asia palm oil.pdf
TRANSCRIPT
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it.
Issuer of report: The Hongkong and Shanghai Banking Corporation Limited
View HSBC Global Research at:
https://www.research.hsbc.com
Key demand centres in Asia want more palm oil, just as…
…El Niño has set up a supply crunch in vegetable oils
With palm oil prices set to rise, we initiate Buy on GGR, IFAR and FR, Hold on WIL; leverage isn’t a bad thing in an upcycle
Demand coming back: After two years, things are finally looking up for palm oil
producers. Indonesia’s biodiesel demand is set to recover with new subsidies rolled out
in mid-2015. Soybean crush, primarily used as animal feed, delivered enough soy oil to
hurt palm oil in China. But, unlike the rest of the Street, we think that China’s animal
protein appetite is approaching saturation and slowing soy growth would leave palm oil
with a larger share of the market. India, the biggest consumer, is predominantly
vegetarian and needs oil without the by-product meals – palm oil is the only major crop
to offers this. We estimate these factors will drive demand up by 6% y-o-y in 2016.
Supply crunch taking shape: 2H15 saw the strongest El Niño in 17 years and most
commentators expect it will result in lower palm oil production this year. Furthermore,
record harvests of oilseeds, like soybean, which have been crowding palm out of the
market in the past four years, could end in 2016 with dryness in Brazil. At the same
time, USD strength is pricing out US soybean, pointing to a reduction in acreage in
2016. A La Niña could further reduce global soybean production in 2016.
Don’t worry about inventory; go upstream: A 4.4MT gap between production and
demand in 2016 is likely enough to work through the 3MT of surplus stock. Declining
inventory would trigger a rally in crude palm oil (CPO) prices and we recommend
buying upstream players, particularly the ones whose shares are most sensitive to the
CPO price. GGR is our non-consensus preferred stock. Admittedly, it screens weakly
on volume growth and return metrics, but the combination of liquidity, leverage and high
correlation (0.9x) to the CPO price makes it the vehicle of choice for global investors to
get exposure to palm oil. Our target prices for upstream stocks (GGR, FR and IFAR)
are based on peak one-year forward EV/EBITDA during the last five years (1.5-2.0
standard deviations above the five-year average). High leverage and operations in
oversupplied downstream industries make Wilmar our least preferred stock.
20 January 2016
Shishir Singh* Analyst The Hongkong and Shanghai Banking Corporation [email protected] +852 2822 4292
* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations
Asia Palm Oil EQUITIES PALM PLANTATIONS
Singapore
Ratings, target prices and valuations
Company BB Rating Current Target Up/Downside Mkt Cap _ EV/EBITDA _ ____ PE _____ ___ RoE ____ ____ PB _____ Net Debt/EBITDA Ticker Price Price (%) USDm 2016e 2017e 2016e 2017e 2016e 2017e 2016e 2017e 2016e 2017eWilmar WIL SP Hold SGD2.67 SGD2.58 -3.4 11,872 11.2x 10.1x 10.4x 9.8x 7.6 7.8 0.8x 0.7x 6.7x 6.0xGolden Agri GGR SP Buy SGD0.34 SGD0.47 38.2 3,031 8.3x 7.5x 13.8x 12.2x 3.5 6.2 0.8x 0.7x 3.8x 3.3xFirst Resources FR SP Buy SGD1.77 SGD2.11 19.5 1,941 7.4x 5.8x 12.3x 9.4x 19.9 27.3 2.9x 2.3x 0.8x 0.4xIndofood Agri IFAR SP Buy SGD0.46 SGD0.56 23.1 457 6.1x 4.9x 15.0x 7.8x 3.3 6.7 0.5x 0.5x 2.7x 2.1xSource: Thomson Reuters Datastream, HSBC estimates. Valuations as at the close of 15 January 2016.
Initiate with a bullish view: Blame it on the rain
2016e palm oil production growth estimate
-1%
+6%
2016e palm oil demand growth estimate
Crude palm oil price growth (y-o-y)
2016e16%
2017e5%
2015 -24%
Source for the above charts: Bloomberg, HSBC estimates
EQUITIES PALM PLANTATIONS
20 January 2016
2
Investment summary 4
Stronger demand ahead 12
Supply crunch taking shape 27
Companies 35
Wilmar International (WIL SP) 36
Golden Agri (GGR) 48
First Resources (FR SP) 60
Indofood Agri (IFAR) 71
Disclosure appendix 85
Disclaimer 89
Contents
3
EQUITIES PALM PLANTATIONS
20 January 2016
Investment thesis summary in charts
As supply-demand imbalance becomes favourable in palm oil due to El Niño
...and oilseed supply shrinks due to low commodity prices, weather and USD strength
Source: MPOB, USDA, GAPKI, SEAI, Bloomberg, HSBC estimates Source: USDA estimates. 2015 refers to Marketing Year starting October 2015.
CPO inventories are likely to fall from their peak …and CPO prices are likely to move up
Source: MPOB Source: Thomson Reuters Datastream, HSBC estimates
All upstream stocks are rated Buy, but GGR and IFAR’s EPS is most sensitive to CPO prices
We also like GGR and IFAR because of their high correlation (c0.9x) to CPO prices
Source: HSBC estimates Source: Thomson Reuters Datastream, HSBC
-2.0-1.00.01.02.03.04.05.06.07.08.09.0
2009
2010
2011
2012
2013
2014
2015
e
2016
e
2017
e
Demand growth (%) Production growth (YoY%)
0.1
-7.9
-1.5
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
2010 2011 2012 2013 2014 2015e
Soybean RapeseedSunflowerseed
YoY%
300
450
600
750
900
1,050
1,200
1,3501.00
1.50
2.00
2.50
3.00
06 07 08 09 10 11 12 13 14 15
Malaysia palm oil inventory (mn tonnes)
Crude palm oil price (USD/Tonne, RHS)
416
725
872
647
863
1,078
937
761
745
566656
688
400
600
800
1,000
1,20020
06
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
e
2017
e
CPO Price, Mysia, FoB (USD/tonne)
0
2
6
10
0
2
5 6
0.0
2.0
4.0
6.0
8.0
10.0
12.0
WIL FR GGR IFAR
2016 EPS 2017 EPS
2016-17 EPS Chg. for 1% Chg. in CPO price estimate
50.0
60.0
70.0
80.0
90.0
100.0
110.0
120.0
Dec
-14
Jan-
15
Feb
-15
Mar
-15
Apr
-15
May
-15
Jun-
15
Jul-1
5
Aug
-15
Sep
-15
Oct
-15
Nov
-15
Dec
-15
CPO FR WILGGR IFAR
EQUITIES PALM PLANTATIONS
20 January 2016
4
Demand growth to return as Asia buys more from Asia
2014 was a year that palm oil investors would like to forget. Both Chinese and Indian imports,
approximately a quarter of global demand and almost 40% of seaborne trade, were falling. As
Indian demand started recovering following parliamentary elections in mid-2014, crude prices
fell sharply and pulled biodiesel demand, representing c15% of global palm oil demand, down
with it. A sluggish start in 2015 is now turning into something more concrete. The next two years
look promising to us but not many believe it yet.
We expect palm oil demand to grow by 6.4% y-o-y, above the long-term trend growth of 5.5%
p.a., in 2016. This would add 3.7 million tonnes (MT) to global demand in 2016, supported
particularly by the following regions:
An increase of 1.4MT in Indonesian demand, primarily driven by an increase of 1.2MT in
demand for biodiesel after the implementation of a new pricing policy in July 2014. The
revised policy has linked biodiesel prices to crude palm oil (CPO) prices instead of
depressed crude oil prices. The government has also established a plantation fund, which
would collect levies on palm oil exports and subsidises biodiesel uptake in the country.
Investment summary
The likely gap of 4.4MT between supply and demand growth in 2016
should soak up excess inventory
We initiate all upstream players (GGR, IFAR and FR) with a Buy rating
but prefer GGR the most for its high correlation with CPO prices and
its high liquidity
WIL’s carry trade with highly leveraged USD liabilities and weak
downstream operations drives our initiation with a Hold rating
2016e demand growth driven by Indonesia, India and China (MT)
Source: USDA, Bloomberg, SEAI, Thomson Reuters Datastream, HSBC estimates
Policy in home market and
competition from soybeans
in export markets are major
determinants of demand
1.4
0.50.8
1.1
53.5
54.5
55.5
56.5
57.5
58.5
59.5
60.5
61.5
62.5
63.5
2013
Indo
nesi
a
Chi
na
Indi
a
Oth
ers
Indo
nesi
a
Chi
na
Indi
a
Oth
ers
Indo
nesi
a
Chi
na
Indi
a
Oth
ers
2016
e
2014
2015e
2016e
5
EQUITIES PALM PLANTATIONS
20 January 2016
An increase of 0.8MT in Indian demand. Indian demand has recovered since the
parliamentary elections in mid-2014. Barring a sharp macroeconomic deterioration, we see
little risk to our forecast since India’s per-capita consumption of vegetable oils is well below
global benchmarks and competition from soy is relatively benign, given the low requirement
for animal protein because of a large vegetarian population.
An increase of 0.5MT in Chinese demand as the displacement of palm by soy is abating.
China’s consumption of animal protein (soymeal) is now near saturation levels seen in the EU
and the US. This is likely to limit the need to crush soybean into soymeal for animal feed
and, as a result, the supply growth of soy oil, a by-product of crushing, would slow as well.
We expect this to leave palm oil with a sizable share of the vegetable oil market.
Stars lining up for a supply crunch
The strong growth in Indonesian acreage over the last seven years has given the sector the
potential to deliver palm oil production growth of 3-4MT annually for the next 2-3 years.
However, weather is an external influence, which threatens to derail production in 2016. Strong
El Niño conditions have prevailed for six months and most indicators suggest this is the
strongest El Niño in 17 years, if not longer. The associated dryness in Indonesia and Malaysia
is likely to cause a drop in fresh fruit bunch (FFB) yields with the impact being relatively severe
on older plantations.
Consequently, we expect Indonesian output to shrink. Historically, El Niño events have
supported CPO prices, but we suspect a more pronounced effect this time since the CPO
production shortfall is unlikely to be filled easily by other vegetable oils or excess inventory of 2-
3MT or so (2-3 weeks of consumption).
Chinese imports growing again... …and Indian import growth has recovered
Source: Bloomberg, HSBC Source: SEAI, Bloomberg, HSBC
EM production of vegetable
oils hurt by weather, US
output likely to be held back
by a strong USD
El Niño events have typically been positive for CPO prices
USDA expects a decline in production of the top three oilseeds in MY15-16
Source: Thomson Reuters Datastream, Australian Bureau of Meteorology Source: USDA estimates. 2015 refers to Marketing Year starting October 2015.
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
Dec
-07
Jul-0
8
Feb
-09
Sep
-09
Apr
-10
Nov
-10
Jun-
11
Jan-
12
Aug
-12
Mar
-13
Oct
-13
May
-14
Dec
-14
Jul-1
5
China Palm oil imports Trailing 12-m YoY%
-20
0
20
40
60
80
Dec
-07
Jul-0
8
Feb
-09
Sep
-09
Apr
-10
Nov
-10
Jun-
11
Jan-
12
Aug
-12
Mar
-13
Oct
-13
May
-14
Dec
-14
Jul-1
5
India Palm oil imports Trailing 12-m YoY%
0
500
1,000
1,500
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
El Nino CPO price (USD/ton, MY FOB)
0.1
-7.9
-1.5
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
2010 2011 2012 2013 2014 2015e
Soybean RapeseedSunflowerseed
YoY%
EQUITIES PALM PLANTATIONS
20 January 2016
6
The downside risk is increasing production of oilseeds, CPO’s main competitors in the
vegetable oil market. Rapeseed and sunflower seed farmers have started responding to low
prices by cutting future production. Soybean, the biggest oilseed in the vegetable oils market,
hasn’t responded in the same fashion yet, but the downside risks to its output are increasing.
Even though, the USDA still expects US soybean output (one-third of global output) to stay
steady, there is no doubt that farmers are being hurt by a strong USD and low prices. Their
Brazilian peers, shielded by FX depreciation, plan to increase soybean acreage, but El Niño’s
effect on North/Northeast Brazil may not allow this. In addition, a La Niña follow-up to El Niño
creates more downside risk for US soybean.
Inventory to turn from an overhang to a catalyst
The pressure from rising inventories is still spooking the crude palm oil (CPO) market. Golden
Agri (GGR) and Indofood Agri (IFAR), the upstream companies whose shares are most heavily
correlated to CPO prices, tracked the decline in CPO, falling 26-32% in 2015 as investors either
abandoned ship or left for safer balance sheets like that of First Resources (FR). Wilmar (WIL),
the only downstream stock discussed in this report, spent the first half of the year in an
uneventful manner, but its FX loss resulting from RMB depreciation in the middle of the year has
reignited concerns about its debt.
Palm oil inventories have surged this year FR and WIL have outperformed GGR and
IFAR in 2015
Source: MPOB, Bloomberg, HSBC Source: Thomson Reuters Datastream
Still, with the way that demand and supply are shaping up, we think there is a lot to be optimistic
about. In our view, about 2-3MT of excess inventory should be easily soaked up by a 3.7MT
increase in demand and 0.7MT contraction in supply during 2016. In fact, we expect the
reversal in inventory levels to act as a catalyst for a rally in CPO and upstream stocks.
300
450
600
750
900
1,050
1,200
1,3501.00
1.50
2.00
2.50
3.00
06 07 08 09 10 11 12 13 14 15
Malaysia palm oil inventory (mn tonnes)
Crude palm oil price (USD/Tonne, RHS)
50.0
60.0
70.0
80.0
90.0
100.0
110.0
120.0
Dec
-14
Jan-
15
Feb
-15
Mar
-15
Apr
-15
May
-15
Jun-
15
Jul-1
5
Aug
-15
Sep
-15
Oct
-15
Nov
-15
Dec
-15
CPO FR WILGGR IFAR
Palm oil production
(MT) 2008a 2009a 2010a 2011a 2012a 2013a 2014a 2015e 2016e 2017e
Indonesia 18.0 20.7 22.0 23.3 25.1 28.6 30.1 32.9 31.9 34.4 Malaysia 17.7 17.6 17.0 18.9 18.8 19.2 19.7 20.0 20.1 20.5 Rest of the world 8.0 7.6 9.5 9.5 11.6 10.9 11.1 9.5 9.6 9.7 World 43.7 45.9 48.5 51.7 55.5 58.6 60.9 62.4 61.6 64.7 y-o-y % 5.0 5.7 6.6 7.2 5.7 3.9 2.4 -1.2 4.9
Source: USDA, Bloomberg, Thomson Reuters Datastream, HSBC estimates. *Approx. one-third in Thailand, one-third in W. Africa.
Excess inventory, which has
been an overhang, amounts
to two weeks of demand and
is set to shrink
7
EQUITIES PALM PLANTATIONS
20 January 2016
Upstream is the place to be as strong demand meets weak supply
As demand rebounds & supply shrinks… …CPO price would rise to mid-cycle levels
Source: MPOB, USDA, GAPKI, SEAI, Bloomberg, HSBC estimates Source: Thomson Reuters Datastream, HSBC estimates
In our view, as the gap between supply growth and demand growth rises through 2016, CPO
prices would start moving up. A reduction in Malaysian inventory levels (reported monthly) is
likely to be an important catalyst. We forecast the Malaysian CPO price (FOB) average to rise to
around USD650/tonne next year from close to USD530/tonne currently. A La Niña event later in
2016 has the potential to push prices above USD750/tonne, but we take a more conservative
sub-USD700/tonne forecast view for now. How can equity investors get exposure to this upside
in CPO prices?
We focus on the Indonesian plantations listed in Singapore in this report. More specifically, we
focus on stocks that give equity investors exposure to the forthcoming upturn in palm oil prices.
So, even though valuations are an important metric for us, we think that the true value lies in
finding stocks that are most sensitive to CPO prices. Golden Agri (GGR) stands out as the most
liquid and tightly correlated upstream stock, which we believe explains its valuation premium as
well. Indofood Agri (IFAR) offers a similar exposure but in the small-cap space. Its lack of
liquidity likely limits its investor base. Earnings at both these companies would swing by 6-10%
for every percentage point move in our CPO price forecast.
Wilmar (WIL), the only downstream heavy and Hold-rated stock in this report, is at the other end
of the spectrum. Its earnings are largely insensitive to CPO prices or even to its downstream
operations. Since 2012, WIL has increasingly relied on its treasury operation’s ability to profit
from the carry trade of funding high-yielding RMB investments with low-cost USD financing.
Interest income rose to as much as 44% of the company’s EBIT in 2014 compared to less than
10-12% prior to 2012.The currency risk built into this trade became evident when WIL reported
-2.0-1.00.01.02.03.04.05.06.07.08.09.0
2009
2010
2011
2012
2013
2014
2015
e
2016
e
2017
e
Demand growth (%) Production growth (YoY%)
416
725
872
647
863
1,078
937
761
745
566656
688
400
600
800
1,000
1,200
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
e
2017
e
CPO Price, Mysia, FoB (USD/tonne)
While mindful of valuations,
we like upstream stocks most
correlated to CPO prices
GGR’s valuation premium is justified by its liquidity and correlation with palm oil prices
Source: Bloomberg, HSBC estimates. GENP = Genting Plantations, KLK = KL Kepong, SIME = Sime Darby, FGV = Felda Global Ventures (All Not Rated)
WIL’s treasury operations
cloud its investment case;
FR’s quality just seems like a
“hiding” place WIL
GGR
FRIFAR
SIME
IOI KLK FGVGENP
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
-0.4x -0.2x 0.0x 0.2x 0.4x 0.6x 0.8x 1.0x
Dai
ly t
rad
ed
val
ue
1-y
r av
g (U
SD m
n)
Correlation of stock price & CPO price since end of 2011
EQUITIES PALM PLANTATIONS
20 January 2016
8
a FX loss due to RMB depreciation in 3Q15. The inherent macro-risk has clouded its investment
case and investors are likely to find the stock challenging, even if its downstream operations
were to become better (unlikely in near term, discussed below).
First Resources (FR) stands out as a quality high RoE generating upstream stock in the sector.
Its young plantations offer production growth and its low operating and financial leverage
reduces the sensitivity of its earnings to CPO prices. Fundamentally, there is nothing to dislike
about the stock, which is why we have it at a Buy, but its weak correlation with CPO prices casts
doubt over whether it should be considered the preferred stock for investors to play the palm oil
upcycle. GGR is our preferred stock for exactly this reason.
Estimated percentage change in 2016-17e EPS for each percentage change in CPO price
Source: HSBC estimates
Valuation methodology summary
Stock Valuation Based on ____ TP implies DCF at ______ Ticker Methodology 1-yr forward EV/EBTIDA CoE Terminal growth
WIL SP 2016e EV/EBITDA ~11.2x 5-yr avg. - 1σ 8.8% 3.0% FR SP 2016e EV/EBITDA ~8.7x 2σ + 5-yr avg. 14.0% 3.0% GGR SP 2016e EV/EBITDA ~10.0x 2σ + 5-yr avg. 12.5% 3.0% IFAR SP 2016e EV/EBITDA ~5.9x 1.5σ + 5-yr avg. 15.7% 0.0%
Source: HSBC estimates
Our EBITDA estimates are in line or ahead of consensus, but net profit estimates are below the
Street. In our view, consensus has probably not adjusted numbers fully to account for the
increase in depreciation due to adoption of IAS 16 from 1 January 2016 and this is what
explains the difference between our net profit estimates and those of the Street.
To explain this further, we would highlight that Singapore-listed plantation companies will adopt
IAS 16 for the accounting of biological assets from 1 January 2016. The new standard requires
biological assets classified as bearer plants to be accounted for like property, plant and
equipment (PPE) and be depreciated as such. So far, these assets were recorded at DCF-
based fair values less costs to sell under IAS 41. Under the new standard, the biological assets,
0
2
6
10
0
2
5 6
0.0
2.0
4.0
6.0
8.0
10.0
12.0
WIL FR GGR IFAR
2016 EPS 2017 EPS
Ratings, target prices and Valuations
Company BB Rating Current Target Up/ Downside
Market Cap
EV/EBITDA __ PE ____ __ RoE ___ __ PB ____ Net Debt/EBITDA
EPS growth (%)
Ticker Price Price (%) USDm 2016e 2017e 2016e 2017e 2016e 2017e 2016e 2017e 2016e 2017e 2016e 2017e
Wilmar WIL Hold SGD2.67 SGD2.58 -3.4 11,872 11.2x 10.1x 10.4x 9.8x 7.6 7.8 0.8x 0.7x 6.7x 6.0x 1.0 6.2 Golden Agri GGR Buy SGD0.34 SGD0.47 38.2 3,031 8.3x 7.5x 13.8x 12.2x 3.5 6.2 0.8x 0.7x 3.8x 3.3x 38.4 13.0 First Resources FR Buy SGD1.77 SGD2.11 19.5 1,941 7.4x 5.8x 12.3x 9.4x 19.9 27.3 2.9x 2.3x 0.8x 0.4x 26.6 30.6 Indofood Agri IFAR Buy SGD0.46 SGD0.56 23.1 457 6.1x 4.9x 15.0x 7.8x 3.3 6.7 0.5x 0.5x 2.7x 2.1x 23.5 91.8
Source: Thomson Reuters Datastream, HSBC estimates. Valuations as at the close of 15 January 2016.
9
EQUITIES PALM PLANTATIONS
20 January 2016
which were carried at fair value based on DCF of the plantations, will be written down to cost
and, unlike the prior method, depreciation will be charged for mature plantations.
In fact, our choice of EV/EBITDA over other valuation metrics, such as PE and PB, is driven by
the fact that EBITDA will not be impacted by the company’s switch to IAS 16 from 1 January
2016 and the calculation EBITDA will remain consistent with history. On the other hand, both
earnings and book value are set to contract due to IAS 16, skewing historical comparisons.
Although, the accounting change would result in lower earnings and book value, it would have
no impact on a company’s cash flows. As a result, we expect the PE and PB multiples of
Singapore-listed plantation stocks to rise.
Downstream margins likely to remain pressured
Although Malaysian palm refining capacity has remained stable at around 24-25MT p.a. during
the last three years, Indonesian refining capacity has surged due to a change in Indonesian
export taxes in late 2011. Under the new tax regime, the export tax on processed palm oil
products was cut from 25% to 10% to a lower level compared to the prevalent tax on CPO. The
preferential tax treatment of processed product has continued even in the newly instituted
export levies from the middle of 2015. The export levy amounts to USD50/tonne for CPO and
USD25-30/tonne for the refined product if the CPO price is below USD750/tonne.
Needless to say, lower export taxes on refined products encouraged domestic capacity creation
on a scale. According to the Indonesia Vegetable Oils Association, palm refining capacity in the
country now exceeds production by 30-35%. Oversupply in neighbouring Malaysia is estimated
at 20-25%.
Indonesia refining capacity has surged (MTPA)
Almost 80% of capacity is for CPO refining
Source: Indonesia Vegetable Oils Association Source: Indonesia Vegetable Oils Association
The sharp increase in Indonesian capacity is further pressuring already thin margins in this
commoditised sector. Downstream margins of major refiners (EBIT for Malaysian refiners and
PBT, in case of Wilmar) have shown a clear declining trend since 1Q14. Investors must also
note that Wilmar’s PBT margins in the figure below probably overstate the profitability of its
operations since the company has used interest income to offset the decline in its operating
profits since 2013.
21.3
30.9
39.545.0
0.0
10.0
20.0
30.0
40.0
50.0
2012 2013 2014 2015e
78%
11%
11%Refining &fractionation
Oleochemical
Biodiesel
Persistent overcapacity
leaves little hope for WIL’s
downstream businesses
EQUITIES PALM PLANTATIONS
20 January 2016
10
Downstream business margins of major refiners
Source: Companies
We believe that the current overcapacity is unlikely to be fully absorbed in the next 2-3 years
and has shifted the bargaining power back to upstream players. In our view, this has resulted in
lower supplier discounts for Indonesian refiners than what would be justified by the differential
tax regime.
