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.

Plantation: The calm before the storm

Plantation: The calm before the storm (Underweight)

YTD, plantation companies have underperformed the JCI. However, we see further downside in share prices of plantation stocks in 2H13 because we expect CPO price would decrease further in 2H13, which would drag down their PE multiples. Hence we rate AALI, BWPT and LSIP as SELL, and SGRO as Neutral on cheap valuation.

Bleak outlook on CPO price. We foresee Rotterdam-based FY13F average CPO price of US$825 per ton (equivalent to RM2,271 per ton), a 17.3% yoy decline from FY12.  We expect strong CPO production growth in FY13F following large addition to newly maturing plantation area in FY12 and FY13F (from aggressive new planting in FY08 and FY09). 1H13 may see relatively high average CPO price of US$865 per ton due to seasonally low production, but we expect palm oil inventory to spike, generating unfavorable palm oil stock usage ratio, in 2H13 due to rising newly maturing plantation area and seasonally high FFB yield. This may well compel CPO mills to become distressed sellers because CPO production is likely to outpace sales. Thus we expect CPO price to slide to US$785 per ton in 2H13.

Not all volume production growth contributes additional net income. Due to a large part of their volume growth coming from newly maturing plantation area in 2013, AALI and BWPT’s expected rise in revenue would not in our view contribute additional net income. Newly maturing area often generates losses as their low productivity fails to compensate for their production costs.

SELL call on AALI, LSIP and BWPT, Neutral on SGRO. PE multiples of palm oil plantation companies decrease when CPO price decreases. Therefore, although plantation companies have underperformed the JCI, we still see further downside as we expect CPO price would further decrease in 2H13. As a result, we have sell calls for 7 months period on AALI, LSIP and BWPT. We have Neutral rating on SGRO as we think the downside of its share price is limited as its EV/ha of US$7,930 as cheap as new planting cost.