Singapore Commodity Stock Technical Analysis

Noble Group Ltd: Our preferred pick within the commodities sector

2009-09-22T07:49:00.000+08:00

Rosy prospects at undemanding valuations. Evidence of a global economic recovery has enhanced investors' preference for cyclical stocks such as commodities. Most stocks have appreciated significantly on expectations of earnings recovery, leaving few with cheap valuations. Against this backdrop of weighing the twin objectives of valuations and outlook, we reiterate Noble Group Ltd (Noble) as our preferred pick within the commodities sector. Noble has performed exceedingly well against an extremely challenging boom-and-bust cycle in 2008 and 1H09. Relentless market share gains have driven volume growth and good balance sheet management has yielded the group superior financial flexibility to capitalise on inorganic growth opportunities. We expect Noble to reap the rewards of its good management in FY10 as global economies recover and commodities markets normalise.

Multiple growth drivers, strong financial flexibility. Noble's growth prospects are backed by several drivers: (i) market share gains as buyers seek quality counterparties, (ii) normalising commodities markets, (iii) new capacity coming on stream, and (iv) inorganic growth. Noble recently acquired distressed assets of SemFuel via bankruptcy proceedings. The acquisition is expected to boost its product portfolio and enhance synergy. We believe that more distressed assets could emerge from the economic slump. Noble is well positioned to capitalise on such opportunities given its strong cash position (US$805.8m as of 1H09). The group's prudent balance sheet management has allowed it to fund acquisitions without needing to raise additional capital. In contrast, its peer Olam has recently raised additional capital to fund inorganic expansion, at the expense of diluting existing shareholders' interests.

Reiterate BUY, fair value raised to S$2.50. We have raised our FY10 revenue and earnings assumptions on the back of stabilising commodities prices. This lifts our fair value estimate to S$2.50 (previously S$2.26). Despite the recent share price appreciation, Noble trades at just 13.6x FY09F PER, a sharp discount to Olam's 22.7x PER. Current valuations are also undemanding against its historical valuations of 4.1x to 22.1x PER. The stock may see an upward re-rating as investors gain appreciation of its sound balance sheet health. We maintain our BUY rating on the stock.

Wilmar International: Stronger then expected 2Q09

2009-09-18T07:58:00.000+08:00

Ahead of expectations. Wilmar's 2Q09 EBIT and net profit rose by 8.8% and 14.0% y-o-y to US$538.7m and US$378.1m, respectively - despite a 27% y-o-y drop in revenues to US$5,712.3m. The group's 2Q09 pretax margin eased to 9.2% from 10.5% in 1Q09, but rebounded from 5.6% in 2Q08. Sequentially, palm & lauric merchandising and processing (M&P) pretax margin/MT declined to US$41 (from US$55 in 1Q09); although that for oilseeds dropped to US$27 (from US$47 in 1Q09). While flat to weaker oilseeds M&P margin was anticipated, that for palm & lauric came out stronger than expected. The group's consumer products also posted strong pretax margin of US$88/MT (vis-vis our initial forecast of US$35/MT for the full year).

Recovering commodity prices reflected in higher debts. Short-term borrowings increased to US$6.1b from US$3.4b in 1Q08 mainly to account for higher working capital needs on recovering feedstock prices q-o-q. Total borrowings increased to US$7.7b at the end of June translating to net gearing ratio of 37.8%, up from 22.6% in 1Q09.

TP upgraded to S$7.25, Buy call reiterated. We raised our assumption of palm & lauric M&P margin to 5.8% (from 4.4%); but reduced that for oilseeds M&P to 7.0% (from 7.7%). We also raised consumer products' margin assumption to 7.0% (US$87/MT) from 2.8% (US$35/MT), in light of the stronger-than expected performance. FY09F-10F earnings were hence upgraded by 13.2%-12.5%. We raised our DCF-derived, fully diluted fair value to S$7.25 (WACC 9.8%, terminal growth rate 3%). Our Buy call is reiterated for 16% upside (excluding 1% FY09F dividend yield).

Indofood Agri Resources - 2Q09: Results above expectations; expect sturdy margin in 2H09

2009-09-17T08:19:00.000+08:00

2Q09 core net profit jumped 78% qoq due to higher CPO ASP. We expect margin to remain stable in 2H09. We raise our target price to S$2.00 on higher margin assumption and a stronger rupiah against the US dollar.

Strong 2Q09 earnings on higher ASPs and forex gains. Indofood Agri Resources (IFAR) posted strong 2Q09 core net profit (excluding changes in fair value of biological assets), which increased 78% qoq to Rp427b. This was mainly attributable to higher crude palm oil (CPO) average selling prices (ASP) (+24% qoq) offset by lower CPO sales volume (-3% qoq), as well as forex gains of Rp240.2b in 2Q09 vs a loss of Rp94.8b in 1Q09.

1H09 core net profit, however, declined 21% yoy. Results are above our expectation as 1H09 core net profit represents 63% of our previous forecast. EBITDA margin improvement in 2Q09. EBITDA increased 31% qoq in 2Q09 on stronger revenue while cost held steady. Therefore, EBITDA margin improved to 37% in 2Q09 from 33% in 1Q09.