Stricter requirements under RSPO limiting new plantings
Sustainability in palm oil production has been a key issue for the industry since major buyers,
such as Nestlé (NESN VX, Not Rated) and Unilever (UNA NA, EUR37.06, Buy), suspended
their purchase contracts in 2010 due to allegations of deforestation by major plantations. The
Roundtable on Sustainable Palm Oil (RSPO) is the key non-profit association in the industry
focused on setting standards and certifications for sustainable palm oil production. It was
established in 2004 and currently certifies around 13MT, or c20% of global palm oil production.
During the last few years, pressure has been intense on the industry to avoid deforestation and
expansion on peat lands. The Forest Conversion Moratorium in Indonesia has dramatically slowed
down issuances of new leasehold titles since 2011. The RSPO is prompting most large upstream
companies to suspend new plantings on suspected high carbon stock areas. This is already
resulting in slower new plantings and is likely to be a trend going forward. Below, we highlight the
progress of the companies mentioned in this report (based on company disclosures) on RSPO
standards and the impact those are having on the growth in their respective new plantings.
Wilmar has achieved RSPO certification for 26 of its 46 mills. All of the company’s mills in
Malaysia have been certified and the company is on track to complete RSPO certification
audits for its Indonesian operations by the end of 2016. Wilmar’s new plantings have also
declined substantially from over 10,000 ha/year in 2008-09 to an average of 2,700 ha in the
last five years.
First Resources hasn’t yet achieved RSPO certification and is still in the process of
achieving its first certification by the end of 2016. However, the company has been a RSPO
member since 2008 and adopted a comprehensive policy on sustainable palm oil production
on 1 July 2015. The company’s policy is guided by the RSPO’s principles and criteria and
aims to avoid high carbon stock forests and peat lands for development. The adoption of the
new policy has resulted in a sharp drop of more than 50% y-o-y in new plantings in 2015.
Golden Agri has received RSPO certification for more than 50% of its plantations, including
the smallholder plantations. The group stumbled in 2015 and had to put its new plantings
on hold after The Forest Trust (TFT), a global environmental charity that was helping it meet
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
IOI EBIT Margin KLK EBIT Margin WIL PBT Margin
11
EQUITIES PALM PLANTATIONS
20 January 2016
its sustainability goals, suspended its operations with one of GGR’s upstream subsidiaries.
The company had to restructure and its sustainability management and implementation
team has since re-engaged with TFT on sustainability goals.
Indofood Agri had achieved RSPO certification for c35% of its CPO output by the end of
2014. 2015 was the fourth year for the group in its sustainability efforts. IFAR plans to
certify all its oil palm estates, including those managed by smallholders to RSPO standards
by 2019. The new plantings for IFAR are on track to slump to less than a 1,000 ha in 2015
from an average of over 10,000 ha in 2010-13.
EQUITIES PALM PLANTATIONS
20 January 2016
12
Biodiesel, India and China to drive demand up by 3.7MT in 2016
Palm oil and soy oil are two of the biggest competitors in the global vegetable oils market worth
cumulatively more than USD110bn in annual sales. Oil palm products (palm oil and palm kernel
oil) and soy oil accounted for market shares of 39% and 28%, respectively, in 2014, but soy
interrupted palm’s run of market share gains in 2013-15. Several factors have been at play in
the last 18-24 months.
A record soybean harvest in the Americas, coupled with continued demand for animal protein
(soybean’s primary product), displaced palm products in China. The sharp fall in crude oil prices
in 4Q14 eliminated palm oil demand for discretionary fuel blending and policy in Indonesia
added to the biodiesel woes. Indian demand also fell sharply from mid-2013 to mid-2014 as its
currency came under pressure following talk of the US Fed tapering quantitative easing.
Stronger demand ahead
CPO’s market share gains, which have been held back by
competition from soy, fall in crude oil prices and Indonesian biodiesel
policy failure in 2014, are likely to resume from 2016
Soy’s saturation in China and strong CPO demand from the Indian
subcontinent would add to the policy-driven recovery in Indonesia’s
biodiesel consumption
We forecast demand to grow at 6.4%y-o-y, above the trend of 5.5%
p.a., in 2016, with the biggest annual jump (3.7MT) since 2008; we
estimate this to happen in a year with shrinking supply
Bearish demand-side factors
have reversed or are in the
process of doing so
Global palm oil consumption
(MT, year-end December) 2008a 2009a 2010a 2011a 2012a 2013a 2014a 2015e 2016e 2017e
World 40.5 42.7 45.2 47.8 51.7 54.7 55.6 58.5 62.2 64.6 India 5.3 6.6 6.5 6.6 7.8 8.5 8.0 9.6 10.3 11.2 Pakistan 1.5 2.0 2.0 1.9 2.0 2.1 2.2 2.6 2.8 2.9 Bangladesh 0.7 0.9 0.8 0.2 0.5 1.1 1.2 1.3 1.4 1.5
Indian Sub-continent 7.6 9.5 9.3 8.7 10.2 11.8 11.4 13.5 14.5 15.6 Indonesia 4.9 5.1 5.7 6.6 7.3 8.1 8.7 7.9 9.3 9.5 EU-27 5.8 6.5 7.1 6.6 7.2 7.2 7.2 7.5 7.6 7.7 China 5.3 6.4 5.7 5.9 6.3 6.0 5.3 5.9 6.4 6.8 Malaysia 2.6 2.4 2.1 1.8 2.0 2.3 2.8 2.6 2.7 2.8 USA 1.6 1.6 1.5 1.5 1.6 1.7 1.5 1.9 2.0 2.0 Others 12.8 11.3 13.9 16.7 17.1 17.7 18.7 19.2 19.7 20.3
y-o-y % 2008a 2009a 2010a 2011a 2012a 2013a 2014a 2015e 2016e 2017e
World 5.4 5.9 5.7 8.2 5.9 1.6 5.1 6.4 3.9 Indian Sub-continent 26.0 -2.3 -6.5 17.3 15.3 -3.2 18.7 7.7 7.4 Indonesia 2.9 13.3 15.2 10.9 11.4 6.5 -9.2 17.8 2.0 EU-27 11.3 9.8 -6.6 8.0 0.0 -0.2 4.3 1.6 1.0 China 21.9 -11.6 3.8 7.3 -5.7 -10.9 10.4 8.4 6.1 Malaysia -7.8 -12.9 -13.7 13.9 12.8 23.5 -6.4 3.0 3.0 USA -4.4 -6.2 3.6 3.1 9.8 -9.4 24.7 1.8 1.5 Others -11.5 22.7 20.0 2.7 3.5 5.6 2.5 3.0 3.0
Source: USDA, Bloomberg, SEAI, Thomson Reuters Datastream, HSBC estimates
13
EQUITIES PALM PLANTATIONS
20 January 2016
All these bearish factors have either already reversed or are in the process of reversing now, in
our view. We expect palm oil demand to grow above the long-term trend growth of 5.5% p.a. in
2016. This would add 3.7MT to global demand in 2016, particularly supported by:
An increase of 1.4MT in Indonesian demand, primarily driven by an increase of 1.2MT in
demand for biodiesel after the implementation of new policy in July 2014. This revised
policy has linked biodiesel prices to CPO prices instead of depressed crude oil prices. The
government has also established a plantation fund, which is collecting levies on palm oil
exports to subsidise biodiesel uptake in the country.
An increase of 0.5MT in Chinese demand as the displacement of palm by soy is abating.
We believe that China’s consumption of animal protein is now near saturation levels seen in the
EU and the US. This is likely to reduce demand for soymeal as an animal feed and, as a
consequence, the supply of soy oil, which is a by-product of soybean crushing. Soymeal is
the primary product of the crush, accounting for 78% of output. We expect this to leave
palm oil with a sizable share of the vegetable oil market.
An increase of 0.8MT in Indian demand. Indian demand has recovered since the
parliamentary elections in mid-2014. Barring sharp macroeconomic deterioration, we see
little risk to our forecast of continued growth palm oil’s biggest market since India’s per-
capita consumption of vegetable oils is well below global benchmarks, and competition from
soy is relatively benign, given the low requirement for animal protein due to a large
vegetarian population.
2016e demand growth driven by Indonesia, China and India (MT)
Source: USDA, Bloomberg, SEAI, Thomson Reuters Datastream, HSBC estimates
In this section, we introduce readers to the global vegetable oils market and palm oil’s position.
Following that, we discuss three of palm oil’s biggest markets and growth opportunities, namely,
biodiesel, China and India. Taken together, these markets account for c40% of market demand
and form the core of our demand thesis.
Market share battle between soy and palm in vegetable oils
Global production of vegetable oil increased at a relatively quick pace of 5-6% p.a. in the
previous decade but has slowed to 2-3% p.a. since 2011. Accelerating demand for food and, to
a lesser extent, biofuels have been the primary drivers of growth.
There is a variety of vegetable oils, but the top three (namely, oil palm, soybean and rapeseed)
dominate the market with an 82% market share.
1.4
0.50.8
1.1
53.5
54.5
55.5
56.5
57.5
58.5
59.5
60.5
61.5
62.5
63.5
2013
Indo
nesi
a
Chi
na
Indi
a
Oth
ers
Indo
nesi
a
Chi
na
Indi
a
Oth
ers
Indo
nesi
a
Chi
na
Indi
a
Oth
ers
2016
e
2014
2015e
2016e
70% of the demand growth in
2016 is likely to be driven by
China, India and Indonesia
Soy oil and palm oil are the
biggest competitors in the
vegetable oil market
EQUITIES PALM PLANTATIONS
20 January 2016
14
Global Vegetable oil production (USDA estimates)
(MT, MY*) 2003a 2004a 2005a 2006a 2007a 2008a 2009a 2010a 2011a 2012a 2013a 2014a 2015e
Palm Oil 30.1 33.6 36.0 37.6 41.4 44.5 46.4 49.2 52.6 56.4 59.4 61.4 62.7 Palm Kernel Oil 3.7 4.2 4.4 4.5 5.0 5.3 5.6 5.8 6.2 6.6 7.0 7.3 7.4 Soybean Oil 30.2 32.5 34.8 36.4 37.7 35.9 38.8 41.4 42.7 43.1 45.0 49.0 51.5 Rapeseed Oil 14.2 15.7 17.5 17.2 18.4 20.4 22.3 22.9 23.9 24.5 26.2 26.8 26.2 Sunflower Oil 9.1 9.0 10.5 10.7 10.2 12.0 12.1 12.2 14.6 13.1 15.8 15.1 15.1 Peanut Oil 5.3 5.2 5.1 4.5 4.9 5.1 4.9 5.3 5.3 5.5 5.6 5.5 5.5 Cottonseed Oil 4.1 5.0 4.9 5.1 5.1 4.7 4.6 5.0 5.2 5.2 5.2 5.1 4.5 Olive Oil 3.1 3.0 2.7 2.9 2.8 2.8 3.2 3.3 3.5 2.4 3.1 2.4 2.9 Coconut Oil 3.3 3.4 3.3 3.2 3.5 3.4 3.5 3.7 3.4 3.7 3.4 3.4 3.4 Major Vegetable Oils 103.0 111.8 119.1 122.1 129.1 134.2 141.5 148.7 157.4 160.6 170.7 176.0 179.1 y-o-y % 8.5 6.6 2.5 5.8 3.9 5.4 5.1 5.8 2.0 6.3 3.1 1.8
Market Share (%) 2003a 2004a 2005a 2006a 2007a 2008a 2009a 2010a 2011a 2012a 2013a 2014a 2015e
Palm Oil 29.2 30.1 30.2 30.8 32.1 33.1 32.8 33.1 33.4 35.1 34.8 34.9 35.0 Palm Kernel Oil 3.6 3.7 3.7 3.7 3.9 3.9 4.0 3.9 3.9 4.1 4.1 4.1 4.1 Soybean Oil 29.3 29.1 29.2 29.8 29.2 26.8 27.5 27.8 27.2 26.8 26.4 27.8 28.7 Rapeseed Oil 13.8 14.1 14.7 14.0 14.3 15.2 15.8 15.4 15.2 15.3 15.4 15.2 14.6 Sunflower Oil 8.8 8.0 8.8 8.8 7.9 8.9 8.6 8.2 9.3 8.1 9.3 8.6 8.4 Peanut Oil 5.1 4.7 4.2 3.7 3.8 3.8 3.4 3.6 3.4 3.4 3.3 3.1 3.1 Cottonseed Oil 4.0 4.5 4.1 4.2 4.0 3.5 3.2 3.3 3.3 3.2 3.0 2.9 2.5 Olive Oil 3.0 2.7 2.2 2.3 2.2 2.1 2.2 2.2 2.2 1.5 1.8 1.4 1.6 Coconut Oil 3.2 3.1 2.8 2.6 2.7 2.5 2.5 2.5 2.2 2.3 2.0 1.9 1.9
Source: USDA, Thomson Reuters Datastream. 2015 estimates are from USDA. *Marketing year ends in September of the following year i.e. MY07 is YE September 2008.
Crude palm oil (CPO) and palm kernel oil (PKO) are oil palm derivatives and account for the
single biggest share (39%) of global vegetable oil production. Soybean oil and rapeseed oil
follow with shares of 28% and 15%, respectively.
Global vegetable oil production split by crop (USDA, MY*15-16 estimate)
Source: USDA estimates, Thomson Reuters Datastream. Total = 178.2MT. *Marketing year ends in September of the following year i.e. MY07 is YE September 2008.
Regional consumption patterns are heavily influenced by domestic availability of oil sources. For
instance, soy oil dominates in the Americas, which accounts for more than 80% of global
soybean production, and palm oil dominates in its key producing countries in Southeast Asia.
Domestic surpluses are exported to regions with deficit. The producer surplus is most acute in
palm oil and soybean and, consequently, the competition is fiercest among these two.
35%
4%
29%
15%
8%
3%2%2%2%
Palm Oil
Palm Kernel Oil
Soybean Oil
Rapeseed Oil
Sunflower Oil
Peanut Oil
Cottonseed Oil
Olive Oil
Coconut Oil
15
EQUITIES PALM PLANTATIONS
20 January 2016
Global vegetable oil consumption – regional split (USDA, MY*15-16 est.)
Source: USDA estimates, Thomson Reuters Datastream. Total = 178.2MT. *Marketing year ends in September of the following year i.e. MY07 is YE September 2008.
We regard heavily populated regions of China and the Indian subcontinent as the key
battleground in the vegetable oils market. These markets account for 22% and 19% of global
population, respectively, and run a significant deficit in domestic production of vegetable oils.
These markets are also characterised by relatively low per-capita consumption of vegetable oils
and, hence, offer more structural upside to demand in the medium to long term.
Vegetable oil – per capita consumption (kg/capita, 2014)
Source: USDA, Thomson Reuters Datastream, HSBC estimates. Includes biodiesel use.
The per-capita consumption in producer regions – namely the Americas, the EU and Southeast
Asia – is already almost twice as much as the global average, but the aggregate consumption in
India, Bangladesh and Pakistan is c30% below the global average.
Around 42% of the global production of vegetable oils isn’t consumed in producing country but
exported to consumption hot spots in Asia. Palm oil is the most-traded of these commodities
and accounts for c60% of global trade. However, this doesn’t mean that it will necessarily be the
major oil to fill the gap between production and consumption in countries with a deficit. Major
consumers and importers trade in the oilseeds (primarily soybean) and crush them locally into
animal feed (meal) and oil. Unlike oilseeds, oil palms need to be pressed right after harvest into
oil and there isn’t any animal feed by-product.
19%
12%
14%
8%9%
7%
4%
27%
China
India
EU-27
USA
Indonesia & Malaysia
Brazil & Argentina
Pakistan & Bangladesh
Others
0.0
10.0
20.0
30.0
40.0
50.0
60.0
India Pak & B'desh China USA Braz & Argtn EU-27 Indo & M'sia World
Indian subcontinent and
China are key battlegrounds
in vegetable oils competition
EQUITIES PALM PLANTATIONS
20 January 2016
16
Vegetable oils – imports as a percentage of consumption
Source: USDA, Thomson Reuters Datastream
Lower cost has helped palm oil gain market share
CPO is the most affordable of the four mainstream edible oils. As a reminder, oil palm is the
highest oil yielding crop in the world, producing four times more oil per unit of land than the next
most productive oil crop, rapeseed, and its productivity is even more pronounced when
compared with soybean. Among the 10 major oilseeds, oil palm accounted for less than 6% of
global land use for cultivation, but produced almost one-third of global oils and fats output. High
yield and less land translate to a lower cost of production, supporting competitive pricing for
CPO producers.
Vegetable oil yield per ha (tonnes) Vegetable oil market share (%)
Source: Oil World Source: USDA
Rapeseed and sunflower seed oil also tend to trade at a premium to CPO because of their
higher use in biodiesel production, and their geographic concentration in Europe and the
Americas, which have higher spending power, while soybean oil usually trades at prices close
to CPO (still at an average discount of 13% since 2008) as output has been constantly
expanding, driven by growing planted area and farmers’ preference for conducting crop rotation
periodically, which means soybean is sometimes planted without much economic support,
leading to abnormal supply in some years.
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015e
Palm Palm Kernel Soy Sunflower Rapeseed Others
0.00.51.01.52.02.53.03.54.04.5
Soybean Sunflower Rapeseed Oil Palm
30.1 34.9
29.127.8
14.1 15.3
23.0 17.9
0.0
20.0
40.0
60.0
80.0
100.0
2004 2014
Palm oil Palm kernel Soy Rape Others
Palm is the most efficient
vegetable oil crop globally
17
EQUITIES PALM PLANTATIONS
20 January 2016
Palm oil price vs. soy oil price (USD/tonne) Palm oil price discount to soy oil (%)
Source: Thomson Reuters Datastream, HSBC Source: Thomson Reuters Datastream, HSBC
Biodiesel demand to recover after slumping in 2015
Around 15% of global palm oil production is consumed as a raw material for biodiesel.
Approximately half of it is consumed in Southeast Asia and one-third in Europe. The palm oil
feedstock generates approximately one-third of global biodiesel production with rapeseed being
the other major contributor.
CPO consumption for biodiesel
(MT) 2007a 2008a 2009a 2010a 2011a 2012a 2013a 2014a 2015e 2016e 2017e
Indonesia 0.3 0.6 0.3 0.7 1.8 2.2 2.8 3.2 1.6 2.8 2.8 Malaysia 0.1 0.2 0.2 0.1 0.1 0.1 0.3 0.3 0.5 0.6 0.6 Other SEA 0.1 0.4 0.7 0.8 1.1 1.5 1.4 1.4 1.2 1.2 1.2 EU 0.6 0.9 0.9 1.2 1.5 1.9 2.9 3.2 3.3 3.3 3.4 USA 0.3 0.6 0.4 0.6 0.7 0.8 1.3 1.0 1.2 1.2 1.2 Others 0.0 -0.2 1.1 0.8 0.1 0.4 0.4 0.4 0.6 0.6 0.6
Total 1.4 2.5 3.6 4.2 5.2 6.9 9.1 9.6 8.3 9.6 9.8
y-o-y % 78.6 44.0 16.7 23.8 32.7 31.9 5.5 -13.5 15.4 2.0
Source: Oil World, USDA, HSBC estimates
CPO-based biodiesel demand is on track to have slumped by c14% y-o-y in 2015. This would
be the first decline in global production of biodiesel since 2006. Three specific issues have
affected market demand in 2014-15. To start with, a sharp fall in crude oil prices at the end of
2014 hit the discretionary blending demand for biodiesel. 2014-15 have also seen demand from
two major customers run out of growth or decline. While Indonesian biodiesel demand suffered
from a lack of subsidies, European growth petered out due to regulatory changes.
Slump in crude oil has hit the demand for discretionary blending of CPO-based biofuels
Source: Thomson Reuters Datastream, HSBC
0
500
1,000
1,500
2,000
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
Jan-
14
Jul-1
4
Jan-
15
Jul-1
5
Jan-
16
Soy oil Palm oil
-20.0
0.0
20.0
40.0
60.0
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
Jan-
14
Jul-1
4
Jan-
15
Jul-1
5
Jan-
16
CPO Discount/(Premium) to Soy Oil (%)
0
200
400
600
800
1,000
1,200
1,400
1,600
Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15
CPO (USD/MT) Brent Crude (USD/MT)
Demand for CPO as biodiesel
fell due to low crude prices
and a lack of subsidies in
Indonesia
EQUITIES PALM PLANTATIONS
20 January 2016
18
We believe that European demand is likely to stabilise in 2016 as the market has digested
changes favouring rapeseed-based biodiesel in Germany. However, further growth for CPO-
based biodiesel in this market is likely to be limited by the cap on the use of crop-based
biofuels. Indonesian demand, on the other hand, is likely to recover strongly in 2016 after a
change in policy removed its link to crude oil prices and implemented a viable policy to
subsidise its usage. Given these changes, we think CPO-based biodiesel demand would
recover to 2014 levels in 2016.
15% percentage of palm oil used as biodiesel
Palm-based biodiesel consumption (2014) CPO biodiesel demand to recover in 2016e
Source: Oil World. Total = 9.6MT. Source: USDA, HSBC estimates
European palm-based biodiesel demand likely flat with some downside risk
The EU is the world’s largest biofuels producer and accounts for almost 40% of global
production. Biodiesel represents 80% of the EU’s biofuels market, which is underpinned by the
EU’s Climate Change Package (CCP) adopted in 2009.
CCP requires 10% of the energy used in transport to come from biofuels (renewable energy) by
2020. By the end of 2013, the EU had achieved a level of 5.4%; however, in mid-2014, it limited
the use of crop-based biofuels (made from feed or food raw materials) to a maximum of 7% of
transport energy. This limits the incremental growth of palm-based biodiesel in Europe and the
impact is already visible in slower growth in 2015.
The USDA expects the EU’s biodiesel demand to remain flat until the end of 2016, but the shift
to a greenhouse gas (GHG) reduction mandate in Germany favours biofuels with a higher GHG
saving. This could potentially displace some palm-based biodiesel demand. Reportedly, CPO-
based conventional diesel also does not provide enough winter stability in northern Europe and
this is somewhat of a demand dampener for CPO in that market.
34%
3%
15%
34%
10%4%
Indonesia
Malaysia
Other SEA
EU
USA
Others
32.731.9
5.5
-13.5
15.4
2.0
-20.0
0.0
20.0
40.0
0.0
5.0
10.0
15.0
2012 2013 2014 2015E 2016E 2017e
CPO Bio-diesel demand (MTPA) YoY%, RHS
EU likely to stabilise but
unlikely to deliver much
growth to biodiesel demand
19
EQUITIES PALM PLANTATIONS
20 January 2016
Rapeseed dominates EU biodiesel market Typical greenhouse gas savings for
different biodiesel feedstock
Source: USDA Source: USDA
Indonesian biodiesel demand to help CPO demand recovery in 2016
In March 2015, Indonesia increased its mandatory biodiesel blending rate from 10% to 15% for
transport and industrial uses in 2015. According to current regulation, the blending target will
increase to 20% in 2016 and 30% in 2020. If implemented fully, Indonesia could be consuming
as much as 10MT of CPO for biodiesel by 2020. However, Indonesia has historically
underperformed its rather aggressive mandates for biodiesel adoption.
Indonesian has historically underperformed its biodiesel adoption targets
Indonesia 2010a 2011a 2012a 2013a 2014a
Mandatory target (million litres – ML) 1,076 1,297 1,641 2,017 4,000 Domestic Consumption (ML) 220 258 670 1,048 1,600 % of target achieved 20% 20% 41% 52% 40%
Source: USDA
The divergence between the targeted consumption and actual usage could expand further in
2015. The fall in crude prices at the end of 2014 hasn’t just shrunk Indonesian biodiesel exports
but has hit domestic demand as well. Indonesian biodiesel producers suffered heavy losses in
2014 since the biodiesel reference price was based on Mean of Platts Singapore (MoPS), and
Singapore gasoil (diesel) slumped relative to the CPO price.
