BWPT is well-known as low-cost CPO producer

BW Plantation: Low cost. But, too much capitalizing expenses to Balance Sheet?
(Initiate with Sell) (BWPT, Rp1,270, SELL, TP: Rp850)

We initiate coverage on BWPT with Sell call, non-concensus call, with TP of Rp 850 as: 1) BWPT would book lower FY13F net income (our EPS is 40% lower than consensus) due to loss-making newly mature (Figure 41 and 42) and lower CPO price. 2) downtrend in CPO price in 2H13 would make its PE multiple to decrease.

Plantation companies have underperformed the JCI

Drag down by lower CPO price and sizable newly mature area. There are 12,732 ha newly mature area in FY13F (47.9% of FY12 mature area), which around 9,019 ha (70.8% of 12,732ha) is located in East Kalimantan, where BWPT’s first palm oil mill in East Kalimantan would commence its operation since Oct’13. Therefore, BWPT would only sell FFB in East Kalimantan for most of 2013. We are confident that FY13F newly mature plantation contributes net loss to consolidated net income, unless the costs are capitalized to balance sheet (Figure 41 & 42)

Too much capitalising expenses to Balance Sheet? BWPT is well-known as  low-cost CPO producer. However, we notice that although BWPT charges cost per ha to Income Statement pretty much lower than its peers, the rate of BWPT capitalising expenses to immature plantation (balance sheet account) increase significantly in the last 2 years, much higher than BWPT’s historical pattern and its peers (Figure 36, 37 and 38). According to Indonesian SFAS, land compensation is capitalised to ‘Deferred charges on landrights’ (before 2013) or ‘Fixed asset –land’ (since 2013), not capitalised to ‘immature plantation’.

Need huge money to fund its capex, while it has high net gearing ratio. BWPT need external funding around Rp700bn to fund its FY13F capex around Rp1tn. Meanwhile, its net gearing ratio is already high at 167% in FY12 (increase from 51% in FY10). BWPT indicates that it would get around Rp700bn from bank in 2Q13.

Initiate with SELL call with TP:Rp850. We derive our TP of Rp850 based on based on PE Target of 13.5x applied to our EPS forecast for 2013 (-1 SD to 3-year mean).  We have Sell call on BWPT as we think: 1) there would be earning disappointment in FY13F. 2) Downtrend in CPO price in 2H13 would drag down its PE multiple.