Sturdy CPO production ahead. As about 40% of plantation area is in the prime age and can produce high yield, and another 29% is expected to become mature area of about 54,789ha, we expect fresh fruit bunch (FFB) production to increase at a three-year CAGR of 9% in 2008-11.

Expect stronger revenue and sustainable margins in 2H09. We expect IFAR to post robust revenue growth in 2H09 on the back of sturdy CPO prices and higher production volume. Moreover, we believe margins in the plantation division are sustainable thanks to lower fertiliser purchase prices. Fertiliser prices ytd have fallen 30% compared with that in 2008. And IFAR’s current fertiliser price is 10% lower than in 1Q09.

Maintain BUY. As we have lifted our earning forecasts, we therefore raise our target price from S$1.45 to S$2.00, based on 12x 2010F PE for mid-cap and integrated plantation players.

More clarity on Wilmar China IPO valuation?

2009-09-16T07:55:00.000+08:00

Strategic investment by the Kuok Group: In an announcement yesterday evening by Wilmar International (WIL), Wilmar China Limited (WCL) – a wholly-owned subsidiary and the entity for the China business IPO – has sold 1.61% of the enlarged issued share capital of WCL for HK$1.93 billion (US$250 million) to 3 entities (Kerry Holdings Limited, Great Cheer Limited and Zheng Ge Ru Foundation) which are members of the Kuok Group. This essentially values WCL at ~US$15.5 billion based on our estimates.

Valuations: The transaction price values WCL at 20x/18x & 19x/17x consensus/J.P. Morgan earnings estimates for FY09E/FY10E based on 50% of WIL’s group earnings (which is derived from China).

Subscribers to top up in the event of better valuation achieved: The announcement further indicated that in the event the valuation obtained in the IPO is higher, the subscribers will be required to top up the valuation difference to WCL while no adjustments will be made if the valuation achieved were equal or lower.

Transaction sets a floor valuation, confirming management guidance: We believe this transaction essentially sets a floor to the valuation of the China business IPO at ~20x P/E which sends a strong signal that the 20-25x P/E valuation range guided by the company is achievable.

First Resources - Remain cautious due to earnings volatility

2009-09-15T07:44:00.001+08:00

Despite strong 2Q09 results and the strengthening of the rupiah against the US dollar, we remain cautious on FR’s earnings volatility on cross currency swap. Downgrade to SELL with a fair price of S$0.90.

Focusing and expanding on upstream business. FR plans to expand its upstream business through expanding its plantation business with long-term target of about 200,000ha. Currently, FR owns about 170,000ha of landbank and planted area of 100,300ha (nucleus and plasma). It will only expand its downstream business once its crude palm oil (CPO) production hits 1.0m tonnes. In 2008, it produced about 323,000 tonnes of CPO.

Higher CPO production coming on stream in 2H09. On the back of the usual seasonality patterns in 1H09, FR expects 2H09 CPO production to exceed 1H09 by about 18%. It targets a 10% yoy increase in CPO production in 2009 and another 10% yoy growth in 2010.

Most CPO production would be sold on “spot-basis” in 2H09. FR has a selling policy to maintain forward selling by not more than 40% of total CPO production. In 2H09, FR expects most of its CPO production to be sold on “spot-basis”. It sells only about 15% of its production based on forward contract. Its long-term contract with Wilmar is expected to expire by the end of 2009.

We raise our net profit forecasts for 2009 and 2010 by 4% and 3% to Rp619b and Rp886b respectively after fine tuning our models given a stronger rupiah vs the US dollar.

Downgrade to SELL with a higher fair price. As we rollover our PE valuation into 2010F, we raise our fair price from S$0.39 to S$0.90, pegged at 10x 2010F PE (small-cap, upstream player). However, as the share price of FR has exceeded our fair price and we remain cautious on its earnings volatility, we downgrade the stock to SELL. We prefer Indofood Agri Resources (BUY/Target: S$2.00) on better earnings visibility and undemanding valuation of 11.4x 2010F PE.

Wilmar - Need To Expedite

2009-09-14T08:27:00.000+08:00

A Department director of China’s National Development & Reform Commission yesterday warned that the soy crushing capacity in the country is “far larger than needed”, suggesting Beijing could push for consolidation in the sector.

(About half of the 80 mln tones of annual soy crushing capacity were not operating in 2008, vs 44% utilization in 2007. The situation is unlikely to improve in 2009, hence the need for consolidation.)

Wilmar is the largest in China with daily average capacity of 32,000 tonnes, vs state-owned COFCO’s 17,100 tonnes. As China had earlier restricted expansion by Wilmar, the latest news should not affect it that much.

Even so, it should expedite the listing of its China operations in Hong Kong. (It has been 4 months since Wilmar first confirmed such plans.) Indications are that the IPO by end ’09 is on track.

We have a Trading BUY on Wilmar, pending the HK listing, and despite its “rich” valuation. At $6.50 (market cap of S$41.19 bln), Wilmar is on 17.5x latest 12 months earnings of US$1643.34 mln / S$2347.62 mln.