Slump in gasoil price (FOB, Singapore) relative to CPO hurt biodiesel producers in 2014
Source: Thomson Reuters Datastream, HSBC
55%29%
8%4%2%2%
Rapeseed
Palm
Soybean
Animal fats
Sunflower
Other
45% 40%58%
36%
62% 56%
Rap
esee
d
Soy
bean
Sun
flow
er
CP
O
CP
O +
met
hane
capt
ure
Cor
n et
hano
l
-300
-200
-100
0
100
200
300
400
500
600
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
CPO Px Premium/(Disc) to SG Gasoil
Indonesia has typically
missed its aggressive targets
EQUITIES PALM PLANTATIONS
20 January 2016
20
Recent policy revisions in March 2015 have led to the resetting of the biodiesel reference price
and creation of a fund to subsidise biodiesel consumption. The plantation fund intends to
provide for the gap between the market price of conventional diesel and biodiesel by collecting
a levy of USD50/tonne and USD20-30/tonne on CPO exports and processed palm oil,
respectively. Simultaneously, the new price formula is based on the market price of CPO
(average price of the previous month before VAT) and covers the biodiesel production costs
(USD125/tonne) as well as a 3% margin for producers.
We estimate that the plantation fund, which has been active since the end of July 2015, could
raise as much as USD800m from export levies in one year. Assuming an allocation of
USD600m specifically for biodiesel subsidies, we estimate that the country can subsidise as
much as 2.8MT of CPO feedstock for biodiesel annually. Consequently, we expect a rebound in
Indonesian biodiesel consumption to around this level in 2016.
Indonesia can subsidise almost 3MT p.a. of CPO for biodiesel with new subsidy
2015 2015 USD/tonne IDR/l
CPO Price - Malaysia FOB less Indonesia export levy - (A)
515
Production cost - (B) 100 Profit margin - (C) 25
Biodiesel cost - (D) = (A+B+C) 640 9,847
Brent Crude 375 Refining margin 100
Diesel cost 475 7,308
Biodiesel subsidy required - (D-E) 165 2,539 Biodiesel volume subsidised (ML) 3,255 CPO volume subsidised (MT) 2.8
Source: USDA, HSBC estimates
Indonesia biodiesel CPO use (MT) Malaysia: Biodiesel CPO use (MT)
Source: USDA, HSBC estimates Source: USDA, HSBC estimates
Malaysian biodiesel demand also on a path to recovery after B7 implementation
Much like Indonesia, Malaysia has also lagged in the implementation of its biodiesel mandate.
Malaysia finally implemented a 7% blend of biodiesel called B7 at the start of 2015 after several
delays (the previous mandate was for a 5% blend). The increased blending is likely to increase
the biodiesel usage to 0.5MT in 2015. The Ministry of Plantation Industries and Commodities
launched the B10 mandate (10% blend) in October 2015, which, if implemented, could raise
demand to 0.65MT in 2016 but key auto manufacturers have pushed back on the plan, claiming
that B10 may have an adverse effect on engines and lubrication systems. Consequently, we
assume only a partial implementation of B10 with a 2016 forecast of 0.58MT.
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
2007
2008
2009
2010
2011
2012
2013
2014
2015
E
2016
E
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
2007
2008
2009
2010
2011
2012
2013
2014
2015
E
2016
E
But new subsidies in
Indonesia are likely to drive
strong biodiesel demand
Adoption of new biodiesel
mandate driving demand
higher in Malaysia
21
EQUITIES PALM PLANTATIONS
20 January 2016
Palm pain from soy’s ascent likely to abate in China
According to the USDA, vegetable oil consumption in China has grown at a CAGR of 4.9% in
the last 10 years. The annual growth continues at a pace of 1.0-1.2MT but almost all of the
growth since 2008 has come from major competing oilseed-based edible oils, namely soy oil
and rapeseed oil. Soy oil has captured almost two-thirds of the consumption growth during this
period and rapeseed oil has taken the rest of it. The future growth, in our view, is likely to be
more balanced and possibly skewed towards palm oil, as demand for oilseeds approaches
maturity in the country.
China vegetable oil consumption (MT)
Marketing Year 2003a 2004a 2005a 2006a 2007a 2008a 2009a 2010a 2011a 2012a 2013a 2014a 2015e
Palm Oil 3.6 4.3 5.0 5.1 5.2 5.6 5.9 5.8 5.8 6.4 5.7 5.7 5.8 Palm Kernel Oil 0.2 0.2 0.2 0.4 0.4 0.5 0.4 0.4 0.5 0.6 0.5 0.6 0.7 Soybean Oil 7.2 7.2 7.6 8.7 9.7 9.5 10.0 11.4 12.0 12.5 13.7 14.2 15.2 Rapeseed Oil 4.4 4.8 4.5 4.3 4.1 4.9 5.6 6.0 6.3 6.3 6.8 7.3 7.6 Sunflower Oil 0.3 0.3 0.4 0.3 0.1 0.4 0.5 0.4 0.5 0.8 1.0 1.0 0.8 Peanut Oil 2.1 2.2 2.3 2.0 2.0 2.2 2.2 2.4 2.5 2.7 2.7 2.7 2.7 Cottonseed Oil 1.1 1.4 1.3 1.5 1.6 1.6 1.5 1.4 1.5 1.6 1.5 1.4 1.1 Major Vegetable Oils 18.8 20.4 21.4 22.4 23.2 24.6 26.2 27.7 29.1 31.0 31.8 32.8 33.9
Market share (%) 2003a 2004a 2005a 2006a 2007a 2008a 2009a 2010a 2011a 2012a 2013a 2014a 2015e
Palm Oil 19.0 21.2 23.3 22.9 22.5 22.8 22.6 20.9 20.1 20.6 17.8 17.5 17.0 Palm Kernel Oil 0.8 1.1 1.2 1.7 1.6 1.8 1.7 1.5 1.6 2.0 1.6 1.8 1.9 Soybean Oil 38.1 35.3 35.6 38.7 41.8 38.5 38.3 41.1 41.4 40.5 43.0 43.2 45.0 Rapeseed Oil 23.2 23.3 21.3 19.4 17.8 19.7 21.5 21.5 21.5 20.4 21.2 22.1 22.3 Sunflower Oil 1.8 1.4 1.8 1.5 0.6 1.8 1.9 1.3 1.6 2.7 3.2 3.0 2.4 Peanut Oil 11.3 11.0 10.6 8.9 8.7 8.8 8.4 8.6 8.7 8.7 8.6 8.3 8.0 Cottonseed Oil 5.9 6.7 6.2 6.9 7.0 6.5 5.6 5.1 5.1 5.1 4.7 4.2 3.4
Source: USDA, Thomson Reuters Datastream. Marketing year ends in September of the following year i.e. MY07 is YE September 2008.
The ascent of oilseeds in China is closely tied to the growing demand for animal protein in the
country. Oilseeds are crushed to produce animal feed (oilseed meal); edible oils are a by-
product of this process. Meal and oil account for 65-85% and 18-35% of the crush, respectively,
depending on the input oilseed. Soybean crush, the biggest contributor of vegetable oils, yields
only 18% of oil and 78% of meal by weight.
China oilseed crush volumes (MT)
Source: USDA, Thomson Reuters Datastream
A high meal yield (78%) in addition to high protein content (48%) has made soymeal the animal
protein of choice in China. This has driven soybean crush volumes at a CAGR of 9.4% during
last ten years. Soy oil consumption, at the same time, has grown at a CAGR of 7%.
0.0
20.0
40.0
60.0
80.0
100.0
120.0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Soybean Rapeseed Cottonseed Sunflower seed
Soy oversupply has crowded
out palm oil; this dynamic is
now likely to reverse
Soy is the animal protein of
choice due to its high feed
and protein content
EQUITIES PALM PLANTATIONS
20 January 2016
22
China animal protein consumption per kg of meat produced
Source: USDA, Thomson Reuters Datastream
The animal protein intake per kilogram of meat production has now reached a level that is in line
with that of the US and the EU, and it’s questionable whether the rapid growth in oilseed
consumption of previous decade would continue.
Given the decade-long gains in animal protein consumption, China’s soymeal requirements are
likely to grow at a more moderate pace and in line with its meat consumption, in our view.
Consequently, we expect the production growth of soy oil to slow down to 2-3% p.a. instead of
the 7-8% p.a. achieved in the last 10 years. That would imply annual growth of around 0.3MT in
soy oil consumption out of a potential 1.0-1.2MT of vegetable oil consumption growth. It would
leave an annual deficit of around 0.5-0.6MT to be plugged by palm oil, in our view.
0.20
0.25
0.30
0.35
0.40
0.45
0.50
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
China US EU-27 World
But, animal protein
consumption is now
approaching saturation
China meat production and animal feed consumption (MT)
Marketing Year 2003a 2004a 2005a 2006a 2007a 2008a 2009a 2010a 2011a 2012a 2013a 2014a 2015e
Swine 42.4 43.4 45.6 46.5 42.9 46.2 48.9 50.7 50.6 53.4 54.9 56.7 56.6 y-o-y % 2.4 4.9 2.1 -7.8 7.8 5.9 3.7 -0.2 5.6 2.8 3.2 -0.2 Beef 5.4 5.6 5.7 5.8 6.1 6.1 6.4 6.5 6.5 6.6 6.7 6.9 6.8 y-o-y % 3.3 1.4 1.5 6.4 0.0 3.6 2.8 -0.9 2.3 1.6 2.4 -0.9 Poultry 10.0 9.9 10.1 10.4 11.5 12.0 12.2 12.5 13.1 13.6 13.2 12.9 12.9 y-o-y % -1.0 1.7 2.9 10.2 4.8 2.0 2.0 4.5 4.1 -2.7 -2.2 -0.3 Total 57.8 59.0 61.3 62.7 60.5 64.3 67.5 69.7 70.1 73.6 74.9 76.5 76.3 y-o-y % 1.9 4.0 2.2 -3.5 6.4 4.9 3.3 0.6 5.0 1.7 2.2 -0.3 Animal Feed consumption 2003a 2004a 2005a 2006a 2007a 2008a 2009a 2010a 2011a 2012a 2013a 2014a 2015e
Soybean meal 19.5 23.4 27.8 27.6 30.8 31.7 37.5 43.4 47.4 50.1 52.5 57.5 62.1 Rapeseed meal 7.1 8.1 8.2 7.2 6.9 8.3 9.2 8.9 10.1 10.7 11.6 11.5 11.4 Cottonseed meal 3.3 4.0 3.9 4.6 4.8 4.7 4.3 4.2 4.3 4.6 4.4 4.2 3.3 Sunflower seed meal 0.4 0.4 0.6 0.4 0.2 0.5 0.5 0.5 0.5 0.7 0.7 0.7 0.6 Total Oilseed meal 30.3 35.9 40.5 39.8 42.7 45.2 51.5 57.0 62.4 66.1 69.3 73.8 77.4 Y-o-Y % 18.5 12.7 -1.7 7.3 5.7 14.0 10.7 9.5 5.9 4.9 6.5 4.8
Source: USDA, Thomson Reuters Datastream. Marketing year ends in September of the following year i.e. MY07 is YE September 2008.
23
EQUITIES PALM PLANTATIONS
20 January 2016
Soy imports still strong as they displace higher cost domestic production
China soy crush margin has been under pressure since 2Q15
Source: Thomson Reuters Datastream, HSBC Source: Thomson Reuters Datastream, Dalian Commodity Exchange, HSBC
We would highlight the recent recovery in Chinese monthly imports as a harbinger of impending
reversal in Chinese demand. However, investors must also pay attention to Chinese soybean
imports as well as to domestic crush margins to feel the pulse of the market.
Chinese palm oil imports have rebounded…
…and we expect Chinese palm oil imports (MT) to reverse 2014 losses in 2015-17e
Source: Thomson Reuters Datastream, HSBC Source: Thomson Reuters Datastream, HSBC estimates
Any seemingly structural decline in import growth and crush margins of soybean amid an
otherwise stable macro-environment should be considered as a sign of oilseed demand
reaching maturity in the country. This would be a positive for palm oil.
In addition, investors must note that any of the following, if realised, would also be positive for
palm oil:
Any decline in meat consumption due to an increase in pork prices
A substitution of oilseed meal by a non-oilseed feed like corn meal or distiller’s dried grain
with solubles (DDGS), a by-product of corn-based ethanol, or
A decline in the production of oilseeds
-10.0
0.0
10.0
20.0
30.0
40.0
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
Jan-
14
Jul-1
4
Jan-
15
Jul-1
5
China Soybean import (trailing 12m YoY%)-40
-20
0
20
40
60
Q3
2010
Q4
2010
Q1
2011
Q2
2011
Q3
2011
Q4
2011
Q1
2012
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Q3
2013
Q4
2013
Q1
2014
Q2
2014
Q3
2014
Q4
2014
Q1
2015
Q2
2015
Q3
2015
Q4
2015
Ch. Crush Margin (USD/tonne)
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
Dec
-07
Jul-0
8
Feb
-09
Sep
-09
Apr
-10
Nov
-10
Jun-
11
Jan-
12
Aug
-12
Mar
-13
Oct
-13
May
-14
Dec
-14
Jul-1
5
China Palm oil imports Trailing 12-m YoY%
5.3
6.45.7 5.9
6.3 6.05.3
5.96.4
6.8
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
2008
2009
2010
2011
2012
2013
2014
2015
e
2016
E
2017
e
China’s CPO imports have
reversed 2014 decline
EQUITIES PALM PLANTATIONS
20 January 2016
24
China pork rump price (RMB/kg) Annual meat consumption per capita (kg,
2014)
Source: Thomson Reuters Datastream, HSBC Source: Thomson Reuters Datastream, USDA, HSBC
India remains palm oil’s single biggest opportunity
According to the USDA, vegetable oil consumption in India has grown at a CAGR of 5.7% in the
last 10 years. In recent years, the annual growth has picked up pace and risen above the long-
term annual average of around 0.8MT per annum. India is the biggest importer of vegetable oils
and the largest consumer of palm oil in the world. Vegetable oil imports are on track to rise to
almost 70% of domestic consumption of 22MT in 2015-16. Furthermore, contrary to what
happened in China, palm oil has captured the lion’s share of the growth in vegetable oil
consumption in India since 2008. Soy oil, the primary competitor, has accounted for only one-
third of the growth, while palm oil has taken over a 60% share.
India vegetable oil consumption
(MT) 2003a 2004a 2005a 2006a 2007a 2008a 2009a 2010a 2011a 2012a 2013a 2014a 2015e
Palm Oil 3.6 3.4 3.1 3.7 5.1 6.2 6.4 7.1 7.5 8.3 8.4 9.0 9.9 Palm Kernel Oil 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.3 0.3 0.2 0.2 Soybean Oil 1.9 2.7 2.8 2.7 2.3 2.3 2.8 2.6 2.8 3.0 3.3 4.1 4.7 Rapeseed Oil 2.1 2.1 2.3 2.1 2.0 2.1 2.1 2.2 2.3 2.3 2.5 2.5 2.4 Sunflower Oil 0.6 0.4 0.6 0.6 0.4 0.7 0.9 1.0 1.3 1.2 1.7 1.7 1.7 Peanut Oil 1.8 1.7 1.6 1.4 1.6 1.5 1.3 1.3 1.2 1.2 1.2 1.1 1.0 Cottonseed Oil 0.6 0.8 0.9 0.9 1.1 1.0 1.1 1.1 1.2 1.2 1.3 1.3 1.3 Coconut Oil 0.5 0.5 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 Major Vegetable Oils 11.3 11.7 11.9 12.0 13.0 14.5 15.3 15.9 16.8 17.9 19.1 20.3 21.7
Market share (%) 2003a 2004a 2005a 2006a 2007a 2008a 2009a 2010a 2011a 2012a 2013a 2014a 2015e
Palm Oil 32.0 29.2 26.2 30.6 39.1 43.0 42.1 44.6 44.5 46.2 44.1 44.3 45.8 Palm Kernel Oil 1.0 0.9 1.0 1.1 1.1 1.4 1.5 1.3 1.2 1.7 1.3 1.2 1.1 Soybean Oil 17.3 23.4 23.5 22.5 18.0 16.0 18.4 16.4 16.3 16.5 17.3 19.9 21.7 Rapeseed Oil 18.9 17.7 19.7 17.8 15.2 14.5 13.7 14.1 13.6 13.0 13.1 12.3 11.0 Sunflower Oil 5.6 3.4 5.3 5.0 3.1 5.1 6.0 6.2 7.6 6.6 8.8 8.2 7.8 Peanut Oil 15.7 14.8 13.4 11.9 12.2 10.0 8.6 7.9 6.9 6.6 6.2 5.3 4.7 Cottonseed Oil 5.4 6.6 7.5 7.9 8.1 7.2 6.9 7.0 7.3 6.9 6.8 6.5 6.0 Coconut Oil 4.2 3.9 3.4 3.2 3.3 2.9 2.7 2.5 2.5 2.3 2.3 2.2 2.0
Source: USDA, Thomson Reuters Datastream, HSBC estimates
Palm oil now makes up almost half of the vegetable oil consumed in the country and, we
believe, India represents the single biggest opportunity for the commodity over the next decade.
Relatively low per-capita consumption of vegetable oils is only part of the reason for the
potential upside. Surprising as it may seem, we think vegetarianism is also a key underlying
driver of its continued success.
Indian consumption of meat is less than 5kg/capita compared with 57kg/capita in China and over
110kg/capita in the US. Although demand for soybean meal as animal feed has been growing in
India, a large vegetarian population caps the uptake of this source of protein for animals. This, in
turn, limits the need to crush soybeans into meal and soy oil. India, as a result, doesn’t face the
15
20
25
30
35
Feb
-09
Aug
-09
Feb
-10
Aug
-10
Feb
-11
Aug
-11
Feb
-12
Aug
-12
Feb
-13
Aug
-13
Feb
-14
Aug
-14
Feb
-15
Aug
-15
China Pork rump price (RMB/Kg)
111.6
97.6
78.1
62.4
56.6
4.6
0.0 20.0 40.0 60.0 80.0 100.0 120.0
US
Brazil
EU-27
Russia
China
India
India is the biggest consumer
of palm oil and, so far, its
biggest growth engine
Lack of animal feed demand
and higher soy oil price limits
its attractiveness in India
25
EQUITIES PALM PLANTATIONS
20 January 2016
animal feed-driven oversupply of soy oil seen in China. In fact, India produces soy meal in surplus,
which it exports, but faces a deficit in soy oil, which it has to make up for through imports.
Surplus production (or deficit) of soymeal and soy oil in India (MT)
Source: USDA
One can argue that India may well continue on this path of importing soybean, crushing it
domestically and exporting the meal after consuming the residual soy oil. However, its
competitiveness relative to soybean producers and traditional exporters of meal (Brazil, the US,
Argentina) is questionable in this trade.
This doesn’t mean that consumption of soy oil isn’t growing but only that the lack of meat
consumption lowers the threat to palm oil from these soybeans, which the need for animal feed
would have created. In other words, soy oil isn’t the default choice among the vegetable oils
available in the country and, unlike in China, the market is a level playing field.
Palm oil’s discount to soy boosts its attractiveness in India (USD/tonne)
Source: Thomson Reuters Datastream, HSBC
Two factors are critical to watch in palm oil’s head-on battle with soy oil – its price discount and
its easier availability in the import-export market relative to soy oil. It’s worth highlighting that
palm oil has traded at a discount of 13% to soy oil since start of 2008.
The importance of palm’s cost competitiveness in India can’t be overstated. The Solvent
Extractor’s Association of India (SEAI), a local Industry organisation, has often claimed that
India is the “dumping ground” for cheaper palm oil and that this has increased country’s reliance
on imported oil to 70%.
Subsequent industry lobbying to protect domestic oilseeds production has encouraged the
Indian government to increase import duty on crude palm oil and refined grades to 7.5% and
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Soy meal Soy oil
0
200
400
600
800
1,000
1,200
1,400
1,600
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
Jan-
14
Jul-1
4
Jan-
15
Jul-1
5
Jan-
16
Soy oil Palm oil
India imports soy oil but
exports soy meal; this trade
has its limits
CPO’s price discount and
easier availability are key
competitive advantages
EQUITIES PALM PLANTATIONS
20 January 2016
26
15% from 2.5% and 10%, respectively, in December 2014. The government hiked the duty yet
again on CPO and refined palm oil to 12.5%and 20%, respectively, in September 2015. While
it’s too early to confirm the impact of the hike, so far the effect has been rather muted with
continuation of robust growth in country’s palm oil imports.
Furthermore, annual soy oil imports have remained range bound between 8-10MT over the last
decade and share of cross-border trade as a proportion of consumption has fallen to low-20s
(%) from high-20s (%) a decade back.
Annual soy oil trade has been range bound between 8MT and 10MT
Source: USDA, Thomson Reuters Datastream
Both a lower price and higher availability have been instrumental in growing palm oil’s share of
consumption in India over the years, but bumper soybean production and a lower premium
helped soy oil claw back some of the losses in 2014. We expect this trend to continue.
Palm oil imports have recovered in 2015… …as soy oil growth has slowed
Source: Bloomberg, SEAI, HSBC Source: Bloomberg, SEAI, HSBC
We expect India to contribute 0.7-0.9MT of palm oil demand annually
Source: Bloomberg, SEAI, HSBC
6,000
7,200
8,400
9,600
10,800
12,000
15.0
18.0
21.0
24.0
27.0
30.0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Soy oil imports as % of consumption (LHS) Soy oil imports ('000 tonnes)
-20
0
20
40
60
80
Dec
-07
Jul-0
8
Feb
-09
Sep
-09
Apr
-10
Nov
-10
Jun-
11
Jan-
12
Aug
-12
Mar
-13
Oct
-13
May
-14
Dec
-14
Jul-1
5
India Palm oil imports Trailing 12-m YoY%
-50.0
0.0
50.0
100.0
Dec
-10
Apr
-11
Aug
-11
Dec
-11
Apr
-12
Aug
-12
Dec
-12
Apr
-13
Aug
-13
Dec
-13
Apr
-14
Aug
-14
Dec
-14
Apr
-15
Aug
-15
Dec
-15
India Soy oil imports trailing 12-m YoY%
5.3
6.6 6.5 6.6
7.88.5
8.0
9.610.3
11.2
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2008 2009 2010 2011 2012 2013 2014 2015e 2016E 2017e
27
EQUITIES PALM PLANTATIONS
20 January 2016
Supply to shrink on El Niño next year
84% of world’s palm oil output is based in Indonesia and Malaysia and almost 80% of this
production is exported. Thus, c92% of the world’s seaborne-traded supply comes from these
two countries. The strong growth in Indonesian acreage over the last seven years has given the
sector the potential to deliver palm oil production growth of 3-4MT annually for the next 2-3
years. However, weather is an external influence that threatens to derail production in 2016.
Strong El Niño conditions have prevailed for seven months and most indicators suggest this is
the strongest El Niño in 17 years. The associated dryness in Indonesia and Malaysia is likely to
cause a drop in FFB yields with the impact being relatively severe on older plantations. We
expect Indonesian output to shrink by 1MT in 2016 and CPO production to decline by 1% y-o-y.
Historically, El Niño events have supported CPO prices, but we suspect a more pronounced
effect this time since the CPO production shortfall is unlikely to be filled easily by other
vegetable oils or excess inventory of 3MT or so at two of its biggest producers.
Rapeseed and sunflower farmers have started responding to low prices by cutting output.
Soybean, the biggest oilseed in the vegetable oils market, hasn’t responded in the same fashion
yet, but the downside risks to its output are increasing. Even though the USDA still expects US
soybean output (one-third of global) to stay steady, there is no doubt that farmers are being hurt
by a strong USD and low prices. Their Brazilian peers, shielded by FX depreciation, plan to
increase soybean acreage, but El Niño’s effect on North/Northeast Brazil may not allow them to
do so. In addition, a La Niña follow-up to El Niño (40% possibility historically) creates more
downside risk for US soybean output.
