Bigger is not always better. In the case of CPO companies, smaller in many cases is actually better cos it is much easier to grow and manage your estate at a faster pace.
This must be one of the top ideas in the small/mid cap space (US$1.5m av daily turnover) where there is almost no research coverage (except local brokerage houses). BW has one of the best managed CPO estate with the highest percentage of their planted area going into maturity over the next few years. Their mechanized harvesting and fertilizing process help lift their FFB yield to 27%+ Vs industry av 21.8% . And yet this stock is among the cheapest (in every metrics) in the industry trading at only $8,500 EV/ha, and 6.8x EV/Ebita 11CL. Our target price of Rp1,100 is based on a conservative $13,000 EV/ha (industry average now at $17k) and 13x PE 11CL. The bigger CPO plays currently already trading well above those numbers. This is a BUY.
Key points from the report:
BW Plantation is a small but extremely fast growing palm oil plantation with the highest FFB yield in the industry at 27.4 tonnes per ha.
As of 2009, 13,000 ha have reached maturity and will double in current size to 26,000 ha within three years. The total planted area will also double in size to 80,000 ha by 2013.
Going forward, the challenge for the company would be to replicate their high yield into relatively much larger new development areas and to maintain this yield as the company grows bigger.
Macro data supports a positive CPO price outlook and BW Plantation is a key beneficiary of this as it is among the most leveraged to CPO price movement. Every US$100/t increase in CPO price will raise the company’s earnings by 23%.
The company generates around 25% of ROAE, while earnings could grow by 30% CAGR until 2012. Despite the stellar operational performance, the market is valuing the company at US$8,300EV/ha, still among the cheapest in the industry.
Our target price of Rp1,100 is based on a blended valuation of US$13,000 EV/ha and 13x 2011 PER.
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