Golden Agri-Resources - 2Q09: Strong results but below expectation

2009-09-11T08:15:00.000+08:00

Net profit of Golden Agri Resources (GGR) soared by 543% qoq in 2Q09. As share price has exceeded our fair price, we downgrade to stock from BUY to SELL.

Strong results in 2Q09, but still below expectation. Net profit of Golden Agri-Resources (GGR) soared by 543% qoq to US$55m in 2Q09 on the back of higher palm products production (+30% qoq) and higher CPO price.

However, 1H09 net profit still declined 78% yoy due to lower ASP, higher fertiliser costs and lower production. Results were below our expectation as 1H09 net profit represents only 25% of our full-year forecast.

CPO production volume recovered in 2Q09. CPO production rose 31% qoq in 2Q09 but still fell 2% yoy in 1H09 as the company experienced poor 1Q09 production on the back of biological tree stress, and less favourable weather conditions, mostly in southern parts of Sumatra and South Kalimantan.

Margin improved on sturdy CPO prices. Gross margin improved to 23% in 2Q09 on stronger CPO prices. But 1H09 gross margin declined to 20% due to forward buying on higher fertiliser cost as well as lower selling prices.

Target 30,000ha of new planting in 2009. GGR targets new planting area of 30,000ha for 2009. During 1H09, the company added 9,800ha of new planting area. This year, the company has a capex of about US$225m.

Higher earnings in 2H09. We expect higher earnings in 2H09 than in 1H09 on the back of sturdy CPO prices in 2H09 as well as improved margins mainly from lower fertiliser cost in 2H09. Management indicated that nucleus production cost (ex-mill) is expected to maintain at US$250/tonne in 2009.

Downgrade to SELL. As share price has exceeded our fair price, we downgrade GGR from BUY to SELL with a fair price of S$0.48, based on 12x 2010F PE for mid-cap and integrated plantations players. We recommend investors to take profit on GGR and start to accumulate at S$0.40.

Straits Asia - Forestry request approved

2009-09-10T08:39:00.000+08:00

Straits Asia has been granted permission to mine the Northern area of its Sebuku operations, the so-called Cagar Alam concession, after waiting for over three years. The approval is inline with our long-time expectation and incorporated in our current valuation and price target.

The advantages of the approval are four fold for Straits Asia; that is, 1) 50-60mt higher reserves from a 12 meter thick coal seam, 2) 2-6mt higher production in the medium-term, 3) lower weighted average costs due to low 4x stripping ratio, and 4) weighted average higher selling price due to higher coal quality. We expect the company to increase production within nine months and for the Sebuku mine to produce 3-4mt in 2010.

We re-iterate our Buy rating on Straits Asia despite its strong performance year-todate as we expect a shortfall in thermal coal over the next two years. We believe coal demand will regain momentum inline with economic growth, while supply remains tight due to neglect and lack of investment. As Chinese metal smelters ramp up production in H209, we note that coal prices should strengthen further as they account for 25-30 pct of power consumption.

Our 12-month price target of S$2.50 is based on a 2010E PE multiple of 12.7x and WACC of 13%.

Olam - Growth is in the price

2009-09-09T08:22:00.001+08:00

Olam is trading at 23x diluted FY10F EPS, a significant premium toother regional agri players. We believe the stock is fully pricing in our diluted earnings CAGR of 18% over FY09F-FY11F, and implied upside is limited. We thus downgrade Olam to NEUTRAL from Buy.

We increase FY10F earnings by 6% and by 2.5% for FY11F, driven mostly by lower assumptions for debt and financing costs as compared to our earlier estimates.

Delivering returns on investments and M&A’s will be critical in determining the company’s future business momentum. Olam has invested about US$750mn in various mergers and acquisitions over the past two years. We believe it has seen mixed results in integrating and improving the profitability of new ventures.

Recent equity dilution worth S$437mn to Temasek helps Olam’s balance sheet. Olam’s net gearing should fall from ~4x in FY08 to 2.1x in FY10 post dilution. The near-term impact from the stake sale looks positive, as our calculations indicate FY10F earnings would have been 5% lower sans equity raising.

We recommend switching from Olam to Noble Group as we expect Noble to outperform Olam driven by attractive valuations on a similar return profile, key Greenfield investments nearing maturity and likely re-rating due to restructuring of its coal assets portfolio.

Indofood - Misperception and earnings growth – strong stock drivers

2009-09-08T07:57:00.000+08:00

The misperception of Indofood’s earnings quality and growth suggests significant upside. Importantly, the noodle business, and not CPO, will drive future profits, accounting for two-thirds of NPAT. We raise our earnings estimates by 27% and 32% for FY09 and FY10, respectively, putting us at 36% ahead of the Street.

We believe there is material upside to our estimates as they are based on a modest 2% increase in noodle prices, a wheat price that is 15% higher than spot and an assumption of no debt paid down.