Supply crunch taking shape
Excluding weather effects, the palm oil market can manage a “steady-
state” production growth of 4-6% p.a. over the next 2-3 years
But the current El Niño, the strongest since 1997-98, is likely to
reduce palm output in 2016; a La Niña follow-up can cut soy output
Downside risks to production of competing oilseeds are also either
visible (rape and sunflower) or rising (soybean)
Palm oil production
(MT) 2008a 2009a 2010a 2011a 2012a 2013a 2014a 2015e 2016e 2017e
Indonesia 18.0 20.7 22.0 23.3 25.1 28.6 30.1 32.9 31.9 34.4 Malaysia 17.7 17.6 17.0 18.9 18.8 19.2 19.7 20.0 20.1 20.5 Rest of the world 8.0 7.6 9.5 9.5 11.6 10.9 11.1 9.5 9.6 9.7 World 43.7 45.9 48.5 51.7 55.5 58.6 60.9 62.4 61.6 64.7 y-o-y % 5.0 5.7 6.6 7.2 5.7 3.9 2.4 -1.2 4.9
Source: USDA, Bloomberg, Thomson Reuters Datastream, HSBC estimates. *Approx. one-third in Thailand, one-third in W. Africa.
EQUITIES PALM PLANTATIONS
20 January 2016
28
CPO market well supplied, unless weather effects change this…
Indonesia and Malaysia account for almost 85% of the global production and more than 90% of
the trade since palm production is largely based around the equatorial belt. Production has
grown at a CAGR of 6.2% over the last decade with 70% of the production growth coming from
Indonesia alone. The USDA estimates a 6% y-o-y growth in world production during next
marketing year (ending September 2016), but weather patterns are likely to be a key
determining factor. We will return to this topic, but let’s highlight some structural trends on
production growth first.
Typical FFB Yield (tonne/ha) vs. age (years)
Indonesia has added most of the output in recent years
Source: HSBC Source: USDA
Palm oil production – USDA estimates
(’000 tonnes, MY*) 2003a 2004a 2005a 2006a 2007a 2008a 2009a 2010a 2011a 2012a 2013a 2014a 2015e
World 30,105 33,630 36,011 37,581 41,418 44,450 46,372 49,239 52,582 56,422 59,383 61,432 62,675 Indonesia 11,970 13,560 15,560 16,600 18,000 20,500 22,000 23,600 26,200 28,500 30,500 33,000 33,000 Malaysia 13,420 15,194 15,485 15,290 17,567 17,259 17,763 18,211 18,202 19,321 20,161 19,879 20,500 Thailand 840 820 784 1,170 1,050 1,540 1,287 1,832 1,892 2,135 2,000 1,800 2,200 W. Africa 1,593 1,628 1,626 1,716 1,754 1,879 1,935 2,162 2,221 2,202 2,244 2,228 2,233 LatAm 1,430 1,546 1,662 1,792 1,966 2,092 2,174 2,160 2,578 2,700 2,826 2,833 2,938 Others 852 882 894 1,013 1,081 1,180 1,213 1,274 1,489 1,564 1,652 1,692 1,804
% Contribution 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Indonesia 39.8 40.3 43.2 44.2 43.5 46.1 47.4 47.9 49.8 50.5 51.4 53.7 52.7 Malaysia 44.6 45.2 43.0 40.7 42.4 38.8 38.3 37.0 34.6 34.2 34.0 32.4 32.7 Thailand 2.8 2.4 2.2 3.1 2.5 3.5 2.8 3.7 3.6 3.8 3.4 2.9 3.5 W. Africa 5.3 4.8 4.5 4.6 4.2 4.2 4.2 4.4 4.2 3.9 3.8 3.6 3.6 LatAm 4.8 4.6 4.6 4.8 4.7 4.7 4.7 4.4 4.9 4.8 4.8 4.6 4.7 Others 2.8 2.6 2.5 2.7 2.6 2.7 2.6 2.6 2.8 2.8 2.8 2.8 2.9
% y-o-y 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
World 11.7 7.1 4.4 10.2 7.3 4.3 6.2 6.8 7.3 5.2 3.5 2.0 Indonesia 13.3 14.7 6.7 8.4 13.9 7.3 7.3 11.0 8.8 7.0 8.2 0.0 Malaysia 13.2 1.9 -1.3 14.9 -1.8 2.9 2.5 0.0 6.1 4.3 -1.4 3.1 Thailand -2.4 -4.4 49.2 -10.3 46.7 -16.4 42.3 3.3 12.8 -6.3 -10.0 22.2 W. Africa 2.2 -0.1 5.5 2.2 7.1 3.0 11.7 2.7 -0.9 1.9 -0.7 0.2 LatAm 8.1 7.5 7.8 9.7 6.4 3.9 -0.6 19.4 4.7 4.7 0.2 3.7 Others 3.5 1.4 13.3 6.7 9.2 2.8 5.0 16.9 5.0 5.6 2.4 6.6
Source: USDA estimates. *2015 refers to Marketing Year starting October 2015.
Indonesia has aggressively increased its planted area during 2007-11 when CPO prices
averaged around USD850/tonne and the perception of future returns was good. New plantings
have slowed with lower prices. For instance, the Indonesia Palm Oil Commission highlights that
new plantings averaged 560,000 ha during 2007-11 but declined c30% to 400,000 ha during
2012-14. Since palm plantations typically take around seven years to mature and the
plantations are just approaching peak production, the new Indonesian plantings in 2007-14 are
likely capable of generating an output growth in the range of 5-7% p.a. (4-6% p.a. for the market
as a whole) over the next 2-3 years (Indonesia has 10-11m ha of oil palm plantations).
0
5
10
15
20
25
30
1 3 5 7 9 11 13 15 17 19 21 23 25
ton
s/h
a
18.0
33.0
17.6
19.9
0.0
15.0
30.0
45.0
60.0
2007 2014
Indonesia Malaysia ThailandW.Africa LatAm Others
Indonesia is the primary
driver of supply growth…
29
EQUITIES PALM PLANTATIONS
20 January 2016
Given the age profile of plantations, there is little doubt that Indonesia would remain the primary
driver of production over the next few years. However, the new plantings and medium-term
growth are likely to slow down as producers of the marginal export barrel react to currently low
prices. The planting cost of USD6,000/ha spread over three years, annual cash cost of
IDR4,000/kg of CPO production, a USD50/tonne export levy and a cost of capital of 11% imply
a payback period of almost nine years at the 2015 average CPO price of USD566/tonne (FOB
Malaysia). The NPV-breakeven price of USD530/tonne (FOB Malaysia) is only 8% lower than
the 2015 average.
El Niño is likely to cut palm oil production in 2016
Southern Oscillation Index (SOI) – strong negative readings correspond to El Niño
Source: Australian Bureau of Meteorology
Weather is one of the biggest causes of volatility in vegetable oil prices through its effects on
production. An El Niño event typically creates dry weather in the western Pacific (Indonesia and
Malaysia) as well as North and Northeast Brazil, while a La Niña event tends to create drier
weather in corn and soybean producing regions of the Americas, particularly the US Midwest.
The first lowers palm oil output (typically with a lag) and, to a lesser extent, soybean output from
Brazil, and the second lowers the soybean output, particularly from the US.
According to the Australian Bureau of Meteorology (ABOM), the current El Niño continues to be
strong well into its seventh month and is unlikely to ease before early 2016. The ABOM notes
that the current El Niño is comparable to the events in 1997-98 and 1982-83 and, hence, the
impact will likely be more significant than the last two episodes in 2006-07 and 2009-10. It’s
worth highlighting that both the Oceanic Nino Index (ONI) and Southern Oscillation Index (SOI,
see below) have been at their most extreme levels in 17 years. El Niño is generally supportive of CPO prices
START END MONTHS ________ CPO Price Chg. _________ Median SOI During El Niño 12M after the end
Mar-91 Apr-92 14 15.7% -1.2% -12.9 Apr-93 Oct-93 7 -10.6% 80.2% -13.5 Mar-94 Apr-95 14 46.9% -8.6% -12.3 Apr-97 Mar-98 12 19.8% -31.8% -18.3 Mar-02 Jan-03 11 40.8% 7.2% -7.4 May-06 Dec-06 8 43.2% 67.2% -7.2 May-09 Mar-10 11 2.3% 52.4% -6.7
Source: Australian Bureau of Meteorology, Thomson Reuters Datastream
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Southern Oscillation Index
…but new plantings to slow
in response to low prices
EQUITIES PALM PLANTATIONS
20 January 2016
30
El Niño events are typically supportive of palm oil prices since the associated dryness it causes
in Southeast Asia hurts crop yields. Indonesian production and older plantations are typically
more affected than the younger ones. Since Indonesia’s plantations are now more mature than
during the previous mild El Niño event in 2009-10, we expect the current severe El Niño to cut
production in 1H16. For 2016, we expect Indonesian output to fall by 1MT to slightly less than
32MT instead of growing by 3MT, if weather conditions would have been conducive.
El Niño events have typically resulted in CPO price rallies
Source: Australian Bureau of Meteorology, Thomson Reuters Datastream
Oilseed supply to tighten gradually through 2016…
The long lifecycle of oil palm means that it can’t respond to declining prices in the short-term to
medium term. However, producers of sunflower and rapeseed oil already seem to be doing so.
Production of the three major oilseeds (namely soybean, rapeseed and sunflower seed) has
grown by 27-33MT (c8%) annually in each of the last three years, but the USDA expects it to
shrink for the first time since the 2011-12 marketing year (ending September 2012).
Recall that soybean prices hit their peak during the previous decline in production during MY11-
12. That fall in production was triggered by a drought in the US and Brazil, with added pressure
from a credit crisis in Argentina. Much like the last time, we believe a supply-side response
would support oilseed and palm oil prices going forward.
USDA expects production of the top three oilseeds to decline in MY15-16 (y-o-y %)
Source: USDA estimates. Year 2015 refers to Marketing Year starting October 2015.
0.0
200.0
400.0
600.0
800.0
1,000.0
1,200.0
1,400.0
1,600.0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
El Nino CPO price (USD/ton, MY FOB)
1.5
-9.0
11.8
5.2
12.7
0.1
-0.7
1.73.5
13.1
-0.2
-7.9
4.1
18.5
-9.4
19.2
-5.2-1.5
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
2010 2011 2012 2013 2014 2015eSoybean Rapeseed Sunflowerseed
Rapeseed and sunflower
seed supply is shrinking…
31
EQUITIES PALM PLANTATIONS
20 January 2016
The USDA continues to forecast steady production of soybean, the biggest of the oilseeds, but
it does acknowledge the pressure on profitability of US soybean farmers from the depreciation
of main competitor currencies, such as the BRL. The sharp fall in BRL versus USD has
sustained BRL-denominated soybean price near its cycle-highs, while the USD-denominated
price lingers near cycle-lows. Furthermore, the USDA estimates that the total cost of production
of US soybean is around USD375/tonne. Even after excluding non-cash depreciation, the
production cost is estimated to be around USD290/tonne, which isn’t far from the 2015 average
price of USD344/tonne. The recent 30%-plus depreciation in the ARS has further boosted the
competitiveness of South American soybean relative to its northern neighbour’s produce.
US soybean prices (USD/tonne) hit their peak when production declined in MY11-12
Source: Thomson Reuters Datastream, HSBC
Given the lower cash profit cushion, high global inventories (stocks-to-crush ratio) and weaker
competitive positioning in the export market, a price-supportive decline in 2016 US output is
likely, in our view. However, so far, the USDA only expects a 7% y-o-y fall in US soybean
exports on a 1% y-o-y increase in its production in MY15-16 (MY = Marketing Year).
The threat to soybean prices from the policies of the new Argentinian administration led by
President Mauricio Macri has receded since the country will cut export taxes in phases. Mr. Macri
plans to cut the soybean export tax by 5% each year from 35% currently. We believe a phased
removal limits the threat of massive destocking of Argentinian soybean (c40% of global stock).
Consequently, the chance of aggressive price pressure on soybean and its derivatives has
receded somewhat. Moreover, it’s worth noting that El Niño concerns are flaring up in Brazil. The
USDA maintains its forecast of an increase in harvested area and production in Brazil but noted
that planting progress after first two months of the planting season (starts 15 September) in Brazil
0
200
400
600
800
1,000
1,200
1,400
1,600
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
USD/Ton (RHS) BRL/Ton
Stronger USD is pressuring
US soybean exports…
…weather and economic
risks to South American
soybean exports next year
Soybean stocks-to-crush ratio (months); inventories are highest in Argentina
Source: USDA estimates. 2015 refers to Marketing Year starting October 2015 for the US, February 2016 for Brazil/Argentina.
2.8x
3.3x3.5x
3.9x
3.1x
2.7x
3.5x
3.8x
2.8x2.9x
3.1x
3.5x 3.5x
2.0x
2.2x
2.4x
2.6x
2.8x
3.0x
3.2x
3.4x
3.6x
3.8x
4.0x
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015e
Stock-to-Crush Ratio (Soybean, months)
EQUITIES PALM PLANTATIONS
20 January 2016
32
is running at 60%, well below its five-year average of 70%. Brazilian farmers are reportedly
uneasy about dry conditions, particularly in the north and northeast of the country.
The political and economic situation in Brazil also presents risks. The USDA reports that
independent truck drivers seeking lower diesel prices and minimum freight rates went on a
strike for the second time in 2015 on 9 November 2015. This affected food distribution in
southern Brazil and, if disruptions like these continue to happen, then these would be a
downside risk to soybean exports.
Having recognised the economic risk to the US soybean output as well as the weather and
political risks to South American output, we would caution that it’s unlikely to get much visibility
on production trends until late 1Q16. Thus, a potential lift-off in soybean prices appears unlikely
before the second quarter of 2016 with the full impact only in second half of 2016, when clarity
develops on US output trends.
It is true that liquidation of near-record inventories, particularly from Argentina, is likely to sustain
market supply even if the output disappoints. But, we believe the price reaction of declining
inventories and production would be bullish. Historical precedence suggests that, much like
2011, a price rally can happen despite high stocks as long as stock depletion begins in earnest
and heads in the right direction through 2016.
…La Niña could accelerate oilseed production decline
La Niña typically follows an El Niño event with a three- to six-month lag
Source: Australian Bureau of Meteorology
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
We expect stronger soy oil
prices in 2H16
33
EQUITIES PALM PLANTATIONS
20 January 2016
It’s probably too early to speculate whether a La Niña event would follow the current El Niño,
but it’s worth noting that La Niña has frequently followed El Niño as the weather pendulum
swings from one extreme to the other (historically, 40% possibility of La Niña, 50% of a normal
year). A La Niña event has followed four of the last five El Niño events in last 20 years with a lag
of 3-6 months. If the pattern repeats itself, then subsequent dryness across the US Midwest
could potentially curb US soybean output in the autumn of 2016. It would certainly impact the
South American planting which start in mid-September and likely have an impact on 2017
soybean production.
Record inventories an overhang but shouldn’t be
Despite the projected decline in palm oil output and increasing economic, political and weather-
related risks to oilseed production and exports, record inventories are an overhang for the
market. Indonesian palm oil inventories are reported to be around 3MT and Malaysian
inventories had risen to a record of 2.9MT in Nov-2015. Although, current inventories are nearly
40-50% higher than normal, this translates to only around 2-3MT of supply in surplus stocks,
which could be easily digested by our demand growth projection of nearly 4MT in 2016. In fact,
when combined with the projected fall in output next year, we would even argue that the
inventory isn’t even enough to ensure interruption-free supply. More importantly, we think that a
fall in inventories is likely to act as a catalyst for prices to rise over the course of next year.
Malaysian palm oil inventories (inverted) vs. palm oil prices
Source: Bloomberg, MPOB
0
200
400
600
800
1,000
1,200
1,4001.00
1.50
2.00
2.50
3.00
3.50
Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15
Malaysia palm oil inventory (mn tonnes) Crude palm oil price (USD/Tonne, RHS)
EQUITIES PALM PLANTATIONS
20 January 2016
34
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35
EQUITIES PALM PLANTATIONS
20 January 2016
Companies
EQUITIES PALM PLANTATIONS
20 January 2016
36
Steady but fragile
Unlike the rest of our ASEAN plantations coverage, Wilmar is primarily a downstream player with
dominant palm refining and soy crushing businesses across Southeast Asia and China. We
expect margins in tropical oils (palm refining) to be stable-to-marginally better due to a pick-up
in biodiesel demand as well as the CPO export levy (lower feedstock prices) in Indonesia.
Margins in the oilseed business have recovered from cycle-lows in 2012 but are unlikely to rise
above current cycle-highs, given the 70-80% excess supply in China’s soy crush market.
Even as WIL’s core operations improve, RoE is likely to remain depressed in a range of 7-8%
as these improvements are offset by the reversal of the carry trade, which was a key contributor
to the company’s earnings in the last three years. Since 2012, Wilmar has generated net
interest income despite its high leverage. The profits from investing in high-yielding RMB assets
with low-cost USD debt are now shrinking as USD rates rise and RMB rates fall. Given WIL’s
low-growth, low-return, high-leverage profile, we initiate on it with a Hold rating.
Wilmar International (WIL SP)
Wilmar’s downstream businesses in CPO refining and soy crushing
suffer from persistent overcapacity in China and Indonesia
Even though core operations are likely to improve marginally, the
unwinding of the carry trade keeps RoE stuck at 7-8% in 2016-17e
Rerating unlikely without sustainable improvement in cash flow
generation; initiate at Hold with a target price of SGD2.58, based on
12.2x 2016e EV/EBITDA, 1SD below the 5-year average
WIL: Key operating metrics
2012a 2013a 2014a 2015e 2016e 2017e
Mature oil palm (ha) 236,470 224,701 213,902 212,767 217,083 221,369 y-o-y % 9.2 -5.0 -4.8 -0.5 2.0 2.0 CPO production (MT) 1.91 1.85 1.91 1.92 1.68 1.72 y-o-y % 7.3 -3.2 3.3 0.3 -12.1 2.3 Sales Volume (MT) 51.2 56.4 59.5 66.1 70.1 72.6 y-o-y % 8.6 10.2 5.5 10.9 6.1 3.6
Tropical oils 23.1 24.5 24.6 24.0 23.9 24.0 Oilseeds & grains 21.6 23.3 25.2 29.2 31.5 32.9 Sugar 6.5 8.6 9.7 12.9 14.8 15.7
ASP (USD/tonne) 888 781 724 596 605 624 y-o-y % -6.3 -12.0 -7.4 -17.7 1.6 3.2
Tropical oils 984 813 824 655 692 723 Oilseeds & grains 819 803 715 616 638 665 Sugar 561 470 418 342 327 341
Unit PBT (USD/tonne) 32.3 31.5 25.8 21.8 22.1 22.6 y-o-y % -26.7 -2.6 -17.9 -15.7 1.4 2.3
Tropical oils 51.1 45.9 39.4 26.0 25.8 28.0 Oilseeds & grains 7.9 19.3 13.8 22.3 21.6 21.4 Sugar 15.4 14.7 13.8 4.7 6.4 7.8
Source: Company, HSBC estimates
37
EQUITIES PALM PLANTATIONS
20 January 2016
Dominant downstream agribusiness but weak returns
Wilmar International is an integrated agribusiness company. Tropical oils, and oilseeds and
grains are two of its key segments. The tropical oils business consists of plantations and palm
mills, which produce and process palm oil from the company’s own plantations as well as third-
party producers. The oilseeds and grains division is primarily a soybean crushing business in
China with downstream presence selling edible oil products. Wilmar also has a sugar business,
which primarily processes and markets sugar in Australia. In 2014, the tropical oils business
generated 47% of revenue, while the oilseeds business generated 42% of revenue.
Regional revenue split (2014) Segmental revenue split (2014)
Source: Company, HSBC Source: Company, HSBC
Sales have flat-lined for the last three years...
...and so have the operating margins
Source: Company Source: Company
The company has run a fairly steady course in recent years but has disappointed both on
growth and profitability metrics. RoE has been stuck in a narrow range of 7-8% and RoIC has
been depressed at only 4-6% due to the large amount of capital invested in the business.
Furthermore, the quality of profits has declined over last three years as the company’s treasury
23%
46%
3%
8%
4%5%
11%
S.E. Asia
PRC
India
Europe
ANZ
Africa
Others
47%
42%
9% 2%
Tropical Oils
Oilseeds & grains
Sugar
Elimination &others
77.0
-18.0
27.2
47.2
1.7
-3.0 -2.3
-40.0
-20.0
0.0
20.0
40.0
60.0
80.0
100.0
2008
2009
2010
2011
2012
2013
2014
Annual Sales Growth YoY%
6.6
9.5
4.7 4.43.8 3.8 3.4
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2008
2009
2010
2011
2012
2013
2014
Annual Operating Margin %
Net debt to EBITDA steady at 6-7x… …as treasury operations generate profits
Source: Company Source: Company
0.0x
5.0x
10.0x
15.0x
Mar
-12
Jul-1
2
Nov
-12
Mar
-13
Jul-1
3
Nov
-13
Mar
-14
Jul-1
4
Nov
-14
Mar
-15
Jul-1
5
Net Debt/EBITDA
Net Debt-to-EBITDA adjusted to working capital
0.0
2.0
4.0
6.0
8.0
10.0
Sep
-07
Sep
-08
Sep
-09
Sep
-10
Sep
-11
Sep
-12
Sep
-13
Sep
-14
Sep
-15
Cost of debt (%)
Interest earned on cash (%)
EQUITIES PALM PLANTATIONS
20 January 2016
38
operations have offset the decline in its core operating profits. Interest income rose to as much
as 44% of the company’s EBIT in 2014 compared to less than 10-12% prior to 2012. Net debt of
USD15bn and net debt to EBITDA of 6-7x are also worrisome, although one-third of the net
debt is for working capital (mostly hedged inventory), which is easy to liquidate.
Oversupply likely to keep tropical oils segment depressed
Although the company is one of the biggest plantation owners with 240,000 ha of self-owned
land, the overall business is skewed towards downstream operations in China and Southeast
Asia. The tropical oils segment has a refining capacity of 29MT p.a. at subsidiaries and another
9MT p.a. at the associates. An annual output of 24MT p.a. by the subsidiaries in this segment
implies that Wilmar processes almost half of the world’s palm oil consumption. The company
also has 3MT p.a. of biodiesel capacity, primarily in Indonesia. Subsidiary palm and lauric oil processing plants
Refinery Oleochemicals Speciality Fats Biodiesel
Indonesia 25 4 4 9 Malaysia 14 1 1 1 China 48 9 6 0 Vietnam 2 0 2 0 Europe 4 3 1 1 Africa 2 0 1 0 Others 4 0 1 0 Total number of plants 99 17 16 11 Total Capacity (MT p.a.) 29 2 2 3
Source: Company
Associate palm and lauric oil processing plants
Refinery Oleochemicals Speciality Fats Biodiesel
India 25 0 5 0 China 10 2 3 0 Russia 4 0 3 0 Ukraine 2 0 1 0 Malaysia 3 0 0 0 Africa 5 0 2 0 Bangladesh 2 0 0 0 Total number of plants 51 2 14 0 Total Capacity (MT p.a.) 9 <1 1 0
Source: Company
Tropical oils: Recovery in CPO prices and biodiesel volumes likely to stabilise margins
Source: Company, HSBC estimates
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
70.0
500
550
600
650
700
750
800
850
900
950
1,000
2007 2008 2009 2010 2011 2012 2013 2014 2015e 2016e 2017e
ASP (USD/Ton) Unit PBT (USD/Ton, RHS)
39
EQUITIES PALM PLANTATIONS
20 January 2016
This downstream focus exposes the company to oversupply in its core markets of Malaysia and
Indonesia. Although Malaysian palm refining capacity has remained stable during the last three
years, Indonesian capacity has more than doubled. We estimate capacity exceeds Malaysian
output by 20-25% and Indonesian output by 30-35% currently. It is difficult to see quick relief
from oversupply, although we think that both an improvement in the CPO price environment and
an increase in Indonesian biodiesel output would help stabilise earnings at the current low levels.
