PT SIMP's listing hogged the limelight
Reiterate OUTPERFORM and target price of S$2.73. We are more positive after today's results teleconference, following indications: 1) that the group is unlikely to sell new PT SIMP shares at a discount to parent valuations; 2) of potential M&As at the IndoAgri level which are likely to be earnings-accretive; and 3) of potential upside to our FFB output-growth projections because of favourable weather. We are keeping our earnings forecasts and target price of S$2.73 (14.5x forward P/E). Judging from its share-price underperformance since the announcement of listing plans for its key operating subsidiary PT SIMP, we believe investors have priced in their listing concerns and may have overlooked potential positives from this exercise. Potential re-rating catalysts are the PT SIMP listing, higher-than-expected output growth and any M&As, in our view.
Highlights
During this morning's 1Q11 results teleconference, CEO Mr Mark Wakeford, CFO Miss Mak Mei Yook and IR manager Miss Elaine Soh briefed analysts and fund managers on the group's results, recent developments and prospects. Questions centred on the proposed listing of PT SIMP and outlook for its business divisions.
Recap of listing of PT SIMP. The group earlier proposed to list its key operating subsidiary and 90%-owned PT SIMP on the Jakarta Stock Exchange to enhance shareholders' value. The rationale expressed was: 1) to reduce gearing and fund capex requirement of US$200m for the current year; 2) to reduce foreign-currency risks via fund-raising in rupiah as all the group's debt lies with PT SIMP; 3) to facilitate payment of future dividends at a reduced withholding tax of 10%; and 4) to expand into new businesses. IFAR has committed cash holdings of S$230m for acquisitions. The above proposal was approved by shareholders in an EGM yesterday. We gather that none of the shareholders voted against it.
Clarification of valuation of PT SIMP. The group intends to list PT SIMP at a fair price. It is not at liberty to reveal the valuation range as this has not been finalised. But it is allegedly comfortable with its current gearing (net gearing of 0.28x) and will only list PT SIMP at a fair or right price. What should be even more comforting to IndoAgri shareholders is its indication that the proposed 20% new PT SIMP shares are unlikely to be placed out at a discount to its parent's valuations as this would not be in line with the rationale of enhancing shareholders' value.
Potential M&As at IndoAgri level. In terms of expansion into new businesses, management is interested to acquire operating assets rather than ? reenfield assets. It does not discount the possibility of diversifying into new crops provided these are grown in the right locations e.g. ideal climatic and soil conditions with a ready supply of labour as well as strong domestic demand. The new acquisitions would most likely be made outside Indonesia. Although, the group prefers upstream assets, it does not rule out downstream operations for existing crops. It is not looking to acquire assets belonging to the Salim Group or related party assets.
Potential upside to FFB output growth. The strong jump in 1Q11 FFB production came mostly from its South Sumatra and Kalimantan estates on the back of improved weather. Last year, FFB yields from these estates were hurt by heavier-than-usual rainfall. FFB output from its North Sumatra estates declined 2% yoy while output from estates in Central Kalimantan was up slightly in 1Q11. It continues to guide for 5-10% output growth for the full year. However, we do not rule out higher guidance later in view of normal weather up until Apr 11 and with expectation of 15-20,000 ha of palm-oil estates coming into maturity in 2012. The group's CPO sales volume of 187,000 tonnes in 1Q11 was 6% higher than its CPO output as it cut inventory holdings to 41,000 tonnes as at end-Mar 11 from 52,000 tonnes as at end-Dec 10. Rubber sales volume fell 25% to 4,400 tonnes in 1Q11 because of lower purchases from plasma and third parties.
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