We believe that Indofood’s earnings are relatively insulated from the volatility in commodity prices. Indofood is 3x less volatile than pure CPO plays. A 10% increase in wheat prices can be offset by a < 2% increase in the price of noodles.

As Indofood is trading at 10.6X FY10 (7.1X ex-IFAR), we find it attractive. We raise our target price to Rp3,500, implying FY10 P/E of 14.7X and 11.7X ex-IFAR, a material discount to regional peers’ 15.2X. The implied valuation does not appear to be too demanding given the stability of the company’s earnings, and because it is one of the best proxies to domestic consumption. Risks: rupiah volatility and rising wheat prices.

First Resources: New US$100m CB to have 7% dilution

2009-09-07T07:55:00.000+08:00

First Resources today announced the issuance of US$100m new Convertible Bonds (CB) with 5.625% coupon and conversion price of S$1.24735/share using fixed exchange rate of S$1.4479/USD. The tenor for the CB is 5 years (maturity date 22 September 2014) at 104.34%; with a put option in 3 years' time (22 September 2012) at 102.44% (yield to put: 6.375%).

As a result of the issuance, the group's net gearing is estimated to decline slightly to 0.23x from 0.26x as at 30 June 2009 after accounting for the value of the equity portion of the CB, minus cash received (net of issuance cost).

Upon full conversion, the CB would represent 116,078,086 new shares, or 7.3% potential dilution - to the current share price (excluding net interest) or to S$1.02 in our TP (from S$1.10). We will account for the dilution when it is in the money.

We are maintaining our Hold call on the stock with TP S$1.10.

Olam - Sell-down overdone

2009-09-04T07:53:00.000+08:00

Olam announced the launch of a new 7-year convertible bond issue of US$400m. While the market should not be surprised at new debt-raising, given management’s earlier explicit intention to gear up, we believe a potential equity dilution of about 10% will result in slightly negative sentiments.

Management expressed that the main attraction of this deal was the long tenure, which is in line with its intention to lengthen the overall term of its debt portfolio to match higher asset intensity. While the entire amount may not be utilised in the immediate term, being backed by this cash will give management the confidence in executing M&A plans.

Post-CB, Olam has an estimated cash position of US$900m. With no immediate re-financing needs, non-utilised cash for the moment will be used to retire existing higher interest debt. CEO Sunny Verghese stated that there is unlikely to be another equity-linked capital raising exercise for the next 3 years and reiterated the target gearing ratio of 2.5-3.5X for working capital and 1-2X for long-term assets.

Separately, Olam also announced the acquisition of a stake in New Zealand Farming Systems Uruguay (NZFSU), a New Zealand-listed firm with its dairy farming operations in Uruguay. The stake was purchased via Hunter Hall Investment Management. At this moment we believe earnings contribution is negligible, although this small non-controlling stake could be a precursor to a larger stake in the future.

While we believe there could be a potential share price overhang around the conversion price, the 7.3% sell-down has been overdone, and is a good entry point for investors. Conversion price now represents a 35% premium to current share price. We maintain our target price of $2.98 which is based on 25X 2010F.

Indofood Agri Resources - Outsized good results

2009-09-03T08:38:00.000+08:00

Indofood Agri Resources (IndoAgri) reported 2Q FY09 results before the market opened on 14 August. Net profits declined 3.9% YoY, down 19.3% YoY if one excludes the effect of a non-cash bio-asset revaluation gain.
The lower YoY revenues were primarily due to lower prices, which were partly offset by higher volumes produced.

After taking into consideration two distorting items (ie, bio-asset revaluation and forex gains for a US dollar-denominated balance sheet/revenue cross-hedge), the results were slightly better than our expectation. As a result, we have raised our FY09 adjusted net-profit forecast (excluding bio-asset revaluation) by 9.6%. Our new adjusted net-profit forecasts are now in line with Bloomberg consensus. Including the bio-asset revaluation, we have raised our FY09 net profit forecast by 50.9%. No major surprises were announced at the company’s analyst briefing.

Our six-month quantitative-model-derived target price is S$1.08. The downside reflects our assumption that IndoAgri’s stock price will follow the crude palm oil (CPO) price lower to our projected target level of US$525/tonne by 31 December 2009 from its current level of around US$700/tonne.

We have a Sell rating on IndoAgri, based on our view that CPO prices may decline by year-end. This anti-consensus view is based on our thesis that global CPO supply will rise HoH in 2H09 due a recovery from impaired yields from ‘tree stress’ and the seasonal peak growing season.

Noble Group Ltd: 2Q09 in line, outlook improving

2009-09-02T08:15:00.000+08:00

2Q09 results within expectations. Noble Group Ltd's (Noble) 2Q09 performance was in line with expectations. Revenue eased 31.2% YoY to US$7.2b along with lower commodities prices, while net profit doubled to US$248.8m thanks to a one-off revaluation gain arising from the Gloucester acquisition. Stripping away this gain, net profit would have contracted by 22.6% to US$94.8m. Sequentially, Noble's performance improved with revenue gaining 18.0% and net profit expanding by 5.1%. The operating environment displayed signs of normalising in 2Q09, leading management to adopt a more confident stance as it heads into 2H09.