Oilseeds to suffer from oversupply of Chinese soy crush capacity
Wilmar is the largest oilseed crusher, edible oils refiner and speciality fats and oleochemicals
manufacturer in China. Almost all of the company’s oilseed and grain division is focused on
China. It’s little surprise then that Wilmar’s oilseed margins are driven by the soybean crush
margins in China.
Oilseed and grain plants and capacity
Oilseed and grain plants Crushing Flour milling Rice milling
China 54 16 13 Malaysia 1 0 0 Vietnam 2 0 0 Africa 2 0 0 Indonesia 0 1 0 Number of subsidiary plants 59 17 13 Total Capacity (MT p.a.) 23 6 2
Source: Company
While soy crush margins have recovered since their bottom in 2012, they are still only around
half the level seen in 2008-09. According to the USDA, China’s soybean crush capacity
exceeded 430,000t per day by the end of 2014. This implies an annual crushing capacity of
about 130MT (based on 300 operating days). Crush volume, on the other hand, was only
around 70-74MT and the growth in crushed volume has slowed to a mid-single digit. We believe
that the overcapacity would persist in the foreseeable future as China’s appetite for animal
protein and soy meal approaches the saturation levels seen in the Western world.
Soy crush volume growth has slowed... …as China’s animal protein consumption
approaches the levels of the US and the EU
Source: USDA, HSBC Source: USDA, HSBC
17.0
10.5
3.8
7.1
3.7
15.9
11.09.4
5.7 5.8
7.6
0.0
5.0
10.0
15.0
20.0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
YoY% growth in China Soy crush volume
0.20
0.25
0.30
0.35
0.40
0.45
0.50
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
China US EU-27 World
Oilseed meal protein/KG of meat produced
EQUITIES PALM PLANTATIONS
20 January 2016
40
Oilseed business profitability is driven by China soy crush margin
Source: Thomson Reuters Datastream, Company, HSBC
Steady but high financial leverage bakes in vulnerability
As highlighted earlier, there has been a significant departure between the interest income that
the company earns on its cash and its interest expenses since the latter half of 2012. This has
allowed the company to report either a thin net interest expense or a net interest income for
most of the last three years despite its net debt of around USD15bn. Interest income rose to as
much as 44% of the company’s EBIT in 2014 compared to less than 10-12% prior to 2012.
In essence, Wilmar’s treasury has generated these gains through a carry trade by funding higher
yielding RMB investments using low-cost short-term debt issued in USD. With China cutting
rates and borrowing cost headed higher in USD, net interest income is again likely to turn into
net interest expense and the onus to create profits would shift back to operations. Furthermore,
any depreciation of the RMB against the USD would also result in a FX loss for the group as in
3Q15.
Working capital and part of cash are required for operations; they are likely to be unavailable to meet near-term liquidity, if need be (USDm)
Source: Company, HSBC
Wilmar has also indicated that it has no problem meeting maturing short-term debt of USD15bn,
as its total available liquid assets (including undrawn committed facilities) was USD18bn at the
end of September 2015. We are not fully convinced by this explanation since a call to retire short-
term debt can’t be met by liquidating all working capital and using all the cash on the books without
disrupting the business. In our view, Wilmar should consider its liquidity needs after excluding
0.0
10.0
20.0
30.0
40.0
50.0
60.0
2007 2008 2009 2010 2011 2012 2013 2014 9M2015
China Soy crush margin (USD/Tonne) WIL Oilseeds PBT (USD/Tonne)
6,815
18,04415,085
4,060
4,826
2,343
0
3,000
6,000
9,000
12,000
15,000
18,000
Cash & Near-cash Structureddeposits (part ofother financialreceivables)
Liquid Wkg. Cap Available undrawncredit lines
Total Liquidity ST Debt
41
EQUITIES PALM PLANTATIONS
20 January 2016
both of these items (working capital and a minimal amount of cash). A more conservative
definition underscores the need to deleverage through asset sales or equity financing.
RoE would continue to flat-line
In our view, the narrative of Wilmar’s business and earnings is unlikely to change much over
next two years. Much like the last four years, RoE would continue to flat-line in the range of 7-8%
with persistent downside risks from overcapacity and debt-related issues. The source of profits,
however, would shift back to the core operations from the company’s treasury.
Wilmar segment-wise PBT forecasts
USDm 2012a 2013a 2014a 2015e 2016e 2017e
Tropical oils 1,182 1,125 969 622 616 671 y-o-y % -10.4 -4.8 -13.9 -35.8 -1.0 8.9 Oilseeds and grains 171 451 348 652 679 703 y-o-y % -66.3 163.4 -22.8 87.1 4.1 3.6 Sugar 100 127 134 61 94 122 y-o-y % -29.3 26.8 6.1 -54.5 54.3 29.2 Others & unallocated expenses 78 -31 5 22 77 60 Share of Associates 123 104 81 80 82 83 Segmental PBT Margin (%) Tropical oils 4.8 5.6 4.8 3.9 3.8 3.9 Oilseeds and grains 1.0 2.6 2.1 3.9 3.6 3.5 Sugar 2.7 3.1 3.3 1.4 2.0 2.3 PBT 1,655 1,775 1,538 1,437 1,548 1,639 y-o-y % -20.4 7.3 -13.4 -6.5 7.7 5.9
Source: Company, HSBC estimates
We expect the tropical oils business to benefit marginally from the Indonesian CPO export levy,
which reduces the cost of domestic feedstock for the company’s refineries. The oilseeds
crushing business in China is also likely to remain stable near cycle-highs but likely faces
pressure in the medium term as animal feed demand growth slows.
8-10% below consensus on 2016-17 EPS
Adoption of IAS 16 has made it difficult to compare our numbers with consensus for upstream
companies, but the impact on Wilmar is rather limited. Upstream biological assets are only 4%
of company’s total assets and the depreciation would increase by only 5-6%, in our view. Still
it’s worth pointing out that our numbers incorporate the accounting impact from 1Q16.
Under the new standard, the biological assets, which were carried at fair value based on DCF of
the plantations, will be written down to cost and, unlike the prior method, depreciation will be
charged for mature plantations. We expect WIL’s biological assets and equity value to be
written down by USD600m and USD500m in the quarter ending March 2016. We also expect
WIL’s annual depreciation to rise by about USD40m in 2016 once the new rule is adopted.
Our net profit estimate is 8-10% below consensus on slightly lower EBITDA in 2016-17. The
difference appears to be due to lower margin expectations in the core business in 2016 and
lower profits from the company’s carry trade in 2017.
HSBC estimates vs. consensus
___________ HSBC ____________ _________ Consensus _________ ____ HSBC vs. consensus ______ USDm 2015e 2016e 2017e 2015e 2016e 2017e 2015e 2016e 2017e
Sales 39,385 42,627 45,789 43,179 46,746 48,084 -8.8 -8.8 -4.8 EBITDA 2,092 2,247 2,507 2,138 2,382 2,496 -2.2 -5.7 0.4 Net Profit 1,036 1,144 1,215 1,151 1,269 1,325 -10.0 -9.9 -8.3
Source: Thomson Reuters Datastream, HSBC estimates
EQUITIES PALM PLANTATIONS
20 January 2016
42
Wilmar’s stock, not earnings, still sensitive to CPO prices
As explained earlier, the three most important factors driving the company’s earnings are: 1)
Indonesian palm refining margins; 2) China soy crush margins; and 3) its carry trade. Despite the
insensitivity of the company’s earnings to CPO prices, the stock tends to follow large moves in it.
These large moves may be a reflection of WIL’s high liquidity relative to other Singapore-listed
players or simply because the source of these moves is some economic factor that impacts both.
WIL’s stock is modestly correlated with correlation of around 0.7x and it typically follows large moves in CPO prices…
Source: Thomson Reuters Datastream, HSBC
TP set at 2016e EV/EBITDA of 11.2x (1 SD below 5-yr average)
In the last four years, WIL’s stock has typically traded within a relatively narrow one-year
forward EV/EBITDA range of 11-13x. We base our valuation on one standard deviation below
the five-year average of 12.2x on this multiple. This implies a target 2016 EV/EBITDA of 11.2x.
Unlike upstream companies, which we argue should be trading at peak or near-peak valuations,
Wilmar’s overcapacity-ridden downstream businesses does not build a convincing investment
case. The company’s high leverage and weak link to CPO prices also favour a modest
valuation. Applying our 11.2x target multiple to our 2016 EBITDA estimate, we derive a target
price of SGD2.58 and a Hold rating.
Wilmar: One-year forward EV/EBITDA
Source: Thomson Reuters Datastream, HSBC
450
600
750
900
1,050
2.40
2.60
2.80
3.00
3.20
3.40
3.60
3.80
4.00
Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15
WIL (SGD, LHS) CPO price (USD/MT, RHS)
10.0x
11.0x
12.0x
13.0x
14.0x
15.0x
16.0x
Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15
WIL -2σ -σ Avg. +σ +2σ
43
EQUITIES PALM PLANTATIONS
20 January 2016
At our target price, the stock would trade at a 2016e PE of 10.4x, which is around one standard
deviation below its long-term average one-year forward PE of 14.8x. This may suggest that the
stock is rather inexpensive at our valuations, but we would highlight that the long-term PE
average is skewed to the upside by pre-2012 valuations. More recently, the stock’s valuations
have gravitated to a one-year forward PE of 11-12x.
WIL: One-year forward PE relative to historical average
Source: Thomson Reuters Datastream, HSBC
Target price discounts a lower CoE or upside risk to margins
While our target valuation is anchored to the stock’s 2016 EBITDA forecast and its historical
trading range on one-year forward EV/EBITDA, it’s worth understanding from a cash flow
perspective what the market is discounting. Assuming a terminal growth of 3%, our cash flow
projections are being discounted at a cost of equity of 8.8%. Although this valuation appears a
little aggressive, we would highlight that the market may simply be baking in the upside risk to
valuations from a modest increase in margins instead of lower cost of equity.
It’s worth pointing out that high operating and financial leverage at Wilmar makes its cash flow
based valuation highly sensitive to EBITDA margin evolution. At our EBITDA margin estimates
of around 5.5%, the annual FCFE is only around USD450m and the resulting DCF-based
valuation is under SGD3.07/share. However, a mere 100bp higher EBITDA margin assumption
would almost double FCFE and should be enough to justify a doubling of the target price or a
higher cost of equity.
5.0x
7.0x
9.0x
11.0x
13.0x
15.0x
17.0x
19.0x
21.0x
23.0x
25.0x
Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15
PE -2σ -1σ Avg +1σ +2σ
DCF pricing in a CoE of 8.8% at our margin forecasts
CoE 8.8% Terminal growth rate of FCFE 3.0% EBITDA Margin (%) 5.3 5.3 5.5 5.6 5.7 5.7
Y/e December, USDm 2015e 2016e 2017e 2018e 2019e 2020e
EBITDA 2,092 2,247 2,507 2,710 2,891 3,067 Capex -911 -953 -989 -1,010 -1,038 -1,072 Δ Wkg. Cap. 1,949 -1,130 -658 -563 -646 -710 Tax paid -324 -325 -344 -365 -388 -413 Interest paid, net 61 -77 -226 -314 -369 -406
FCFE 2,867 -238 290 458 450 466
FCFE Yield % 17.9 -1.5 1.9 3.3 3.4 3.8 PV of explicit FCFE (2015-20e) - USDm 3,875 PV of terminal value - USDm 8,012
Fair Market Value (USDm) 11,887
FX (SGD/USD) 1.39
Fair Value/share (SGD) 2.58
Source: Company, HSBC estimates
EQUITIES PALM PLANTATIONS
20 January 2016
44
We expect a return of stability at all three divisions but believe that low levels of margins would sustain due to overcapacity
Wilmar P&L
USDm 2012a 2013a 2014a 2015e 2016e 2017e
Tropical Oils 24,476 19,986 20,336 15,768 16,576 17,395 Oilseeds & grains 17,694 18,742 18,049 17,977 20,090 21,872 Sugar 3,642 4,031 4,060 4,421 4,825 5,365 Others & eliminations -348 1,326 640 1,197 954 718 Revenue 45,463 44,085 43,085 39,363 42,445 45,349 y-o-y % 1.7 -3.0 -2.3 -8.6 7.8 6.8 EBITDA 2,258 2,276 2,112 2,092 2,247 2,501 y-o-y % -7.9 0.8 -7.2 -1.0 7.4 11.3 EBITDA Margin (%) 5.0 5.2 4.9 5.3 5.3 5.5 EBIT 1,809 1,690 1,379 1,334 1,542 1,777 y-o-y % -15.2 -6.6 -18.4 -3.3 15.6 15.2 EBIT Margin (%) 4.0 3.8 3.2 3.4 3.6 3.9 Finance Costs -611 -539 -523 -468 -559 -634 Cost of debt (%) 2.8 2.2 2.2 2.1 2.5 2.9 Finance Income 334 521 600 492 483 413 Interest rate (%) 4.1 5.1 6.3 6.5 6.5 5.8 Net Interest -277 -18 77 23 -76 -221 Segmental PBT Tropical oils 1,182 1,125 969 622 616 671 y-o-y % -10.4 -4.8 -13.9 -35.8 -1.0 8.9 Oilseeds & grains 171 451 348 652 679 703 y-o-y % -66.3 163.4 -22.8 87.1 4.1 3.6 Sugar 100 127 134 61 94 122 y-o-y % -29.3 26.8 6.1 -54.5 54.3 29.2 Others & unallocated expenses 78 -31 5 22 77 60 Share of Associates 123 104 81 80 82 83 Segmental PBT Margin (%) Tropical oils 4.8 5.6 4.8 3.9 3.7 3.9 Oilseeds & grains 1.0 2.6 2.1 3.9 3.6 3.5 Sugar 2.7 3.1 3.3 1.4 2.0 2.3 PBT 1,655 1,775 1,538 1,437 1,548 1,639 y-o-y % -20.4 7.3 -13.4 -6.5 7.7 5.9 PBT Margin (%) 3.6 4.0 3.6 3.7 3.6 3.6 Tax -334 -385 -314 -325 -325 -344 Tax rate (%) 20.2 21.7 20.4 22.6 21.0 21.0 Net Profit 1,255 1,319 1,156 1,036 1,144 1,215 y-o-y % -21.6 5.1 -12.3 -10.4 10.5 6.2 Net Margin (%) 2.8 3.0 2.7 2.6 2.7 2.7 Net Profit Adjusted 1,162 1,297 1,229 1,132 1,144 1,215 y-o-y % -19.4 11.6 -5.2 -7.9 1.0 6.2 Net Margin (%) 2.6 2.9 2.9 2.9 2.7 2.7 EPS Basic (USD) 0.20 0.21 0.18 0.16 0.18 0.19 EPS Basic (SGD) 0.25 0.26 0.23 0.22 0.25 0.26 y-o-y % -22.1 5.2 -11.3 -3.1 12.0 6.2 DPS (USD) 0.04 0.06 0.06 0.05 0.06 0.06 DPS (SGD) 0.05 0.08 0.08 0.07 0.08 0.09 Dividend Payout (%) 20.5 31.0 32.3 30.4 33.0 33.0
Source: Company, HSBC estimates
We expect margins in tropical oils (palm refining) to be stable-to-marginally-better due to a pick-
up in biodiesel demand as well as the CPO export levy (lower feedstock prices) in Indonesia.
Margins in the oilseed business have recovered from cycle-lows in 2012 but are unlikely to rise
above current cycle-highs, given the 70-80% excess supply in China’s soy crush market. Last
but not the least; the net interest is again likely to turn negative as the carry trade unwinds.
45
EQUITIES PALM PLANTATIONS
20 January 2016
Cash flow increased in 2014-15 as working capital requirement decreased with lower commodity prices
Wilmar is on track to generate almost USD3bn in FCFE during 2015, but two-thirds of this is due
to the reduction in working capital as commodity prices collapsed and the costs of carry
inventories as well as receivables shrunk for the group. With commodity prices (palm oil,
soybean) near cycle-lows, another year of strong cash flows from this source is unlikely. The
onus of cash flow generation, as a result, would be back on operations.
Given our margin expectations, we doubt if the CFO would be anything more than USD1.5bn in the
medium term, particularly if the shrinking of carry trade profits is factored in. This would be enough to
cover capex of around USD1bn (USD500-600m for maintenance) with the residual being paid out as
dividends. We expect net debt to remain around USD15bn unless margins surprise us on the upside.
Cash flow statement
USDm 2012a 2013a 2014a 2015e 2016e 2017e
PBT 1,655 1,775 1,538 1,437 1,548 1,639 Depreciation & amortisation 543 608 660 661 704 725 Net Interest Expense 277 18 -77 -23 77 226 Others -181 94 -257 -7 -82 -83 Other non-cash adjustments -58 198 -176 73 0 0 Wkg. Cap. Change -581 -288 423 1,949 -1,130 -658 Interest paid -644 -566 -578 -485 -559 -635 Interest received 367 431 583 546 482 409 Income taxes paid -342 -460 -318 -324 -325 -344 CFO 1,094 1,614 1,973 3,754 715 1,278 Capex (PPE + Biological Assets) -1,822 -1,365 -1,092 -911 -953 -989 Proceeds from disposal of PPE & Biological Assets 33 55 88 123 0 0 Purchase/sales of subsidiary or associates -257 -313 -146 -455 0 0 Other Investments 191 191 -78 -161 0 0 CFI -1,856 -1,432 -1,228 -1,404 -953 -989 Dividends paid -263 -281 -383 -381 -341 -393 Issuance of stock 3 2 0 37 0 0 Repurchase of stock -18 0 -9 -137 0 0 Debt repaid 0 -205 -3,432 -4,133 -63 -296 Debt issued 6,538 1,997 2,495 548 63 336 Others -5,250 -955 97 3,419 0 0 CFF 1,011 527 -1,281 -694 -341 -353
Source: Company, HSBC estimates
Balance sheet
USDm 2012a 2013a 2014a 2015e 2016e 2017e
Inventories 7,137 7,221 6,581 4,976 5,904 6,492 Trade receivables 3,953 4,085 4,045 3,390 3,848 4,086 Other financial receivables 2,162 2,981 3,995 5,174 5,174 5,174 Other current assets 2,005 1,819 2,495 2,199 2,199 2,199 Cash & bank balances 8,562 11,735 7,399 7,642 7,064 7,000 Current Assets 23,819 27,842 24,515 23,381 24,189 24,951 PPE 8,924 9,337 9,477 9,119 9,293 9,424 Biological assets 1,970 1,921 1,892 1,795 1,270 1,402 Intangible assets 4,458 4,421 4,402 4,360 4,360 4,360 Associates 1,658 2,035 2,153 2,691 2,773 2,856 Other non-current assets 1,090 1,076 1,118 1,246 1,246 1,246 Non-current assets 18,101 18,790 19,043 19,211 18,941 19,288 Trade payables 1,580 1,403 1,747 1,303 1,560 1,727 Other financial payables 1,204 1,302 1,192 1,239 1,239 1,239 Loans & Borrowings 17,740 19,392 15,204 15,085 15,085 15,085 Dividends payable 0 0 0 196 232 240 Other current liabilities 889 1,095 1,055 1,005 1,005 1,005 Current Liabilities 21,413 23,191 19,197 18,827 19,121 19,295 Long-term debt 4,505 6,804 7,158 7,000 7,000 7,040 Other LT liabilities 807 750 792 815 715 715 LT Liabilities 5,312 7,554 7,950 7,815 7,715 7,755 Minority Interest 849 882 916 970 1,049 1,129 Shareholders’ Equity 14,346 15,005 15,495 14,979 15,246 16,060
Source: Company, HSBC estimates
EQUITIES PALM PLANTATIONS
20 January 2016
46
Key upside/downside risks to target price and rating
Volatility in Indonesian domestic CPO prices leading to distortion in palm refining
margins. Lower prices are better for earnings and multiples; higher prices are worse.
Lower biodiesel or edible oil demand in Indonesia and Malaysia would worsen
overcapacity and lower margins; higher demand would lead to higher margins.
Lower animal feed demand or soy crush margins in China would hurt earnings by
weakening margins in the oilseed business; higher feed demand would help margins.
Stronger USD vs. RMB would be negative for earnings since most of the company’s debt
is USD-denominated, while a relatively high portion of current and fixed assets are
RMB/MYR/IDR denominated; RMB strengthening, on the other hand, would be positive.
Macro-environment and investor sentiment could impact the company’s funding or cost
of funding. Changes in fund flows in or out of emerging markets would affect valuations.
WIL: Long-term one-year forward PE trading band on consensus estimates
Source: Thomson Reuters Datastream, HSBC
0
1
2
3
4
5
6
7
8
Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15
P 8.0x 10.0x 12.0x 14.0x 16.0x
47
EQUITIES PALM PLANTATIONS
20 January 2016
Financials & valuation: Wilmar International Hold Financial statements
Year to 12/2014a 12/2015e 12/2016e 12/2017e
Profit & loss summary (USDm)
Revenue 43,085 39,385 42,627 45,789
EBITDA 2,112 2,092 2,247 2,507
Depreciation & amortisation -660 -661 -704 -725
Operating profit/EBIT 1,452 1,430 1,543 1,782
Net interest 77 23 -77 -226
PBT 1,538 1,437 1,548 1,639
HSBC PBT 1,610 1,534 1,548 1,639
Taxation -314 -325 -325 -344
Net profit 1,156 1,036 1,144 1,215
HSBC net profit 1,229 1,132 1,144 1,215
Cash flow summary (USDm)
Cash flow from operations 1,973 3,754 715 1,278
Capex -1,092 -911 -953 -989
Cash flow from investment -1,228 -1,404 -953 -989
Dividends -383 -381 -341 -393
Change in net debt 503 -520 579 103
FCF equity 1,208 2,828 -238 290
Balance sheet summary (USDm)
Intangible fixed assets 4,402 4,360 4,360 4,360
Tangible fixed assets 12,488 12,160 11,808 12,072
Current assets 24,515 23,381 24,189 24,951
Cash & others 7,399 7,642 7,064 7,000
Total assets 43,558 42,592 43,131 44,239
Operating liabilities 4,785 4,362 4,519 4,686
Gross debt 22,362 22,085 22,085 22,125
Net debt 14,963 14,443 15,022 15,125
Shareholders’ funds 15,495 14,979 15,246 16,060
Invested capital 29,221 27,897 28,775 29,697
Ratio, growth and per share analysis
Year to 12/2014a 12/2015e 12/2016e 12/2017e
Y-o-y % change
Revenue -2.3 -8.6 8.2 7.4
EBITDA -7.2 -1.0 7.5 11.5
Operating profit -12.9 -1.5 7.9 15.5
PBT -13.4 -6.5 7.7 5.9
HSBC EPS -5.3 -7.9 1.0 6.2
Ratios (%)
Revenue/IC (x) 1.5 1.4 1.5 1.6
ROIC 4.0 3.9 4.3 4.8
ROE 8.1 7.4 7.6 7.8
ROA 3.6 3.4 3.9 4.1
EBITDA margin 4.9 5.3 5.3 5.5
Operating profit margin 3.4 3.6 3.6 3.9
EBITDA/net interest (x) – – 29.2 11.1
Net debt/equity 91.2 90.6 92.2 88.0
Net debt/EBITDA (x) 7.1 6.9 6.7 6.0
CF from operations/net debt 13.2 26.0 4.8 8.5
Per share data (USD)
EPS Rep (diluted) 0.18 0.16 0.18 0.19
HSBC EPS (diluted) 0.19 0.18 0.18 0.19
DPS 0.06 0.05 0.06 0.06
Book value 2.42 2.34 2.38 2.51
Key forecast drivers
Year to 12/2014a 12/2015e 12/2016e 12/2017e
Tropical oils ASP (USD/MT) 824 656 700 742
Oilseeds ASP (USD/MT) 715 616 638 665
Sugar ASP (USD/MT) 418 342 327 341
Tropical oils Unit PBT (USD/MT) 39 26 26 28
Oilseeds Unit PBT (USD/MT) 14 22 22 21
Sugar Unit PBT (USD/MT) 14 5 6 8
Valuation data
Year to 12/2014a 12/2015e 12/2016e 12/2017e
EV/sales 0.6 0.6 0.6 0.6
EV/EBITDA 12.1 11.8 11.2 10.1
EV/IC 0.9 0.9 0.9 0.9
PE* 9.7 10.5 10.4 9.8
PB 0.8 0.8 0.8 0.7
FCF yield (%) 11.4 27.9 -2.3 2.9
Dividend yield (%) 3.2 2.7 3.2 3.4
* Based on HSBC EPS (diluted); **From working capital reduction due to commodity price declines
Issuer information
Share price (SGD) 2.67 Free float 31%
Target price (SGD) 2.58 Sector Food & Staples Retailing
Reuters (Equity) WLIL.SI Country Singapore
Bloomberg (Equity) WIL SP Analyst Shishir Singh
Market cap (USDm) 11,871 Contact +852 2822 4292
Price relative
Source: HSBC
Note: Priced at close of 15 Jan 2016
2.30
2.50
2.70
2.90
3.10
3.30
3.50
3.70
2.30
2.50
2.70
2.90
3.10
3.30
3.50
3.70
2014 2015 2016 2017Wilmar International Rel to STRAITS TIMES INDEX
EQUITIES PALM PLANTATIONS
20 January 2016
48
Most liquid upstream stock highly correlated with CPO prices
Golden Agri Resources (GGR) is the biggest Indonesian plantation owner listed in Singapore. It
has the second biggest market share in Indonesian branded cooking oil market and over
484,000 ha of oil palm plantations, predominantly in Kalimantan and Sumatra. Consensus loves
to hate GGR and there are a number of reasons why. The company has ageing plantations,
which offer little or no production growth. It has invested heavily over the years in building up its
downstream palm refining and oilseed capacities, which generate sub-optimal returns now, if
any. The company’s financial leverage is uncomfortable at a 2015 net debt to EBITDA of 5.1x
and its margins are too low to provide much of a safety cushion.
