Mandiri Sekuritas BUDI: Green Power

BUDI Acid Jaya (BUDI), Indonesian largest producer of cassava-based products, is soon to monetize biogas power plants project which will result in significant cost-savings and additional revenues from CER credit sale. Additionally, the company is planning to import new seeds that will double cassava yield/ha, leading to more competitive selling price. These, coupled with shift in product mix to more lucrative downstream products are the main catalysts for the company. Based on DCF method, we arrived at a target price of Rp240/share and a Buy recommendation as the stock provides a 23.1% upside potential.

Biogas power plants provide cost-saving and additional revenue. The company has focused on 8 projects regarding biogas power plants. Four projects have started partial operations with one of them having been registered at UNFCCC and waiting for verification to get CER credit (Certified Emission Reduction). At full utilization, these 4 projects generate electricity cost-savings, which is equal to US$7.0mn pa on top of additional revenue from sales of CER credits amounting to US$6.0mn pa. The remaining projec! ts are ex pected to be completed by the end of 2009. While cost-savings has already been realized, the company expects to book CER revenue by 2010 due to some regulatory approval needed to sell carbon credits.

Greater cassava seeds will double yield/ha. The company plans to import new cassava seeds that will increase cassava yield from 30ton/ha to 80ton/ha. However, the company is still working on getting import permit from the government. This plan, if successful, will increase its competitiveness through mass production that could lead to more competitive prices.

Shift towards profitable products. While tapioca starch remains as its main product, fructose and glucose are derived from further processing of tapioca starch. Expansion of these products allows the company to reap higher margin. The acceptance rate of these products is gradually increasing with 70.0% CAGR from 2005-08 on revenues. Going forward, the company is putting more emphasis on these products as more relevant earning contributors.

Buy stance on BUDI. We re-initiated coverage with a Buy recommendation based on new DCF based-TP of Rp240/share, implying a 10.1x PER09F. Currently, BUDI is trading at PER09F of 8.2x Risks are: 1) the company is highly leveraged (92.8% net gearing as of 1Q09), 2) uncertainty on CER credit certification on the remaining projects.