Growth in market share. 1H09 tonnage grew 19.4% YoY, demonstrating Noble's ability to grow its market share despite harsh operating conditions. With the exception of Agriculture, all other segments reported higher tonnage. The group's market share gains put it in good stead to leverage on the economic recovery when demand for commodities strengthens. In particular, we expect tightening energy markets to drive Noble's growth in 2H09. Higher energy prices have already helped to buoy the energy segment's gross profit margin, which expanded to 2.3% in 2Q09 from just 0.9% in 1Q09.

Blip in MMO does not taint outlook. A blemish in its 2Q09 results came from the Ferro Alloys division's losses - the result of a collapse in prices. This resulted in gross profit margin contraction for the Metals, Minerals & Ores (MMO) segment. Nevertheless, management remains confident of the MMO segment's outlook, citing strong performance from all other divisions coupled with robust tonnage growth. Normalising economic conditions and sustained demand from China will support its performance going forward.

Balance sheet remains healthy. Noble's conservative balance sheet management has enabled it to tide through volatile commodity markets, and will equip it with financial flexibility to emerge stronger from the downturn. Inventory hedge ratio remained healthy at 94%, a slight improvement over the 93% recorded in 1Q09. The group's inventory levels rose from US$1.8b to US$2.0b, and according to management, this is a precursor of improving conditions ahead. Adjusted net gearing came in at a conservative 0.15x (vs. a net cash position in 1Q09), and credit facilities remain ample at US$3.4b.

Improving outlook; maintain BUY. We expect Noble to be a key beneficiary of the global economic recovery. Improving demand and supply fundamentals, the resurgence of commodity prices and market share expansion will drive its 2H09 performance. Valuations remain undemanding at 12.2x FY09 PER (vs peer Olam's 27.3x). We maintain our BUY rating and S$2.26 fair value estimate.

Golden Agri-Resources - 2Q09 Yields Surprise

2009-09-01T07:51:00.001+08:00

Reiterate OW: We upgrade our PT to S$0.55 per share on higher FY2009-11e EPS estimates. The share price for Golden Agri-Resources (GGR) is now discounting a CPO (crude palm oil) price of US$730/T vs. our FY2010 estimate of US$800/T. GGR will trade at FY2010e PE of 10x at our new TP, low against sector average of 14x.

Surprise in 2Q09 Yields… GGR’s 2Q09 FFB yields came in 22% higher than our estimate and 4% above 2Q08. Indonesian-wide FFB yields, which suffered from tree stress since 2H08, is now back to normal, we think. …Drive EPS Upgrade. 2Q09 net profit came in 54% above our estimates on positive operating leverage unleashed from the higher-than-expected CPO production/sales volume. We revise our EPS estimates higher to account for the higher CPO production/sales volume and margins.

CPO Stocks Remain Tight: Despite the recovery in Indonesian production yields in 2Q09, global CPO stocks remain tight in the near term for two reasons: 1) Yield stress is not over in Malaysia. We see yield recovery only in 2010 for Malaysia; and 2) CPO export demand remains robust.

Best Upside within Coverage: Our 2009-11e EPS estimates are 27% above consensus, mainly on our higher CPO price assumption. Currently, GGR has the best share price upside of 20% within our coverage universe. Near-term catalysts: 1) Consensus earnings upgrade; 2) Firm CPO price trend going into Ramadan festival; and 3) Good 3Q09 results in November 2009.

Agri-Resources - Supportive 2Q09 Results

2009-08-31T07:50:00.000+08:00

Stay OW: We maintain our PT for Indofood Agri-Resources’ (IFAR) at S$1.90 per share as we are keep our EPS estimates essentially unchanged. IFAR’s share price is now discounting a CPO (crude palm oil) price of US$770/T vs. our F2010 estimate of US$800/T, we estimate. At our PT, IFAR would trade at F2010 P/E of 11x, which we view as attractive against a sector average of 14x.

Supportive 2Q09 Results; EPS Unchanged. IFAR’s 2Q09 plantation profits grew 40% Q/Q, offsetting the lower profits from non-plantation divisions. The net impact is neutral to our estimates. Given positive company guidance, we expect better non-plantation profits in 2H09.

CPO Stocks Remain Tight: We believe the CPO price will remain firm in the near term. Indonesian FFB (fresh fruit bunch) yields recovered in 2Q09, but we continue to see tightness in global CPO stock levels in the near term for two reasons: 1) yield stress is not over in Malaysia as we see a yield recovery for Malaysia only in 2010; and 2) CPO export demand remains robust.

10% Upside: Our 2009-11 EPS estimates are 18% above consensus on our higher CPO price assumption. Long term, IFAR is one of top two picks within our CPO coverage; KL Kepong (KLKK.KL, OW, RM13.40) being the other. However, short term, we prefer Golden Agri-Resources (GAGR.SI, OW, S$0.48; +20% upside) and KLK (+19% upside) given their superior share price upside. Near-term catalysts: 1) Consensus earnings upgrade; 2) firm CPO price trend going into Ramadan festival; and 3) good 3Q09 results in November 2009.