Despite these drawbacks, we believe the stock’s high correlation with CPO prices and its
liquidity make it a unique vehicle for investors for exposure to palm oil, particularly in an upcycle.
As yields and production come under pressure in 2016, we expect GGR’s RoE to benefit from
an increase in prices and would rise to mid-single digits by 2017. The case for its downstream
operations is not compelling but is not deteriorating either; selling these downstream operations
in China could help the deleveraging. Overall, an earnings recovery from a low base and FCF
generation are likely to keep multiples elevated near cycle-highs. Investors should also note that
earnings and book value will be depressed by the adoption of IAS 16 from 1 January 2016. As
the stock’s prospective PE and PB multiples won’t be comparable with their historical ranges,
we adopt an EV/EBITDA-based valuation methodology.
GGR: Key performance metrics
2012a 2013a 2014a 2015e 2016e 2017e
Mature oil palm (ha)* 416,309 430,711 440,578 461,831 469,862 476,597 y-o-y % 6.5 3.5 2.3 4.8 1.7 1.4 FFB Yield (t/ha) 23.3 21.0 21.7 20.8 19.9 20.5 CPO production growth y-o-y % 10.3 -4.9 6.7 -2.2 -4.2 3.9 EBITDA Margin 12.8 9.9 7.2 7.1 8.8 9.3 Plantations NA 27.8 29.1 25.0 32.5 34.1 Palm refining NA 2.8 0.9 1.9 1.9 1.7 Oilseeds NA 2.3 -7.2 1.5 1.7 1.8 Capex/Sales 6.8 7.9 6.0 6.3 4.8 3.9
Source: Company, HSBC estimates
Golden Agri (GGR)
GGR is the biggest plantation owner among Singapore-listed palm
equities with a dominant position in Indonesian cooking oils
High leverage has made RoE and stock highly sensitive to CPO
prices; it is likely to achieve its previous peak RoE of 6% by 2017
High liquidity and correlation to CPO prices make GGR the vehicle of
choice for palm oil exposure; initiate at Buy with a TP of SGD0.47
based on 10x 2016e EV/EBITDA, 2SD above the 5-year average
49
EQUITIES PALM PLANTATIONS
20 January 2016
Vertically integrated but driven by maturing upstream plantations
Golden Agri Resources (GGR) is a vertically integrated plantation company, majority owned by
the Widjaja family. With a total planted area of 484,000 ha (21% owned by the smallholders
under the Plasma scheme), it’s the biggest plantation owner among the Singapore-listed
Indonesian oil palm companies. Its plantations are predominantly based in Kalimantan and
Sumatra and produce 7-8% of the Indonesian palm oil output. GGR also has exposure to a
220,000 ha concession for oil palm plantations in Liberia through a private equity fund.
The pace of new plantings ran at 14-15,000 ha per annum during 2010-14 which, barring
weather effects, underpins 2-3% y-o-y organic growth over the next 2-3 years. New plantings
were put on hold following the suspension of The Forest Trust’s (TFT) work with GGR on forest
conservation and sustainability issues. Both organisations agreed to re-engage after GGR took
steps to rectify the situation, including the reorganisation of its sustainability management team.
GGR also operates palm oil refineries with a total capacity of 4.7MT p.a. in Indonesia as well as
2.3MT p.a. soy crushing capacity in China. GGR is one of the top two cooking oil brands in
Indonesia along with Indofood Agri Resources (IFAR SP, SGD0.50, Buy). The downstream
segment of the company trades more than a quarter of Indonesia’s total palm oil output.
Age distribution of GGR’s plantations Regional split of self-owned plantations
Source: Company; Total = 383,000 ha Source: Company
Segment-wise sales (USDm) Segment-wise EBITDA (USDm)
Source: Company, HSBC estimates. Excludes inter-segment elimination. Source: Company, HSBC estimates
Although, revenues are skewed towards the company’s downstream business, it’s the upstream
plantations business, which generates at least three-quarters of the EBITDA. Still, much like
other downstream-heavy players, GGR’s plantations are at peak maturity with an average age
of 15 years. This limits the potential of further gains in FFB yields and, in fact, exposes the
plantation yields to weather-induced downside. In short, if all else is unchanged, the biggest
trigger for GGR’s profitability is higher CPO and PKO prices instead of production.
5%11%
47%
32%
5%
Immature (0-3years)
Young (4-6years)
Prime-1 (7-18years)
Prime-2 (19-25years)
Old (25+ years)
38%
59%
3%
Sumatra
Kalimantan
Papua
0
2,000
4,000
6,000
8,000
10,000
2013 2014 2015e 2016e 2017e
Plantations Palm & Laurics Oilseeds Others
-200
0
200
400
600
800
2013 2014 2015e 2016e 2017e
Plantations Palm & Laurics Oilseeds Others
Downstream business drives
sales, but upstream business
generates most profits
GGR’s earnings are largely
driven by CPO price, not
production growth
EQUITIES PALM PLANTATIONS
20 January 2016
50
Ownership: debtholders’ share has increased over the years
GGR is majority owned by Indonesia’s Widjaja family. The company’s free float is little more
than one-third of the outstanding shares. The company has invested heavily since 2010, both
upstream and downstream; however, returns haven’t kept pace. The free cash flow deficit
during 2012-14, in particular, resulted in a pile of debt, which now commands a greater share of
the enterprise value than the company’s shareholders.
Ownership – Family-controlled company Mkt. cap. increasingly depressed by debt
Source: Company Source: Company, HSBC estimates
Indebted but can’t ignore the stock when CPO price rises
RoE more sensitive to CPO price due to increase in leverage over the years
GGR has the lowest net margin (2014, %) due to high leverage
Source: Company, HSBC estimates Source: Companies. BAL = Bumitama Agri (Not Rated).
Link to CPO price tighter than ever: It’s right that several years of over-investment and the
build-up of leverage on GGR’s books have depressed the company’s RoE, but it’s also true that
this leverage has made the company’s net margins and RoE sensitive to changes in CPO
prices. It is for this reason that we think it will be wrong to ignore the stock when CPO prices
moves up, even if it may look pricier on metrics, such as PE or PB. It is worth noting that GGR’s
stock has historically been highly correlated with CPO prices and, we have no reason to believe
that this correlation would not hold in the next upcycle.
CPO production to decline in 2016: GGR maintained its FFB production guidance at 0-5% y-
o-y in 2015 as dry weather last year triggered a fall in yields. We estimate another c5% fall in
FFB yields on top of the 4% fall estimated for 2015 as this year’s dry weather and haze take a
toll. We estimate that FFB and CPO production is likely to remain flat in 2015 but fall by 3% y-o-
y in 2016. In addition, the company estimates that the impact of this year’s El Niño can lead to a
10% fall in Indonesian palm production.
50%
11%
39%
Widjaja Family
SilchesterInternational
Free Float0
2,000
4,000
6,000
8,000
10,000
Mar
-07
Mar
-08
Mar
-09
Mar
-10
Mar
-11
Mar
-12
Mar
-13
Mar
-14
Mar
-15
Mkt. Cap Net Debt
-5.0
0.0
5.0
10.0
500
700
900
1,100
1,300
2008
2009
2010
2011
2012
2013
2014
2015
e
2016
e
2017
e
CPO Px (USD/MT) RoE(%) - Clean, RHS
1.0 2.75.1
20.0
28.2
0.0
5.0
10.0
15.0
20.0
25.0
30.0
GGR WIL IFAR BAL FR
51
EQUITIES PALM PLANTATIONS
20 January 2016
Downstream profitability likely to remain low but stable: The introduction of an Indonesian
CPO export levy is a marginal positive for domestic refiners but would really have been helpful if
there wasn’t any overcapacity in Indonesian palm refining. This just isn’t true and we fail to see
any material improvement in downstream earnings over the next 2-3 years. Moreover, the China
soy crushing business is unlikely to become much better. Crush margins are already at cyclical
highs, overcapacity is intense and the growth in soymeal, the primary product of the crush, is
likely to slow in the future. It’s hardly any surprise then that GGR plans to restructure its
business with planned sale of one of its two soybean crushing plants.
GGR: Key performance metrics
Key metrics 2012a 2013a 2014a 2015e 2016e 2017e
FFB Yield % 23.3 21.0 21.7 20.8 19.9 20.5 CPO Production y-o-y % 9.5 -4.9 6.5 -2.6 -4.2 3.9 Plantation ASP (USD/MT) N/A 633 653 520 611 622 Plantation ASP discount to benchmark (%) N/A -16.9 -12.4 -8.1 -6.9 -9.5 Plantation pre-EBITDA cost (IDR ’000/ha/yr) N/A 37,617 46,341 39,265 39,815 40,526 EBITDA Margin (%) 12.8 9.9 7.2 7.0 8.8 9.3
Plantation (%) N/A 27.8 29.1 24.9 32.5 34.1 Palm & Laurics (%) N/A 2.8 0.9 1.9 1.9 1.7 Oilseeds (%) N/A 2.3 -7.2 1.5 1.7 1.8
EBIT (USDm) 679 518 256 203 421 455 y-o-y % -61.6 -23.6 -50.6 -20.8 107.5 8.1 Net Profit 410 310 113 60 220 249 y-o-y % -67.7 -24.3 -63.4 -46.7 264.3 13.0
Source: Company, HSBC estimates
Above consensus on EBITDA but below on EPS due to IAS 16
While our EBITDA estimates are 11-15% ahead of consensus, our net profit estimates are 7-8%
below. In our view, consensus has probably not adjusted numbers fully to account for the
increase in depreciation due to adoption of IAS 16 from 1 January 2016 and this is what
explains the difference between our net profit and that of the Street.
To explain this further, we would highlight that Singapore-listed plantation companies will adopt
IAS 16 for the accounting of biological assets from 1 January 2016. The new standard requires
biological assets classified as bearer plants to be accounted for like property, plant and
equipment (PPE) and be depreciated as such. So far, these assets were recorded at DCF-
based fair values less costs to sell under IAS 41.
Under the new standard, the biological assets, which were carried at fair value based on DCF of
the plantations, will be written down to cost and, unlike the prior method, depreciation will be
charged for mature plantations. The company has guided that GGR’s biological assets and
equity value are likely to be written down by USD6.7bn and USD5bn, respectively, on adoption of
the new rule. Management has also guided GGR’s annual depreciation to rise by USD70-80m.
HSBC estimates vs. consensus
___________ HSBC ____________ _________ Consensus _________ ____ HSBC vs. consensus ______ USDm 2015e 2016e 2017e 2015e 2016e 2017e 2015e 2016e 2017e
Sales 6,607 7,851 7,928 6,750 7,295 7,778 -2.1 7.6 1.9 EBITDA 466 688 733 504 596 658 -7.6 15.4 11.4 Net Profit 60 220 249 198 237 270 -69.5 -7.0 -7.7
Source: Thomson Reuters Datastream, HSBC estimates
EQUITIES PALM PLANTATIONS
20 January 2016
52
GGR’s stock and earnings are highly sensitive to CPO price
Investors must note the relatively high correlation between GGR’s stock and CPO price. This is
not without reason. A 1% change in our CPO price assumptions of USD656/tonne in 2016e and
USD688/tonne in 2017e would change our GGR’s earnings estimate by 5-6%.
GGR’s stock and CPO prices have had a correlation of 0.93x since the end of 2011
Source: Thomson Reuters Datastream, HSBC
Our GGR’s earnings change by 5-6% for every 1% change in CPO
Source: HSBC
TP set at 2016e EV/EBITDA of 10x (2SD above 5-yr avg.)
Despite its weak production and returns profile, we believe that GGR’s stock would trade close
to its cyclical peak once the CPO upcycle takes off. We establish our target price at SGD0.47
based on a one-year forward EV/EBITDA of 10x, two standard deviations above the five-year
average.
450
600
750
900
1,050
1,200
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15
GGR (SGD, LHS) CPO price (USD/MT, RHS)
-58
-29-11
11
29
57
-54
-27-11
11 27
54
-80.0
-60.0
-40.0
-20.0
0.0
20.0
40.0
60.0
80.0
-10% -5% -2% 0% 2% 5% 10%
Change in CPO price assumption
Change in 2016 EPS Change in 2017 EPS
53
EQUITIES PALM PLANTATIONS
20 January 2016
GGR: One-year forward EV/EBITDA peaked at 10.6x during 2011-15
Source: Thomson Reuters Datastream, HSBC
Given the cyclical nature of the stock, multiples tend to be close to peak during earning troughs,
such as now and, tend to deflate during the course of the upcycle. This is the reason for
choosing the peak multiple as a basis of our target price.
Our choice of EV/EBITDA over other valuation metrics, such as PE and PB, is driven by the fact
that EBITDA will not be impacted by the company’s switch to IAS 16 from 1 January 2016 and
the calculation EBITDA will remain consistent with history. On the other hand, both earnings
and book value are set to contract due to IAS 16, skewing historical comparisons.
Although, the accounting change would result in lower earnings and book value, it would have
no impact on the company’s cash flows. As a result, we expect the PE and PB multiples of
Singapore-listed plantation stocks to rise. Indeed, our target price implies 2016e and 2017e PE
multiples of 19.6x and 17.5x, respectively, which are materially higher than two standard
deviations (14.6x) above the five-year average one-year forward PE.
GGR: One-year forward PE is likely to be higher in the future due to IAS 16 adoption
Source: Thomson Reuters Datastream, HSBC
6.0x
6.5x
7.0x
7.5x
8.0x
8.5x
9.0x
9.5x
10.0x
10.5x
11.0x
Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15
GGR -2σ -σ Avg. +σ +2σ
8.0x
9.0x
10.0x
11.0x
12.0x
13.0x
14.0x
15.0x
16.0x
Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15
PE -2σ -1σ Avg +1σ +2σ
IAS 16 adoption leaves only
EV/EBITDA consistent with
history but PE/PB would be
higher as EPS/BV decline
EQUITIES PALM PLANTATIONS
20 January 2016
54
GGR: One-year forward PE trading band on consensus estimates
Source: Thomson Reuters Datastream, HSBC
TP discounts CPO price of USD700-750/tonne at CoE of 12.5%
Since historical PE and PB trading ranges are likely to be less relevant in assessing the fair
value of the stock after IAS 16 adoption, we back-test our EV/EBITDA-based target price with a
DCF methodology. Our medium-term forecasts for CPO prices (FOB, Malaysia) range between
USD700-750/tonne and we estimate that these would generate a FCFE yield of 7-8% at our
target price of SGD0.47. In other words, our target price discounts CPO price of USD700-
750/tonne at a cost of equity of 12.5%.
GGR: Our TP discounts CPO prices of USD700-750/tonne at cost of equity of 12.5%
CoE 12.5% Terminal growth rate of FCFE 3.0% CPO Price - FOB Malaysia - USD/MT 566 656 688 708 729 751
YE December, USDm 2015e 2016e 2017e 2018e 2019e 2020e
EBITDA 466 688 733 756 770 779 Capex -416 -375 -306 -269 -251 -244 Δ Wkg. Cap. 320 -126 10 -19 -23 -25 Tax paid -114 -74 -84 -91 -97 -104 Interest paid, Net -90 -124 -120 -111 -97 -79
FCFE 166 -11 234 267 301 327
FCFE Yield % 3.3 -0.2 5.9 7.4 8.2 8.7 PV of explicit FCFE (2015-20e) - USDm 897 PV of terminal value - USDm 3,442
Fair Market Value (USDm) 4,339
FX (SGD/USD) 1.39
Fair Value/share (SGD) 0.47
Source: HSBC estimates
Liquidity and correlation to CPO price attractive for investors
As highlighted earlier, GGR’s multiples have gravitated above its average valuations in more
recent times. This could be partly explained by the cyclical nature of the stock in a downcycle,
but we think that GGR’s liquidity and high correlation to CPO prices also play a role.
With an average daily trading value of USD7m over the last year, GGR provides global equity
investors with the most liquid exposure to CPO prices. The high correlation of GGR’s stock with
CPO prices, coupled with its daily liquidity, has essentially made it the de-facto vehicle for equity
investors to gain exposure to CPO prices; hence, its valuation premium.
0.25
0.35
0.45
0.55
0.65
0.75
Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15
P 10.0x 11.0x 12.0x 13.0x 14.0x
Liquidity and strong
correlation with CPO prices
underpin GGR’s premium
valuation
55
EQUITIES PALM PLANTATIONS
20 January 2016
GGR’s valuation premium is justified by its liquidity and correlation with palm oil prices
Source: Bloomberg, HSBC estimates. GENP = Genting Plantations, KLK = KL Kepong, SIME = Sime Darby, FGV = Felda Global Ventures (All Not Rated)
High leverage and FX depreciation to boost RoE
GGR has relatively high operating leverage with EBIT margins in the low single digits as well as
high financial leverage in which net interest expenses could be as much as half of EBIT in
trough years like 2015. The high leverage has made the company’s RoE more sensitive to CPO
prices now than during the last upcycle. Consequently, we expect the company’s RoE to
recover its previous peak RoE of 6% (excluding one-off gains and losses) in 2017 despite much
lower CPO prices compared to 2011-12 upcycle. This belief underpins our valuation of the
company near peak multiples.
P&L
USDm 2013a 2014a 2015e 2016e 2017e
Plantations & Palm Oil mills 1,751 1,927 1,502 1,692 1,790 Palm & Laurics 5,150 6,465 5,948 7,193 7,327 Oilseeds 1,134 845 596 608 561 Others 184 201 201 200 200 Inter-segment eliminations -1,635 -1,819 -1,640 -1,841 -1,950
Revenue 6,584 7,619 6,607 7,851 7,928 y-o-y % 8.8 15.7 -13.3 18.8 1.0
Plantations & Palm Oil mills 10.1 -22.0 12.6 5.8 Palm & Laurics 25.5 -8.0 20.9 1.9 Oilseeds -25.5 -29.5 2.0 -7.7
EBITDA (Adjusted) 649 545 466 688 733 EBITDA Margin (Adjusted) 9.9 7.2 7.0 8.8 9.3 Plantations & Palm Oil mills 487 561 375 549 610 Palm & Laurics 142 57 113 137 121 Oilseeds 26 -61 9 10 10 Others 10 13 4 6 7 EBITDA (Co. Reported, includes interest income) 665 571 501 703 748 y-o-y % -15.6 -14.3 -12.2 40.2 6.4 Plantations & Palm Oil mills 27.8 29.1 24.9 32.5 34.1 Palm & Laurics 2.8 0.9 1.9 1.9 1.7 Oilseeds 2.3 -7.2 1.5 1.7 1.8 EBITDA Margin (%) - Co. Reported 10.1 7.5 7.6 9.0 9.4 Operating Profit 552 263 296 421 455 Y-o-Y % -22.3 -52.4 12.7 42.2 8.1 Operating Margin (%) 8.4 3.4 4.5 5.4 5.7 FX gain/(loss) -33 -14 -99 0 0 Share of results of associates 1 0 0 0 0 Share of results of JVs -2 0 6 0 0 Exceptionals 0 8 0 0 0 EBIT 518 256 203 421 455 Y-o-Y % -23.6 -50.6 -20.8 107.5 8.1 EBIT Margin (%) 7.9 3.4 3.1 5.4 5.7
WIL
GGR
FRIFAR
SIME
IOI KLK FGVGENP
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
-0.4x -0.2x 0.0x 0.2x 0.4x 0.6x 0.8x 1.0x
Dai
ly t
rad
ed
val
ue
1-y
r av
g (U
SD m
n)
Correlation of stock price & CPO price since end of 2011
EQUITIES PALM PLANTATIONS
20 January 2016
56
P&L
USDm 2013a 2014a 2015e 2016e 2017e
Finance Costs -106 -123 -138 -139 -134 Cost of debt (%) 4.8 4.4 4.5 4.6 4.6 Finance Income 17 25 36 15 14 Interest rate (%) 3.8 7.7 13.5 7.4 7.1 PBT 429 158 101 297 335 y-o-y % -29.9 -63.2 -36.2 194.9 12.8 PBT Margin (%) 6.5 2.1 1.5 3.8 4.2 Tax -114 -41 -38 -74 -84 Tax rate (%) 26.6 25.9 37.4 25.0 25.0 PAT 315 117 63 223 252 Minorities -5 -3 -3 -3 -3 Net Profit 310 113 60 220 249 y-o-y % -24.3 -63.4 -46.7 264.3 13.0 Net Margin (%) 4.7 1.5 0.9 2.8 3.1 Wtd. Avg. Shares (m) 12,838 12,838 12,756 12,735 12,735 EPS Basic (USD) 0.02 0.01 0.00 0.02 0.02 EPS Basic (SGD) 0.03 0.01 0.01 0.02 0.03 y-o-y % -26.8 -62.9 -42.0 270.1 13.0 DPS (SGD) 0.01 0.01 0.00 0.00 0.00 Dividend Payout (%) 36.1 52.3 7.9 14.8 13.9
Source: Company, HSBC estimates
The company doesn’t disclose details on its cost structure on an ongoing basis but has reported
in the past that close to 30% of its cash costs (pre-EBITDA) are for fertilisers (industry
benchmark at 30-40%) and another 40% of the costs are for labour. The two more important
things to note, however, are that: 1) most costs are fixed in nature and, consequently, CPO
price inflation is highly earnings accretive and 2) the product price and, hence, revenues are
largely USD-denominated, almost half of the costs are IDR-denominated. This makes
Indonesian upstream companies like GGR a beneficiary of local currency depreciation.
Rising revenues along with leverage and FX depreciation are likely to result in a doubling of
EBIT and more than tripling of net profit in 2016, in our view.
