.9 6.0 7.8 7.6 ROA (%) 2.6 2.6 2.3 2.9 2.9 ROCE (%) 2.8 3.0 2.8 3.8 3.6 Div Payout Ratio (%) 33.1 36.0 43.2 35.0 35.0 Net Interest Cover (x) NM NM 47.7 7.9 9.2 Source: Company, DBS Bank

Page 89


Company Guide


Quarterly / Interim Income Statement (US$ m)

FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 10,649 9,431 9,003 9,367 11,084 Cost of Goods Sold (9,385) (8,296) (8,040) (8,885) (9,943) Gross Profit 1,265 1,135 963 482 1,141 Other Oper. (Exp)/Inc (808) (725) (636) (664) (569) Operating Profit 457 411 327 (181) 572 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 14 58 13 32 29 Net Interest (Exp)/Inc 10 (2) (38) (38) (41) Exceptional Gain/(Loss) (79) 1 20 1 7 Pre-tax Profit 402 468 321 (186) 567 Tax (115) (71) (59) (21) (150) Minority Interest (20) (32) (23) (13) (25) Net Profit 268 365 239 (220) 392 Net profit bef Except. 347 364 220 (221) 385 EBITDA 650 645 534 34 785 Growth Revenue Gth (%) 14.7 (11.4) (4.5) 4.1 18.3 EBITDA Gth (%) 52.0 (0.8) (17.3) (93.6) 2,199.9 Opg Profit Gth (%) 79.2 (10.0) (20.5) nm nm Net Profit Gth (%) 38.5 36.5 (34.4) nm nm Margins Gross Margins (%) 11.9 12.0 10.7 5.1 10.3 Opg Profit Margins (%) 4.3 4.4 3.6 (1.9) 5.2 Net Profit Margins (%) 2.5 3.9 2.7 (2.3) 3.5 Balance Sheet (US$ m)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 9,477 8,983 8,949 8,804 8,611 Invts in Associates & JVs 2,153 2,757 2,797 2,879 2,964 Other LT Assets 7,412 7,397 6,585 6,672 6,763 Cash & ST Invts 9,139 5,265 5,396 6,552 7,567 Inventory 6,581 6,318 7,234 7,705 7,927 Debtors 8,040 6,652 8,169 8,790 9,036 Other Current Assets 756 567 567 567 567 Total Assets 43,558 37,939 39,698 41,969 43,435 ST Debt 15,204 11,076 14,613 15,724 16,164 Creditor 3,332 3,034 3,571 3,803 3,912 Other Current Liab 661 580 593 628 633 LT Debt 7,158 6,348 4,480 4,480 4,480 Other LT Liabilities 792 821 551 579 608 Shareholder’s Equity 15,495 15,127 14,880 15,667 16,468 Minority Interests 916 952 1,010 1,088 1,170 Total Cap. & Liab. 43,558 37,939 39,698 41,969 43,435 Non-Cash Wkg. Capital 11,384 9,922 11,808 12,631 12,985 Net Cash/(Debt) (13,224) (12,159) (13,698) (13,652) (13,077) Debtors Turn (avg days) 64.0 69.1 62.7 66.7 68.2 Creditors Turn (avg days) 30.9 34.1 31.5 33.1 33.6 Inventory Turn (avg days) 65.2 69.1 64.7 67.0 68.2 Asset Turnover (x) 1.0 1.0 1.1 1.1 1.1 Current Ratio (x) 1.3 1.3 1.1 1.2 1.2 Quick Ratio (x) 0.9 0.8 0.7 0.8 0.8 Net Debt/Equity (X) 0.8 0.8 0.9 0.8 0.7 Net Debt/Equity ex MI (X) 0.9 0.8 0.9 0.9 0.8 Capex to Debt (%) 6.0 6.1 4.8 4.2 3.9 Z-Score (X) 1.9 2.1 2.0 2.1 2.1


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Company Guide


Cash Flow Statement (US$ m)

FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 1,538 1,429 1,213 1,601 1,650 Dep. & Amort. 660 737 843 895 942 Tax Paid (314) (294) (256) (339) (349) Assoc. & JV Inc/(loss) (81) (101) (40) (82) (85) Chg in Wkg.Cap. (201) 1,353 (1,898) (859) (359) Other Operating CF 32 (7) (105) 25 (6) Net Operating CF 1,634 3,117 (244) 1,241 1,793 Capital Exp.(net) (1,350) (1,063) (912) (855) (804) Other Invts.(net) 0 0 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (12) 200 (38) (53) (110) Net Investing CF (1,362) (863) (950) (908) (914) Div Paid (383) (381) (369) (397) (418) Chg in Gross Debt (3,833) (4,938) 1,670 1,111 440 Capital Issues 0 0 0 0 0 Other Financing CF (393) (628) (53) 28 29 Net Financing CF (4,609) (5,947) 1,247 741 51 Currency Adjustments 0 0 0 0 0 Chg in Cash (4,336) (3,693) 53 1,075 929 Opg CFPS (S cts) 28.7 27.5 25.8 32.8 33.6 Free CFPS (S cts) 4.4 32.1 (18.1) 6.0 15.4



Source: DBS Bank


S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 19 Feb 16 3.16 3.70 BUY

2: 10 Mar 16 3.18 3.85 BUY

3: 11 Apr 16 3.39 3.85 BUY

4: 15 Apr 16 3.50 3.85 BUY

5: 10 May 16 3.41 3.85 BUY

6: 11 May 16 3.29 3.75 HOLD

7: 31 May 16 3.32 3.75 HOLD

8: 12 Jul 16 3.30 3.76 BUY

9: 20 Jul 16 3.16 3.76 BUY

10: 08 Aug 16 3.04 UNDER REVIEW

11: 11 Aug 16 3.09 3.13 HOLD12: 10 Nov 16 3.35 3.39 HOLD13: 11 Nov 16 3.30 3.39 HOLD14: 14 Nov 16 3.33 3.39 HOLD

Note : Share price and Target price are adjusted for corporate actions. 15: 14 Dec 16 3.70 3.39 HOLD16: 10 Jan 17 3.67 3.39 HOLD17: 10 Feb 17 3.93 3.39 HOLD

1

2 3

4

56 7 8

910

11

121314

15

1617

2.85

3.05

3.25

3.45

3.65

3.85

4.05


S$

Page 91

Industry Focus


DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

Completed Date: 17 Feb 2017 17:55:56

Dissemination Date: 17 Feb 2017 19:08:01

GENERAL DISCLOSURE/DISCLAIMER

This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd,

its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated

in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS

Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,

the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to

change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard

to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of

addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal

or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of

profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This

document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or

persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have

positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and

other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can

be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.

The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it

may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no

obligation to update the information in this report.

This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned

schedule or frequency for updating research publication relating to any issuer.

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and

assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on

which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual

results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED

UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:

(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and

(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein.

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.

Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)

mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the

commodity referred to in this report.

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Industry Focus


DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research

department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction

in the past twelve months and does not engage in market-making.

ANALYST CERTIFICATION

The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the

companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her

compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in the report. The DBS Group has

procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of

research reports. As of 17 Feb 2017, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold

interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). The research analyst(s)

responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and

procedures are in place to ensure that confidential information held by either the research or investment banking function is handled

appropriately.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a proprietary position in the

First Resource, Indofood Agri Resources, Golden Agri Resources, Wilmar Internationalrecommended in this report as of 31 Jan 2017.

2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

Compensation for investment banking services:

3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a

manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further

information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document

should contact DBSVUSA exclusively.

RESTRICTIONS ON DISTRIBUTION

General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report is being distributed in Hong Kong by or on behalf of, and is attributable to DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission and/or by DBS Bank (Hong Kong) Limited which is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission. Where this publication relates to a research report, unless otherwise stated in the research report(s), DBS Bank (Hong Kong) Limited is not the issuer of the research report(s). This publication including any research report(s) is/are distributed on the express understanding that, whilst the information contained within is believed to be reliable, the information has not been independently verified by DBS Bank (Hong Kong) Limited. This report is intended for distribution in Hong Kong only to professional investors (as defined in the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and any rules promulgated thereunder.) For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.

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Industry Focus


Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.

United Kingdom This report is produced by DBS Bank Ltd which is regulated by the Monetary Authority of Singapore. This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom. In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.

Dubai

This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United States This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank Ltd

12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel. 65-6878 8888

e-mail: [email protected] Company Regn. No. 196800306E

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