Olam - A unique investment proposition

2009-08-28T07:41:00.000+08:00

We believe Olam continues to be a good proxy for the agricultural theme, as the growth of long-term global demand outstrips supply. With a good farm-to-factory business model, sourcing and marketing presence in more than 60 countries, these trends will lead to volume growth and margin expansion opportunities.

Since 2007, Olam has pursued an integration strategy that involves selectively owning assets such as midstream processing capacity in the supply chain. This allows the Group to become less of a price-taker. While its traditional trading business nets a steady 2% margin, the market could have underestimated a potential expansion to 2.8% by FY11.

With a lowered gearing ratio of 1.8X following Temasek’s $437.5m equity injection in June, Olam now has sufficient credit headroom to pursue an estimated current pipeline of more than 10 M&A deals. In the post credit-crisis environment, we see more opportunities for acquiring good distressed assets at attractive prices, such the recent SK Food deal.

While Olam might seem highly leveraged using conventional ratios, such concerns are unwarranted due to the liquid nature of its large inventory. Furthermore, we believe the subsiding of the credit-crisis, Temasek’s equity injection, together with management’s recent voluntary reduction of target gearing level to 2.5X-3.5X, has sufficiently addressed this.

We believe Olam’s growth profile for a company of its size continues to present a unique proposition. We estimate Olam’s EPS (normalised) to grow at a CAGR of 27% from FY10-FY11, significantly above its peers. With this growth profile, we have pegged our target price of $3.05 to a premium 25X FY10F, which is still below its historical average of 31X PE.

Golden Agri-Resources Ltd: Maintain HOLD

2009-08-27T09:29:00.000+08:00

2Q09 results mostly within expectations. Golden Agri Resources (GAR) released its 2Q09 results on Friday; revenue was down 30.7% YoY but rebounded 37.2% QoQ to US$565.6m, aided by slightly firmer QoQ CPO (crude palm oil) prices as well as higher production volume. The average CPO price fell from US$1117/ton in 2Q08 to US$696/ton in 2Q09 but was an improvement from US$511 in 1Q09. As a result, while net profit tumbled 64.7% YoY, it was up nearly 543.0% QoQ to US$55.1m. For the first half, revenue fell 37.5% to US$977.8m, meeting 41.9% of our original FY09 estimate, while net profit slid 78.1% to US$63.7m, or about 23.6% of our full year forecast.

CPO production likely bottomed in 1Q09. Operationally, it appears that the worst of the previous tree stress (due to the drought in 2006) has passed; CPO production increased 15.1% YoY and 30.8% QoQ, while CPO yield improved 1.5% YoY and 26.9% QoQ. We also understand that due to the better-than-expected production, GAR has about 100k ton of unsold CPO at end-Jun, but has since been sold. And while there may be a possible El Nino effect this year, management believes that the impact will probably be felt some 12 months later. It is also confident that it will escape the worst of the impact due to the dispersion of its oil palm plantations in Indonesia. Management is hopeful of seeing better production numbers in 2H09; also assured that it will not have excess unsold CPO this time around.

Bumping up our CPO assumptions. The recovery in the global economies has come slightly faster than expected and this has lent some support to crude oil prices and CPO prices. We have also raised our CPO assumptions for this year from US$600/ton to US$620/ton, and this in turn bumps up our FY09 revenue forecast by 6.8%. However, we raise our net profit estimate by a smaller 4.2% as GAR will still be working through the excess fertilizer that it had bought at a much higher price late last year; management expects to only enjoy lower fertilizer prices from next year onwards. We are raising our FY10 revenue and earnings estimates by 6.0% and 11.0%, respectively. Using a higher 12x blended FY09/FY10 EPS valuation (vs. 10x previously), our fair value will rise from S$0.35 to S$0.45. Given the limited upside, we maintain our HOLD rating.

Wilmar International – Price target raised to S$7.50 – maintain Buy

2009-08-26T07:59:00.000+08:00

Wilmar posted 2Q09 results that were ahead of expectations, mainly from stronger commodity prices. Net profit came in at US$407.2m, up 22.7% from 2Q08, and up 7.1% sequentially. Wilmar has also continued its momentum from 1Q09, despite earlier indications that last year’s record earnings could not be matched. We now believe that the group is capable of surpassing this benchmark, and have raised our forecasts accordingly. Wilmar also declared an intereim dividend of S$0.03 per share.

Despite 2Q09 headline revenues declining by 27% YoY, sequential revenues have actually increased by 15% to US$5.7bn, on the back of a recovery in commodity prices. More encouragingly, however, sales volumes have increased across the board, with the minor exception of consumer products.

Despite this, the consumer division managed to hold on to its uncharacteristically high margins at 7.2%, versus 8.4% in 1Q09 and 1.6% in FY08. Merchandising & Processing saw some sequential erosion of margins, due to higher commodity input prices, but is still handily ahead of last year’s average. Its upstream Palm Plantation and Milling business naturally showed an increase in margins, from higher CPO prices.