GGR: High operating and financial leverage has made RoE more sensitive
Source: Company, HSBC estimates
-1.6
6.2
0.5
4.6
4.8 3.62.9
1.8
3.5
6.2
872
647
863
1,078
937
761745
566 656688
500
600
700
800
900
1,000
1,100
1,200
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
2008 2009 2010 2011 2012 2013 2014 2015e 2016e 2017e
RoE(Clean, %) CPO price (USD/MT, RHS)
57
EQUITIES PALM PLANTATIONS
20 January 2016
Cash flow statement
USDm 2013a 2014a 2015e 2016e 2017e
PBT 429 158 101 297 335 Depreciation & amortisation 134 149 169 267 278 Net Interest Expense 89 98 102 124 120 Others -186 239 34 0 0 Wkg. Cap. Change -125 -131 320 -126 10 Interest received 12 17 26 15 14 Interest paid -81 -97 -116 -139 -134 Income taxes paid -254 -84 -114 -74 -84 CFO 18 349 523 364 540 Capex -519 -458 -416 -375 -306 Proceeds from disposal of PPE & Biological Assets 8 21 5 0 0 Purchase/sales of subsidiary or associates -5 -51 -55 0 0 Other Investments -337 -190 -76 0 0 CFI -852 -678 -542 -375 -306 Dividends paid -131 -53 -57 -7 -39 Issuance of stock 0 0 0 0 0 Repurchase of stock 0 0 -32 0 0 Debt repaid -45 0 -1,939 -151 -245 Debt issued 795 383 1,905 170 50 Other CFF -7 0 -4 0 0 CFF 612 330 -128 11 -234
Source: Company, HSBC estimates
FCF to increase as high investment phase comes to an end
We believe that the company is coming out of its high investment phase as new plantings have
zeroed out from an average of around 26,000 ha in 2007-09 period and 14,000 ha during 2010-
14. As capex/sales moves down to sub-5%, we see the company yielding around 6% free cash
flow to equity holders (FCFE) at our target price of SGD0.47. However, this cash flow is likely to
be put to use for the company’s deleveraging instead of dividends in the near term.
Balance sheet
USDm 2013a 2014a 2015e 2016e 2017e
Inventories 772 851 612 777 762 Trade receivables 474 526 490 622 609 Other current assets 706 827 1,156 1,156 1,156 ST Investments 259 261 248 248 248 Cash & bank balances 327 330 200 200 200 Current Assets 2,539 2,794 2,706 3,003 2,975 PPE 2,351 2,552 2,826 2,934 2,962 Biological assets 7,988 7,902 7,931 1,167 1,167 Goodwill 116 152 152 152 152 Other non-current assets 1,155 1,266 1,269 1,269 1,269 Non-current assets 11,610 11,872 12,178 5,522 5,550 Trade payables 556 543 641 812 793 ST Loans + Bonds Payable 1,060 1,641 1,669 1,669 1,669 Other current liabilities 268 316 474 499 495 Current Liabilities 1,884 2,501 2,784 2,980 2,958 LT Borrowings + Bonds & notes payable 1,521 1,427 1,352 1,370 1,175 Other LT liabilities 2,022 2,010 1,905 197 197 LT Liabilities 3,544 3,438 3,256 1,566 1,371 Minority Interest 83 90 91 94 97 Shareholders’ Equity 8,638 8,639 8,753 3,885 4,099
Source: Company, HSBC estimates
We expect the company’s net debt to EBITDA to fall to 3.2x by the end of 2017 from over 5x at
the end of 2015.
EQUITIES PALM PLANTATIONS
20 January 2016
58
Key downside risks to target price and rating
Volatility in CPO prices: Higher prices are better for earnings and multiples.
Weather: Changes in rainfall patterns (caused by either El Niño or La Niña) would affect
FFB yields and CPO prices with some lag.
Stronger USD vs. IDR is typically supportive of earnings since costs are largely in IDR
whereas CPO prices trade as a USD-denominated commodity. The margin gains from USD
strength are most significant, if IDR weakness does not spark cost inflation.
Change in expansion plans could result in material changes to our volume growth, capex,
leverage and interest expense forecasts.
Regulatory tariffs: Higher cross-border tariffs increase the competition for higher margin
local market and hurt exports.
Macro-environment and investor sentiment regarding emerging market equities:
Changes in fund flows in or out of emerging markets would affect valuations.
59
EQUITIES PALM PLANTATIONS
20 January 2016
Financials & valuation: Golden Agri-Resources Buy Financial statements
Year to 12/2014a 12/2015e 12/2016e 12/2017e
Profit & loss summary (USDm)
Revenue 7,619 6,607 7,851 7,928
EBITDA 545 466 688 733
Depreciation & amortisation -149 -169 -267 -278
Operating profit/EBIT 396 296 421 455
Net interest -98 -102 -124 -120
PBT 158 101 297 335
HSBC PBT 298 200 297 335
Taxation -41 -38 -74 -84
Net profit 113 60 220 249
HSBC net profit 253 159 220 249
Cash flow summary (USDm)
Cash flow from operations 349 523 364 540
Capex -458 -416 -375 -306
Cash flow from investment -678 -542 -375 -306
Dividends -53 -57 -7 -39
Change in net debt 484 95 18 -195
FCF equity -182 230 -11 234
Balance sheet summary (USDm)
Intangible fixed assets 152 152 152 152
Tangible fixed assets 10,454 10,757 4,100 4,129
Current assets 2,794 2,706 3,003 2,975
Cash & others 591 448 448 448
Total assets 14,667 14,885 8,525 8,525
Operating liabilities 2,870 3,014 1,477 1,459
Gross debt 3,068 3,021 3,039 2,844
Net debt 2,478 2,572 2,591 2,396
Shareholders’ funds 8,639 8,753 3,885 4,099
Invested capital 10,092 10,305 5,483 5,501
Ratio, growth and per share analysis
Year to 12/2014a 12/2015e 12/2016e 12/2017e
Y-o-y % change
Revenue 15.7 -13.3 18.8 1.0
EBITDA -15.9 -14.6 47.8 6.6
Operating profit -23.0 -25.3 42.2 8.1
PBT -63.2 -36.2 194.9 12.8
HSBC EPS -17.1 -36.7 38.4 13.0
Ratios (%)
Revenue/IC (x) 0.8 0.6 1.0 1.4
ROIC 3.0 1.8 4.0 6.2
ROE 2.9 1.8 3.5 6.2
ROA 1.4 1.0 2.8 4.1
EBITDA margin 7.2 7.0 8.8 9.3
Operating profit margin 5.2 4.5 5.4 5.7
EBITDA/net interest (x) 5.6 4.6 5.6 6.1
Net debt/equity 28.4 29.1 65.1 57.1
Net debt/EBITDA (x) 4.5 5.5 3.8 3.3
CF from operations/net debt 14.1 20.3 14.0 22.5
Per share data (USD)
EPS Rep (diluted) 0.01 0.00 0.02 0.02
HSBC EPS (diluted) 0.02 0.01 0.02 0.02
DPS 0.00 0.00 0.00 0.00
Book value 0.67 0.69 0.31 0.32
Key forecast drivers
Year to 12/2014a 12/2015e 12/2016e 12/2017e
Plantations EBITDA Margin (%) 29 25 32 34
Palm & Laurics EBITDA Margin (%) 1 2 2 2
Oilseeds EBITDA Margin (%) -7 2 2 2
Plantations - % of Sales 25 23 22 23
Palm & Laurics - % of Sales 85 90 92 92
Oilseeds - % of sales 11 9 8 7
Valuation data
Year to 12/2014a 12/2015e 12/2016e 12/2017e
EV/sales 0.7 0.9 0.7 0.7
EV/EBITDA 10.3 12.2 8.3 7.5
EV/IC 0.6 0.6 1.0 1.0
PE* 12.0 18.9 13.7 12.1
PB 0.4 0.3 0.8 0.7
FCF yield (%) -5.8 7.4 -0.4 7.5
Dividend yield (%) 2.0 0.2 1.1 1.2
* Based on HSBC EPS (diluted)
Issuer information
Share price (SGD) 0.34 Free float 50%
Target price (SGD) 0.47 Sector Agricultural Products
Reuters (Equity) GAGR.SI Country Singapore
Bloomberg (Equity) GGR SP Analyst Shishir Singh
Market cap (USDm) 3,030 Contact +852 2822 4292
Price relative
Source: HSBC
Note: Priced at close of 15 Jan 2016
0.24
0.29
0.34
0.39
0.44
0.49
0.54
0.59
0.64
0.24
0.29
0.34
0.39
0.44
0.49
0.54
0.59
0.64
2014 2015 2016 2017Golden Agri-Resources Rel to STRAITS TIMES INDEX
EQUITIES PALM PLANTATIONS
20 January 2016
60
Consensus preferred stock but near-term growth is priced in
First Resources (FR) is the consensus preferred stock and not without good reason. The
company delivers production growth through a relatively young plantation profile (average age
of nine years) without the risk of much financial leverage. Although, a long-term DCF
methodology clearly shows value in the stock, its weak correlation with CPO prices and
historical trading range suggests less upside from current levels, at least until the company’s
FCF delivery begins in earnest (2017 and beyond). We initiate with a TP based on 2016e
EV/EBITDA of 8.7x, two standard deviations above its five-year average of 7.1x on one-year
forward EV/EBITDA.
Production growth to rebound in 2017: FR planted 15,000-20,000 ha during 2012-14. As
these plantations mature, CPO production is likely to hold flat despite tree stress and lower
yields in 2016. The full impact of production growth and increase in CPO prices would come in
2017. We expect CPO production to accelerate to 10% y-o-y in 2017. It is worth mentioning that
the company has also been fairly active in seeking acquisitions but has not typically paid
excessively for them.
Upstream margin expansion to drive RoE: Upstream plantation costs tend to be relatively
fixed in nature with labour and fertiliser accounting for the bulk of COGS. This allows for margin
expansion in the event of price increases. We expect FR’s upstream margins to head back to
levels last seen in 2011, but the depressed margins downstream due to oversupply are likely to
prevent a full recovery. RoE is likely to recover to mid-20s (%) in 2017, partly due to the
application of a new accounting rule, which would require equity to be written down in 2016.
FR: Key operating metrics
2012a 2013a 2014a 2015e 2016e 2017e
Mature oil palm (ha) 85,888 104,493 114,377 132,345 141,062 156,422 y-o-y % 15.0 21.7 9.5 15.7 6.6 10.9 FFB Yield (t/ha) 22.1 18.7 18.7 18.3 17.3 17.7 CPO Yield (%) 23.2 23.1 22.4 22.7 22.4 22.1 CPO production (’000 tonnes) 525 589 631 713 714 786 PKO production (’000 tonnes) 123 135 146 161 170 191 EBITDA Margin 53.5 54.1 48.7 48.7 52.6 57.7 Capex/Sales 34.7 28.4 34.2 29.7 25.7 22.2 Source: Company, HSBC estimates
First Resources (FR SP)
FR’s relatively clean upstream focus with a lack of financial leverage
makes it one of the Street’s favourites in the sector
But, full value unlikely to be realised before FCF delivery begins in
2017; in 2016, stock likely to be anchored to historical trading range
Initiate at Buy with a target price of SGD2.11, based on 8.7x 2016e
EV/EBITDA, 2SD above the 5-year average
61
EQUITIES PALM PLANTATIONS
20 January 2016
Owner of relatively young oil palm plantations in Indonesia
FR is one of the biggest oil palm plantation owners in Indonesia. The company has more than
200,000 ha of plantations of which it owns 85% with the rest being under the Plasma (small
landowner) scheme. The company owns 12 palm oil mills across Riau and Kalimantan, which
have a combined capacity to process more than 4MT of FFB. Downstream refining and
biodiesel plants have a capacity of 850,000t per annum.
FR oil palm plantations
Source: HSBC
FR owns among the youngest plantations in the sector, with an average plantation age of less
than 10 years. The company has a total land bank of around 250,000 ha for oil palms, of which
it has planted over 80%. The new plantings ran close to 15,000 ha per year during the early part
of this decade and would be a source of production growth between 2016 and 2018 as the trees
reach maturity. Consequently, we think that the company’s CPO production would reaccelerate
in 2017 once the impact of El Niño on 2016 yields fades off.
Oil palm average age distribution CPO production growth (y-o-y %)
Source: Company. Total = 205,631 ha at end of 3Q15. Source: Company, HSBC estimates
Although the company has an ample land bank to pursue growth over the next 3-4 years, it has
slowed the pace of new plantings to 5-7,000 ha this year. We expect the pace of planting to
remain subdued in 2016-17 but expect a recovery to 10,000 ha annually beyond this period as
and when palm oil prices return toward mid-cycle averages.
To encourage and enforce sustainable agriculture practices in palm oil, Indonesia placed a two-
year moratorium on the issuance of new forest licenses for logging, oil palm, and wood-fibre
plantations in May 2011. The moratorium has been extended twice, once in 2013 and more
-
Malaysia
– –
-
-
-
-Malaysia
28%
27%
24%
21%0-3 years
4-7 years
8-17 years
18+ years
16.2
12.1
7.1
13.1
0.0
10.1
0.0
5.0
10.0
15.0
20.0
2012 2013 2014 2015e 2016e 2017e
FR’s new plantings during
2012-14 would be a source of
production growth in 2016-18
FR actively seeking inorganic
expansion as well
EQUITIES PALM PLANTATIONS
20 January 2016
62
recently in 2015. Increasing regulatory limitations, such as these, due to sustainability and
environmental issues have made plantation owners seek growth elsewhere.
It’s worth noting that First Resources has been among one of the most active Indonesian
plantation owners to pursue inorganic expansion. Having said that, we must acknowledge that
the company does not appear to have ever overspent, with acquisitions priced reasonably in the
range of USD8,000-11,000 EV/ha.
Family-owned firm with upstream heavy earnings
FR is majority owned by the family of Mr. Ciliandra Fangiono, the company’s CEO since 2007.
The free float in the company is c31% with the rest being owned by family and associates.
Ownership (% of outstanding shares) Segment-wise EBITDA (USDm)
Source: Company Source: Company, HSBC estimates
The company has a presence both in upstream plantations as well as downstream refining and
biodiesel operations; however, most of its EBITDA currently comes from its upstream
operations.
CPO price-driven RoE recovery despite production decline
We expect FR to hold its CPO production flat despite a decline in yields as the company’s
relatively young plantations are likely to be relatively less impacted by dryness in 2015. The
structural increase in production from maturing plantations, which were planted during 2012-14,
is also likely to shield the company’s production from a decline in 2016 with a reacceleration in
production growth in 2017.
Key earnings drivers
2012 2013 2014 2015e 2016e 2017e
CPO production y-o-y % 16.2 12.1 7.1 13.1 0.0 10.1 ASP y-o-y % -7.3 -3.0 -16.7 -19.6 14.2 3.1 Revenue y-o-y % 22.0 3.8 -1.8 -24.8 25.2 11.2 Plantation EBITDA Margin % 58.5 53.9 51.6 51.1 56.5 60.0 Refining EBITDA Margin % 12.3 13.2 8.0 7.7 5.2 6.4 Operating Profit y-o-y % 9.8 4.5 -13.6 -27.5 24.0 26.1 EPS, Adjusted (SGD cents) 19.2 18.8 13.9 10.2 13.8 18.1 EPS, Adjusted y-o-y % 15.4 -2.0 -26.2 -26.2 35.2 30.6
Source: HSBC estimates
Despite the relatively weak production expected next year, we believe that the jump in prices
and relatively fixed cost structure would be enough to deliver a strong rebound from cyclical
lows of earnings in 2015. We expect the company’s RoE to rebound from an estimated 12.3%
63%6%
31%Eight cap.
Infinite cap.
Free Float
295 314266
217
295356
30 27 33 21 18 24
-100
0
100
200
300
400
2012 2013 2014 2015e 2016e 2017ePlantations Refining Others
63
EQUITIES PALM PLANTATIONS
20 January 2016
in 2015 to 19.9% in 2016 and 27% in 2017. We expect the company’s net debt to remain
relatively flat in 2016 but come down from 2017 onwards.
In line with the Street on 2016 EBITDA but accounting distortions and inter-segment sales make it tough to compare sales and net profit
Singapore-listed plantation companies will adopt IAS 16 for the accounting of biological assets
from 1 January 2016. The new standard requires biological assets classified as bearer plants to
be accounted for like property, plant and equipment (PPE) and be depreciated as such. So far,
these assets were recorded at DCF-based fair values less costs to sell under IAS 41.
Under the new standard, the biological assets, which were carried at fair value based on DCF of
the plantations, will be written down to cost and, unlike the prior method, depreciation will be
charged for mature plantations. We expect FR’s biological assets and equity value to be written
down by USD400m and USD350m in the quarter ending March 2016. We also expect FR’s
annual depreciation to rise by approximately USD30m in 2016 once the new rule is adopted.
Consensus has probably not adjusted the numbers fully to account for depreciation and this is
probably what explains the difference between our 2016 EPS forecast and that of the Street.
We also believe that consensus estimate for inter-segment elimination is too low, which explains
our below-consensus sales forecast. The distortion created by the accounting change and inter-
segment elimination leaves only EBITDA as a comparable number. We are in line with the
Street on 2016 EBITDA but 10% ahead on 2017.
HSBC estimates vs. consensus
___________ HSBC ____________ _________ Consensus _________ ____ HSBC vs. consensus ______ USDm 2015e 2016e 2017e 2015e 2016e 2017e 2015e 2016e 2017e
Sales 463 579 644 541 646 728 -14.4 -10.4 -11.5 EBITDA 225 304 372 248 299 339 -9.3 1.8 9.6 Net Profit 118 158 206 139 165 192 -15.4 -4.3 7.1
Source: Thomson Reuters Datastream, HSBC estimates
DCF shows value but…
FR has generated a positive free cash flow to equity holders (FCFE) through its investment
phase over last five years. As its plantations mature, the annual FCFE is expected to grow to
close to USD200m by the end of this decade. At our EV/EBITDA-based target price (discussed
below), the stock discounts a terminal growth of 3% at a relatively high cost of equity of 14%. In
our view, the DCF underpins the thesis that FR offers value for long-term investors. However,
the catalyst for the realisation of this value is likely to come only when the company starts
delivering sizable FCFE in 2017. In the near term, valuations are likely to be anchored to the
historical trading range and, consequently, we choose to establish our target price based on
EV/EBITDA.
EQUITIES PALM PLANTATIONS
20 January 2016
64
At our EV/EBITDA-based TP, the stock factors in a cost of equity above 14%
CoE 14.0% Terminal growth rate of FCFE 3.0% CPO Price - FOB Malaysia - USD/MT 566 656 688 708 729 751
YE December, USDm 2015e 2016e 2017e 2018e 2019e 2020e
EBITDA 225 304 372 408 419 432 Capex -137 -149 -143 -132 -120 -109 Δ Wkg. Cap. -23 -27 -2 0 -1 -1 Tax paid -63 -54 -70 -79 -81 -84 Interest paid -22 -26 -25 -25 -25 -24
FCFE -20 48 132 172 192 212
FCFE Yield % -0.8 2.0 5.8 7.5 8.3 9.1 PV of explicit FCFE (2015-20e) - USDm 465 PV of terminal value - USDm 1,939
Fair Market Value (USDm) 2,404
FX (SGD/USD) 1.39
Fair Value/share (SGD) 2.11
Source: HSBC estimates
…relatively low cost structure makes earnings and stock less sensitive to CPO prices…
FR’s upstream focus with relatively low cost structure allows EBITDA margins of close to 50%.
This limits the sensitivity of its earnings to CPO prices compared to some of its low-margin
peers. A 1% change in our CPO price assumptions of USD656/tonne in 2016e and
USD688/tonne in 2017e would change our earnings estimates for FR by 2.5% for 2016e and
2% for 2017e. The relatively low sensitivity of FR’s earnings to CPO prices probably explains
why its share price has a relatively weak correlation with CPO prices. In our view, this reduces
FR’s attraction as a stock to participate in the CPO rally.
FR’s stock is not as highly correlated with CPO prices as it peers…
Source: Thomson Reuters Datastream, HSBC
450
550
650
750
850
950
1050
1150
1.50
1.70
1.90
2.10
2.30
2.50
2.70
Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15
65
EQUITIES PALM PLANTATIONS
20 January 2016
…since FR’s earnings benefit from relatively lower costs and higher margins
Source: HSBC
…and trading range suggests there isn’t as much upside as in GGR; TP set at 2016e EV/EBITDA of 8.7x (2SD above 5-yr avg.)
Given the company’s strong growth profile, relatively young plantations, low cost structure and
modest level of leverage, one could argue that the stock deserves a premium valuation vs. its
peers. However, the stock’s history suggests that the market has a different opinion. In fact, FR
has generally traded at a discount to GGR, its closest peer listed in Singapore. Thus, even
though we set FR’s target price at two standard deviations above its five-year average one-year
forward EV/EBITDA, the target multiple of 8.7x is still at a 13% discount to the target multiple of
10x that we have assigned to its peer GGR. Applying our 2016 EBITDA forecast to this 8.7x
multiple, we derive a target price of SGD2.11. We initiate the stock with a Buy rating. At this
target price, the stock would be trading at a 2016e PE of 15.3x, which is more than two standard
deviations above its long-term average one-year forward PE of 10.7x.
First Resources has generally traded at a discount to GGR on one-year fwd. EV/EBITDA
Source: Thomson Reuters Datastream, HSBC
Our choice of EV/EBITDA over other valuation metrics, such as PE and PB, is driven by the fact
that EBITDA will not be impacted by the company’s switch to IAS 16 from 1 January 2016 and
its calculation will consistent with history. On the other hand, both earnings and book value are
set to contract due to IAS 16, skewing historical comparisons.
-25
-12
-5
5
12
25
-21
-11
-4
411
21
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
-10% -5% -2% 0% 2% 5% 10%
Change in CPO price assumption
Change in 2016 EPS Change in 2017 EPS
4.0x
5.0x
6.0x
7.0x
8.0x
9.0x
10.0x
11.0x
Dec-08 Jul-09 Feb-10 Sep-10 Apr-11 Nov-11 Jun-12 Jan-13 Aug-13 Mar-14 Oct-14 May-15 Dec-15
GGR FR
EQUITIES PALM PLANTATIONS
20 January 2016
66
FR: Upside limited relative to historical one-year fwd. EV/EBITDA trading range
Source: Thomson Reuters Datastream, HSBC
While the accounting change would result in lower earnings and book value, it would have no
impact on the company’s cash flows. As a result, we expect the PE and PB multiples for
Singapore-listed plantations stocks to rise.
We expect reported earnings growth of 30-35% y-o-y in 2016-17
The increase in depreciation due to the adoption of IAS 16 from 2016 is set to eat into the
company’s margin expansion below the EBITDA line, but we still expect earnings growth of 33%
y-o-y in 2016-17 driven by CPO price gains.
On the cost side, the IDR’s depreciation has arrested the decline in EBITDA in 2015 but further
savings would be difficult to achieve now that pre-EBITDA unit costs have reversed the cost
inflation of 2013. As RoE expands to 27% by 2017, the leverage is likely to inch down.