We are raising our FY09 forecast by 21% to US$1,631m, and by 15% in FY10 and FY11. This implies a 3-year earnings CAGR of 10% versus our previous expectation of around 5%. Aside from the recovery in CPO prices, Wilmar will also be a beneficiary of an economic recovery in China and India, and has an established distribution network that it can use to grow its existing and new businesses.

With the earnings upgrade, we are raising our target price of Wilmar to S$7.50, from S$5.70 previously, and assigning a premium valuation of 20x FY09 earnings. Its application to list its China businesses in Hong Kong was recently approved, and we believe that Wilmar will be able to secure above-average valuations. We expect the listing to take place within the next two months, and strong investor interest in the stock is likely to continue, leading up to this.

AusGroup Ltd: Rio Tinto increases capex target for 2009 by 25%

2009-08-25T09:30:00.000+08:00

Major AusGroup customer Rio Tinto released 1H09 results yesterday.

2009 capex target up 25%. Rio Tinto's management said they have revised their capex target upwards for 2009. The new target for 2009 capital expenditure is US$5b (up 25% from US$4b previously). US$2.7b of this amount is allocated for development projects.

Reviewing 2010 target. Management is also reviewing its 2010 target in light of improved market conditions. The previous target was for US$2.5b, allocated for sustaining capex only. It will release the new guidance in October.

Focus on "high definable near-term value".Rio Tinto said for the moment, it is focused on brownfield step-ups (increasing capacity, for instance). It said this was the most efficient allocation of capital (a small investment for a big uptick) in the current environment. Rio Tinto also said that down the road, "of course" it would invest in greenfields.

Confirms our view on AusGroup. This latest development supports our investment thesis that blue-chips in the minerals resources sector are "un-freezing" capital expenditure plans. We believe order wins over the next few months from both the mining and the oil & gas industries will underpin AusGroup's earnings performance in FY10 and FY11.

Maintain BUY with S$0.70 fair value (14x FY10F earnings or 10x FY11F earnings). Refer to our report dated 19 Aug 2009 for more details.

Indofood Agri Resources – Raising TP to S$2.10 – maintain BUY

2009-08-24T08:00:00.001+08:00

IFAR reported 2Q09 results that were slightly ahead of our expectations. On a YoY basis, net profit fell 4.4% to Rp. 682.4b; stripping out its biological revaluation of Rp. 593.2bn, we estimate net earnings declined by 27%. On a sequential basis, however, core net profit rose 23%. Revenue declined by 30% to Rp. 2.3b, but was up 15% sequentially, in line with CPO price trends.

IFAR also recorded a Rp. 240bn forex gain on the back of the strength in the Rupiah, which mainly pertained to its US dollar denominated loans. For its core business, gross margins did see a decline to 33.5% versus 1Q09’s 41.2%. IFAR also saw sequential strength on CPO prices, which rose 24%. IFAR was also able to raise average selling prices by between 5-10% over 1Q.

Going forward, IFAR has raised its ASPs by a further 5% in July, and this is expected to hold steady for the next 2 months. More importantly, we expect sales volumes to increase through the second half of the year, in line with seasonal factors, as cooking oil consumption is expected to increaser through the festival seasons. IFAR’s cost of production is also expected to decline on lower fertiliser and fuel costs.

On a longer-term outlook, the fundamental demand for palm products remains strong, both in Indonesia and globally. IFAR’s leading position in the Indonesian branded cooking oil market makes it a prime beneficiary of this. We are adjusting our FY09 core net profit forecast upward by 7% to Rp. 1,144.5b, or an EPS of S$0.115. This is still 6% ahead of consensus estimate.

We are raising our target price to S$2.10 from S$1.35, based on a re-rating of palm related stocks to around 18x on the back of higher CPO prices. We also maintain our Buy recommendation.

SSH Corporation Ltd: Affected by further inventory provisions and low demand

2009-08-21T08:34:00.000+08:00

Impacted by low demand, steel prices and provisions. SSH Corporation (SSH) reported a 13% YoY fall in FY09 revenue to S$217.6m and a 44% drop in net profit to S$15.5m as the group felt the impact of softer steel prices, lower demand and provision of inventories write down. Results were below expectations due to the inventory provision as well as lower revenue in the last quarter which made up 20% of our full year estimate. Excluding the write down of S$9.7m, gross profit margin would be about 26%, similar to that of FY08's. Although other income rose 98% YoY to S$6.4m due to increase in rental income, other operating expenses increased by 225% to S$3.9m due to an exchange loss of S$1.2m in FY09. We also note that gross gearing decreased from 0.48x as at 30 Jun 08 to 0.29x as at 30 Jun 09 as bank borrowings fell with lower working capital requirements.

Steel prices have likely bottomed out. As steel prices bottomed out in May this year and have recovered since, it is less likely that the group should require further provision for inventory write downs. Assuming adequate provision and if steel prices continue to recover, the group may book revaluation gains, but this will not be reflected in the income statement but rather in the revaluation reserve. Steel prices have trended upwards, supported by strong demand from certain countries such as China which have taken advantage of low prices to stock up on inventories. we see that China started experiencing a recovery in iron and carbon steel products imports from February this year, near the trough of the global composite steel price index. Although SSH mainly caters to customers in Singapore, Indonesia and nearby countries, there is the possibility that the group may expand its reach in the Chinese market since it can leverage on the network of KS Energy and Aqua-Terra Supply.

Maintain HOLD. Management expects that FY10 will remain "challenging and competitive" but pointed out that if the rise in oil prices is sustained, it may induce more oil exploration which increases the demand for SSH's products and services. We maintain our fair value estimate of S$0.16 as outlook remains murky with relatively low earnings visibility. As such, our HOLD rating remains.

Wilmar - China holds the key

2009-08-19T08:33:00.000+08:00

Re-affirm BUY, with 16% upside to revised PT of S$7 We are increasing our margin assumptions for the plantation and processing businesses. We are also boosting our FY10F and FY11F earnings forecasts by 10% and 13%, respectively. We reiterate our BUY rating on the stock with a new price target of S$7, for upside of 16%. Our SOTP valuation on a segmental basis suggests a fair value of US$31bn for Wilmar.

Investors have started appreciating integrated Wilmar Palm & laurics and oilseeds processing account for 75-80% of Wilmar’s business. In our view, the market still does not fully appreciate Wilmar’s evolution into an integrated agribusiness player. However, since the China IPO announcement, the stock has started to decouple from physical commodity price movements, indicating that the listing and adequate information flow should correct this opinion.

China listing to drive valuation for the company At S$7, the implied value of the standalone China business as a geographical entity is US$14.5bn (19x FY10F earnings of US$763mn), which is undemanding versus other agri players in the region. This China valuation would imply that the rest of Wilmar’s business is currently trading at only 12.4x, which we consider attractive. We think a higher valuation of 25-30x for the China business could lead to a further re-rating of Wilmar shares. However, Wilmar would have to significantly raise its earnings growth profile to justify richer valuations.

Leader in China, but growth subject to regulations Wilmar derives ~50% of its business from China. Though it is the leader in the oilseed processing and consumer segments, regulatory risks could constrain future growth. In our view, investments in newer segments like rice/water will take time to begin contributing meaningfully.

Kencana Agri: Fast forward

2009-08-14T07:43:00.000+08:00

2QFY09 earnings slightly weaker than anticipated. Kencana posted a 399.2% q-o-q jump in 2Q09 net profit to US$2.5m, mainly due to recovery in FFB (Fresh Fruit Bunch) yields. Annualized, this was nevertheless slightly lower than our projection as the recovery in yields was not as sharp as we had anticipated. The group expanded by 1,227 ha in 1H09 (1,886 ha YTD) faster than expected and is targeting to plant of 5,000 ha p.a. from 10F onwards.

New TP yields 24% upside. We reduced our expectations of the group's 09F and 10F FFB yield by 11.4% and 7.9%, respectively, as we believe our previous targets were aggressive relative to what they had achieved in 1H09. This resulted in 6.6% and 12.4% cuts in 09F and 10F earnings. However, faster-than-expected expansion this year and sustained target thereafter would result in a higher net profit from15F onwards. Using DCF (WACC 13.8%, terminal growth rate 3%), this raised our TP to S$0.40.

Going international. The group's recent JV with Louis Dreyfus Commodities (LDC) to build a deep-water port in Balikpapan (capable of accommodating large-size vessels) is expected to extend Kencana＊s markets and reduce costs. The group has bought (through the issuance of shares) US$2.0m worth of land for the JV. It is expected to be fully operational by end of 2010F.

Rating upgraded to Buy. We are encouraged by the group＊s expansion target, now that it is able to secure funding for its capex plans. We believe the group should sustain double-digit growth over at least the next five years.

Straits Asia Resources 2Q09 results highlights

2009-08-06T07:53:00.000+08:00

1. Good operational results. Revenue exceeded our expectations at US$175.6m (+8.6% YoY, +25.7% QoQ). Gross profit came in at US$81.0m (+25.9% YoY, +22.4% QoQ). Gross profit margin grew by 6.4ppt to 46.1% thanks to higher selling prices and lower fuel costs.

2. Net profit tainted by non-cash charge.Earnings came in below expectations at US$21.4m (-43.3% YoY, -39.6% QoQ) due mainly to a US$14.3m non-cash charge from warrant expenses. Excluding this, net profit would have met our estimates at US$35.8m (-5.4% YoY, +0.8% QoQ).

3. Outlook positive. The group is on track to deliver record earnings in FY09. It is confident of meeting its 9mt production target. Management remains positive on its outlook, citing recovering energy demand.

4. Good dividends, undemanding valuations.SAR has declared an interim dividend of 1.14 US cents, in line with its 60% payout policy. SAR trades at an undemanding 9.8x FY09F PER coupled with a relatively good 4.1% dividend yield.

5. Risks. Key risks to note are a deterioration of global energy markets and refinancing risk. SAR faces a repayment schedule of US$94m in 2009 and US$125m in 2010. It is in the midst of negotiations to refinance the loan.