4.0x
5.0x
6.0x
7.0x
8.0x
9.0x
10.0x
Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15
FR -2σ -σ Avg. +σ +2σ
FR: One-year forward PE relative to historical average
Source: Thomson Reuters Datastream, HSBC
3.0x
6.0x
9.0x
12.0x
15.0x
Mar-08 Nov-08 Jul-09 Mar-10 Nov-10 Jul-11 Mar-12 Nov-12 Jul-13 Mar-14 Nov-14 Jul-15
PE -2σ -1σ Avg +1σ +2σ
67
EQUITIES PALM PLANTATIONS
20 January 2016
Lower costs due to FX depreciation to boost RoE at lower CPO prices than past
Source: Company, HSBC estimates
P&L
USDm 2012 2013 2014 2015e 2016e 2017e
Plantation & Palm Oil mills 504 583 516 425 521 593 Refinery & Processing 243 203 406 265 341 367 Inter-segment elimination -144 -159 -307 -228 -283 -316
Revenue 603 626 616 463 579 644 y-o-y % 22.0 3.8 -1.8 -24.8 25.2 11.2 Inter-segment as % of Revenue 19.3 20.3 33.3 33.0 32.8 32.9
Plantation & Palm Oil mills 295 314 266 217 295 356 Refinery & processing 30 27 33 21 18 24 Others -2 -2 1 -12 -8 -8
EBITDA 323 339 300 225 304 372 y-o-y % 9.5 5.0 -11.6 -24.9 35.2 22.1
Plantation & Palm Oil mills 58.5 53.9 51.6 51.1 56.5 60.0 Refinery & processing 12.3 13.2 8.0 7.7 5.2 6.4
EBITDA Margin (%) 53.5 54.1 48.7 48.7 52.6 57.7 Operating Profit 298 311 269 195 242 305 y-o-y % 9.8 4.5 -13.6 -27.5 24.0 26.1 Operating Margin (%) 49.3 49.7 43.7 42.2 41.8 47.4 Exceptionals 48 21 -2 -7 0 0 EBIT 346 332 267 189 242 305 y-o-y % 11.6 -3.9 -19.6 -29.4 28.3 26.1 EBIT Margin (%) 57.3 53.0 43.4 40.8 41.8 47.4 Finance Costs -22 -22 -20 -25 -26 -25 Cost of debt (%) 4.8 4.3 3.8 4.4 5.0 5.0 Finance Income 2 4 5 3 1 1 Interest rate (%) 0.8 1.1 1.9 1.5 1.1 1.0 PBT 326 313 252 167 217 282 y-o-y % 16.8 -4.0 -19.6 -33.7 30.0 29.7 PBT Margin (%) 54.1 50.0 40.9 36.1 37.5 43.7 Tax -78 -67 -71 -44 -54 -70 Tax rate (%) 23.9 21.5 28.2 26.3 25.0 25.0 PAT 248 246 181 123 163 211 Minorities -11 -8 -7 -5 -5 -5 Net Profit 237 238 173 118 158 206 y-o-y % 22.1 0.4 -27.1 -32.0 33.7 30.6 Net Margin (%) 39.3 38.0 28.2 25.5 27.2 32.0 Wtd. Avg. Shares (m) 1,544 1,584 1,584 1,584 1,584 1,584 EPS Basic (USD) 0.15 0.15 0.11 0.07 0.10 0.13 EPS Basic (SGD) 0.19 0.19 0.14 0.10 0.14 0.18 y-o-y % 15.4 -2.0 -26.2 -26.2 35.2 30.6 DPS (SGD) 0.04 0.05 0.04 0.03 0.03 0.05 Dividend Payout (%) 21.1 24.0 25.3 25.6 25.0 25.0
Source: Thomson Reuters Datastream, HSBC estimates
863
1,078
937
761 745
566
656688
20.8
25.6 25.023.8
17.7
12.3
19.9
27.3
10.0
12.0
14.0
16.0
18.0
20.0
22.0
24.0
26.0
28.0
30.0
500
600
700
800
900
1,000
1,100
1,200
2010 2011 2012 2013 2014 2015 2016 2017
CPO price (FOB, Malaysia, USD/MT) RoE (%, RHS)
EQUITIES PALM PLANTATIONS
20 January 2016
68
Cash flow statement
USDm 2012a 2013a 2014a 2015e 2016e 2017e
PBT 326 313 252 167 217 282 Depreciation & amortisation 25 28 31 30 62 67 Net Interest Expense 19 19 15 22 25 23 Others -68 -49 5 -20 0 0 Wkg. Cap. Change -10 -16 11 -23 -27 -2 Interest received 2 3 5 3 1 1 Interest paid -25 -21 -19 -22 -26 -25 Income taxes paid -73 -76 -77 -63 -54 -70 CFO 196 200 223 94 198 276 Capex (PPE + Biological Assets) -209 -178 -210 -137 -149 -143 Proceeds from disposal of PPE & Biological Assets 2 0 0 0 0 0 Purchase/sales of subsidiary or associates -31 -70 0 -72 0 0 Other Investments 8 12 -4 0 0 0 CFI -230 -236 -215 -209 -149 -143 Dividends paid -48 -51 -58 -43 -25 -45 Issuance of stock 0 0 0 0 0 0 Repurchase of stock 0 0 0 -32 0 0 Debt repaid 0 -77 -3 -10 -37 -19 Debt issued 275 39 130 82 14 0 Other CFF 3 -20 -27 -70 0 0 CFF 231 -109 43 -73 -49 -64
Source: Company, HSBC estimates
As new plantings run at a slower rate than in the past and more plantations achieve maturity,
we expect the company’s capex intensity to accelerate and FCF to expand significantly by
2017. At our target price, the company’s FCFE yield would be 5-6% in 2017.
Balance Sheet
USDm 2012a 2013a 2014a 2015e 2016e 2017e
Inventories 58 59 49 102 129 126 Trade receivables 25 35 30 23 33 37 Restricted cash 13 33 59 162 162 162 Other current assets 60 44 46 60 60 60 Cash & bank balances 405 239 291 100 100 170 Current Assets 561 410 475 446 485 554 Biological assets 844 869 961 900 544 583 Plasma plantation receivables 44 28 59 54 54 54 PPE 321 303 338 344 388 427 Goodwill 33 73 61 79 78 76 Associates 0 0 0 0 0 0 Land use rights 41 43 46 38 38 38 Other non-current assets 87 53 57 59 59 59 Non-current assets 1,370 1,370 1,523 1,474 1,161 1,237 Trade payables 21 24 20 42 54 52 Other payables & accruals 38 35 37 31 31 31 ST Loans + Bonds Payable 40 3 11 39 39 39 Dividends payable 0 0 0 15 29 36 Other current liabilities 31 18 20 12 12 12 Current Liabilities 131 80 88 139 165 169 LT Borrowings + Bonds & notes payable 498 487 572 493 469 450 Other LT liabilities 196 219 274 331 281 281 LT Liabilities 694 706 846 823 749 731 Minority Interest 51 47 53 49 54 59 Shareholders’ Equity 1,055 947 1,011 909 678 832
Source: Company, HSBC estimates
69
EQUITIES PALM PLANTATIONS
20 January 2016
Key downside risks to target price and rating
Volatility in CPO prices: Higher prices are better for earnings and multiples.
Weather: Changes in rainfall patterns (caused by either El Niño or La Niña) would affect
FFB yields and CPO prices with some lag.
Stronger USD vs. IDR is typically supportive of earnings since costs are largely in IDR
whereas CPO price trades as a USD-denominated commodity. The margin gains from USD
strength are most significant, if IDR weakness doesn’t spark cost inflation.
Change in expansion plans could result in material changes to our volume growth, capex,
leverage and interest expense forecasts.
Regulatory tariffs: FR could be impacted either by the Indonesian export tax/levies or the
import duties at key importers like India.
Macro-environment and investor sentiment regarding emerging market equities:
Changes in fund flows in or out of emerging markets would affect valuations.
EQUITIES PALM PLANTATIONS
20 January 2016
70
Financials & valuation: First Resources Buy Financial statements
Year to 12/2014a 12/2015e 12/2016e 12/2017e
Profit & loss summary (USDm)
Revenue 616 463 579 644
EBITDA 300 225 304 372
Depreciation & amortisation -31 -30 -62 -67
Operating profit/EBIT 269 195 242 305
Net interest -15 -22 -25 -23
PBT 252 167 217 282
HSBC PBT 254 174 217 282
Taxation -71 -44 -54 -70
Net profit 173 118 158 206
HSBC net profit 175 124 158 206
Cash flow summary (USDm)
Cash flow from operations 223 94 198 276
Capex -210 -137 -149 -143
Cash flow from investment -215 -209 -149 -143
Dividends -58 -43 -25 -45
Change in net debt 15 38 -24 -88
FCF equity 14 0 49 133
Balance sheet summary (USDm)
Intangible fixed assets 107 118 116 114
Tangible fixed assets 1,359 1,298 986 1,064
Current assets 534 608 646 716
Cash & others 351 262 262 331
Total assets 2,057 2,082 1,807 1,953
Operating liabilities 352 415 377 375
Gross debt 583 532 508 489
Net debt 232 270 247 158
Shareholders’ funds 1,011 909 678 832
Invested capital 1,298 1,346 1,110 1,188
Ratio, growth and per share analysis
Year to 12/2014a 12/2015e 12/2016e 12/2017e
Y-o-y % change
Revenue -1.8 -24.8 25.2 11.2
EBITDA -11.6 -24.9 35.2 22.1
Operating profit -13.6 -27.5 24.0 26.1
PBT -19.6 -33.7 30.0 29.7
HSBC EPS -19.3 -29.1 26.6 30.6
Ratios (%)
Revenue/IC (x) 0.5 0.3 0.5 0.6
ROIC 15.6 11.0 14.9 20.0
ROE 17.9 13.0 19.9 27.3
ROA 10.1 6.8 9.4 12.2
EBITDA margin 48.7 48.7 52.6 57.7
Operating profit margin 43.7 42.2 41.8 47.4
EBITDA/net interest (x) 20.0 10.4 12.2 15.9
Net debt/equity 21.8 28.2 33.7 17.8
Net debt/EBITDA (x) 0.8 1.2 0.8 0.4
CF from operations/net debt 96.0 34.7 80.4 174.4
Per share data (USD)
EPS Rep (diluted) 0.11 0.07 0.10 0.13
HSBC EPS (diluted) 0.11 0.08 0.10 0.13
DPS 0.03 0.02 0.02 0.03
Book value 0.64 0.57 0.43 0.53
Key forecast drivers
Year to 12/2014a 12/2015e 12/2016e 12/2017e
Total planted (ha) 194,567 205,785 208,366 210,772
Mature planted nucleus (ha) 114,377 132,345 141,062 156,422
FFB Yield (MT/ha) 19 18 17 18
CPO produced (’000 MT) 631 713 714 786
CPO ASP (USD/MT) 745 566 656 688
pre-EBITDA cost (IDR ’000/ha) 17,839 15,767 17,311 17,938
Valuation data
Year to 12/2014a 12/2015e 12/2016e 12/2017e
EV/sales 3.5 4.8 3.8 3.3
EV/EBITDA 7.2 9.8 7.2 5.6
EV/IC 1.7 1.6 2.0 1.8
PE* 11.1 15.6 12.3 9.4
PB 1.9 2.1 2.9 2.3
FCF yield (%) 0.7 0.0 2.5 6.9
Dividend yield (%) 2.3 1.6 2.0 2.7
* Based on HSBC EPS (diluted)
Issuer information
Share price (SGD) 1.76 Free float 31%
Target price (SGD) 2.11 Sector Agricultural Products
Reuters (Equity) FRLD.SI Country Singapore
Bloomberg (Equity) FR SP Analyst Shishir Singh
Market cap (USDm) 1,941 Contact +852 2822 4292
Price relative
Source: HSBC
Note: Priced at close of 15 Jan 2016
1.30
1.50
1.70
1.90
2.10
2.30
2.50
2.70
1.30
1.50
1.70
1.90
2.10
2.30
2.50
2.70
2014 2015 2016 2017First Resources Rel to STRAITS TIMES INDEX
71
EQUITIES PALM PLANTATIONS
20 January 2016
A rising tide lifts all boats
Indofood Agri Resources (IFAR) is a leading vertically integrated player with a 40-45% market
share in Indonesia’s branded cooking oil market and over 330,000 ha of oil palm plantations,
predominantly in Riau and Sumatra. We initiate coverage on the stock with a target price of
SGD0.56 based on 2016e EV/EBITDA of 5.9x, which is 1.5 standard deviations above its five-
year average one-year forward EV/EBITDA.
Production likely to remain flat over the next two years: IFAR planted 14,000-16,000 ha per
year in 2010-13, but the new plantings slowed down to around 6,000 ha annually in 2014 and is
likely to come to only 2,000 ha in 2015. This limits the potential for future production growth at
IFAR’s relatively old plantations (which have an average age of around 14 years). Furthermore,
CPO production is likely to hold flat over 2016 due to tree stress and lower yields.
Still, high operating leverage makes earnings and stock sensitive to CPO prices:
Upstream plantation costs tend to be relatively fixed in nature with labour and fertiliser
accounting for bulk of the COGS. This allows for margin expansion in the event of price
increases. Thus, consolidated EBITDA margins are likely to recover to levels not seen since
2011. RoE is likely to recover to mid-single digits (%) in 2017, partly due to the application of a
new accounting rule (IAS 16), which would require equity to be written down from 1 January
2016. Despite having weaker return metrics than its peers, IFAR’s share price and earnings
have historically been highly leveraged to CPO prices; thus, we expect the stock to be a key
beneficiary of the expected rebound in CPO prices.
IFAR: Key operating metrics
2012a 2013a 2014a 2015e 2016e 2017e
Mature oil palm (ha) 176,105 177,099 185,181 196,128 205,130 211,264 y-o-y % 11.3 0.6 4.6 5.9 4.6 3.0 FFB Yield (t/ha) 16.9 16.3 17.6 17.0 16.2 17.4 CPO Yield (%) 21.4 21.5 21.9 21.4 21.2 21.1 CPO production (’000 tonnes) 829 864 957 901 881 1,003 PKO production (’000 tonnes) 202 190 193 230 233 286 EBITDA Margin 23.7 19.7 23.5 18.6 23.2 26.2 Capex/Sales 14.8 16.8 14.5 14.0 8.9 8.2
Source: Thomson Reuters Datastream, HSBC estimates
Indofood Agri (IFAR)
IFAR is a leading vertically integrated player with a dominant position
in Indonesia’s branded cooking oil market
With ageing plantations and relatively high costs, IFAR is not the best
placed palm player but still a key beneficiary of rising CPO prices
Initiate at Buy with a TP of SGD0.56, based on 2016e EV/EBITDA of
5.9x, 1.5SD above the 5-year average
EQUITIES PALM PLANTATIONS
20 January 2016
72
Vertically integrated operations focused on Indonesia
Indofood Agri Resources (IFAR) is a vertically integrated agribusiness group. Its activities range
from oil palm seed breeding, oil palm cultivation and milling to downstream operations like
refining, branding and marketing of cooking oil, margarine, shortening and other palm oil
derivatives. It has a market share of 40-45% in Indonesia’s branded cooking oil (Bimoli) and
shortening and margarine (Palmia) markets.
Indofood Agri Resources (IFAR) is a vertically integrated company based in Indonesia
Source: Company
IFAR also engages in the cultivation of other crops, such as rubber, sugar cane, cocoa and tea,
which account for c18% of its total self-owned planted area of around 300,000 ha. IFAR’s first
venture into sugarcane was in 2008 when it acquired Laju Perdana Indah. In 2013, it followed
that with the acquisition of a 50% stake in CMAA (Brazil) and a 10% stake in RHI (Philippines,
ROX PM, Not Rated). The downstream operations include a 1.4MT per annum of refining
capacity as well as the branded cooking oil business. IFAR acquired London Sumatra (LSIP IJ,
Not Rated) in November 2007 and the downstream operations have since been self-sufficient in
their CPO requirements.
For reporting purposes, the business consists of an upstream plantations segment and a
downstream edible oils and fats segment. Although the upstream and downstream segments
have similar levels of revenue, the plantations segment, particularly from dominant palm oil
plantations, accounts for 85-95% of the company’s EBITDA.
Segment-wise revenue (IDRtrn) Segment-wise EBITDA (IDRtrn)
Source: Company, HSBC estimates Source: Company, HSBC estimates
Seed breeding End ProductsCPO RefiningPalm oil millOil palm
plantations
Annual capability
33mn seedsPlantation estates
- Planted 246,055
Ha
Fruit Bunches
(FFB)
- Capacity 6.4mn
tons/yr
Number of mills
- 6 in Riau
- 7 in South
Sumatra
- 4 in North
Sumatra
- 7 in Kalimantan
2014 Production
956,000 MT Crude
Palm Oil & 218,000
MT Palm Kernel Oil
Refining capacity
1.4MT/yr
- Cooking oil
- Margarine
- Shortening
Plantation Business Edible oils & fats business
8.5
10.3
8.6 9.510.7
8.6 9.88.5
10.010.9
2013 2014 2015e 2016e 2017e
Plantations Edible Oils
2.3
3.2
2.2
3.2
4.0
0.40.2 0.2
0.3 0.3
2013 2014 2015e 2016e 2017e
Plantations Edible Oils
73
EQUITIES PALM PLANTATIONS
20 January 2016
Slower growth in acreage ahead
Given the weak CPO prices as well as dry weather in 2015, IFAR is likely to slow its new
plantings to a pace of around 2,000 ha per year in the near term from 14,000-16,000 ha per
year in 2010-13. The guidance has previously been around 5,000 ha per year, which is what
IFAR continues to guide following a recovery from the current conditions. The company has a
land bank of 40,000 ha, of which 25,000 ha are plantable and the rest is for the Plasma
scheme. Despite lower new plantings, maturing plantations (currently totalling 58,000 ha) and
downstream capacities required to process the output are likely to keep IFAR’s capex. We
expect the company’s capex to run at a pace of IDR2.4trn per year over the next two years
compared with a pace of around IDR3.3trn per year in the recent past.
Distribution of planted area in Indonesia (ha)
2012a 2013a 2014a
Riau 57,025 57,025 57,025 North Sumatra 39,360 39,326 39,321 South Sumatra 87,160 89,819 93,562 West Sumatra 28,493 28,478 28,997 East Sumatra 42,026 46,433 64,458 Central Kalimantan 6,128 7,410 8,756 Java 2,864 2,864 2,865 Sulawesi 5,669 5,354 5,066 Total 268,725 276,709 300,050
Source: HSBC
Most of IFAR’s plantations are situated in the Indonesian provinces of Riau and Sumatra.
IFAR oil palm plantations
Source: HSBC
Ownership: listing of subsidiary has not hurt valuations as much
IFAR is an indirect subsidiary of First Pacific (142 HK, HKD5.08, Buy), the Hong Kong-listed
conglomerate. First Pacific owns 50.1% of Jakarta-listed Indofood Sukses Makmur (INDF IJ,
IDR 5,300, Buy), which in turn owns 60.5% of the company (2.7% direct and the rest through
83.8% owned Indofood Singapore Holdings).
Accounting for the partial ownership in Jakarta-listed Salim Ivomas and London Sumatra, IFAR
shareholders effectively own around 150,000 ha or 61% of 246,000 ha of oil palm plantations.
-
Malaysia
– –
-
-
-
-Malaysia
EQUITIES PALM PLANTATIONS
20 January 2016
74
IFAR ownership
Source: Company
IFAR’s premium to its palm oil subsidiary has expanded in recent times
Source: Thomson Reuters Datastream, HSBC
IFAR’s stock price traded below the market cap of Salim Ivomas (SIMP IJ, Not Rated), its palm
oil subsidiary, following the latter’s Jakarta IPO in 2011. However, this isn’t true anymore,
possibly due to better liquidity of Singapore-listed IFAR.
CPO price-driven RoE recovery despite production decline
We expect IFAR’s CPO production to fall next year due to a decline in yields. The company has
already lowered 2015 FFB output guidance by 100,000 tonnes to 3.3MT from 3.4MT due to
severe dry weather earlier this year. According to the company, North Sumatra was the worst hit
with materially lower rainfall throughout the year whereas other estates have been under stress
Indofood Agri
Resources
CMAA
(Brazil Sugarcane)
Salim Ivomas
(SIMP IJ)
London Sumatra
(LSIP IJ)
Indofood Sukses
Makmur (INDF IJ)
CAB Hldgs.
(First Pacific)
50.1%
60.5%
6.5%
73.5%
59.5%
50.0%
50%
60%
70%
80%
90%
100%
110%
120%
Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15
% of IFAR's market cap explained by Salim Ivomas stake
75
EQUITIES PALM PLANTATIONS
20 January 2016
since mid-2015. Going forward, this is likely to hurt yields, which may drop by c20% y-o-y in
1Q16. While the company expects the output to recover in the latter part of the year, it expects
the decline yet again in 2017 due to the lagged impact of this year’s rainfall deficit.
Consequently, we expect CPO production to decline by 3% y-o-y in 2016 and rise only modestly
by 4% y-o-y in 2017 despite the increase in mature acreage.
Key earnings drivers
2012a 2013a 2014a 2015e 2016e 2017e
CPO production y-o-y % 5.0 -8.0 18.0 2.2 -1.9 9.8 ASP y-o-y % -7.4 -13.3 -3.4 -20.5 10.5 -1.0 Revenue y-o-y % 9.8 -4.1 12.7 -10.3 10.2 10.2 Plantation EBITDA Margin % 31.0 26.8 31.3 25.6 33.4 37.4 Edible Oils EBITDA Margin % 5.4 4.6 2.0 2.7 2.6 2.5 Operating Profit y-o-y % -18.6 -31.8 47.5 -44.9 38.2 36.6 EPS, Adjusted (IDR) 702 486 572 242 298 572 EPS, Adjusted y-o-y % -11.5 -31.6 17.8 -57.8 23.5 91.8
Source: HSBC estimates
Despite the fall in production and a relatively fixed cost structure, we believe that the jump in
prices would be enough to deliver a strong rebound from cyclical lows of earnings in 2015. We
expect the company’s RoE to rebound from an estimated 2.5% in 2015 to 6.1% in 2017. The
leverage during this time, however, would continue remain flat due to company’s capex outlay.
Our 2016 EBITDA estimates are in line with the Street but EPS lower
Singapore-listed plantation companies will adopt IAS 16 for accounting of biological assets from
1 January 2016. The new standard requires biological assets classified as bearer plants to be
accounted for like property, plant and equipment (PPE) and be depreciated as such. So far,
these assets were recorded at DCF-based fair values less costs to sell under IAS 41.
Under the new standard, the biological assets, which were carried at fair value based on DCF of
the plantations, will be written down to cost and, unlike the prior method, depreciation will be
charged for mature plantations. We expect IFAR’s biological assets and equity value to be
written down by IDR3trn and IDR2.5trn, respectively, in the quarter ending March 2016. We also
expect IFAR’s annual depreciation to rise by approximately IDR375bn in 2016 once the new
rule is adopted.
Consensus has probably not adjusted the numbers fully to account for depreciation and this is
probably what explains the difference between our 2016-17 EPS forecast and that of the Street
despite our EBITDA forecasts being relatively in line with the Street’s.
HSBC estimates vs. consensus
___________ HSBC ____________ _________ Consensus _________ ____ HSBC vs. consensus ______ IDRbn 2015e 2016e 2017e 2015e 2016e 2017e 2015e 2016e 2017e
Sales 13,421 14,794 16,310 14,432 15,969 17,571 -7.0 -7.4 -7.2 EBITDA 2,495 3,435 4,281 2,851 3,478 3,995 -12.5 -1.2 7.1 Net Profit 61 423 811 641 806 1,002 -90.5 -47.5 -19.0
Source: Thomson Reuters Datastream, HSBC
IFAR’s earnings and stock are highly sensitive to CPO price
Investors must note the relatively high correlation between IFAR’s stock and CPO price. This is not
without reason. A 1% change in our CPO price assumptions of USD656/tonne in 2016e and
USD688/tonne in 2017e would change our IFAR’s earnings estimate by 10% and 5.5%, respectively.
EQUITIES PALM PLANTATIONS
20 January 2016
76
IFAR’s stock price has had a correlation of 0.85x with CPO prices since end-2011
Source: Thomson Reuters Datastream, HSBC
IFAR’s earnings change by 6-10% for every 1% change in CPO
Source: HSBC
TP set at 2016e EV/EBITDA of 5.9x (1.5SD above 5-yr avg.)
Despite a weak returns profile, we believe that IFAR’s stock would trade close to its cyclical
peak once the CPO upcycle takes off. Relative to its own history, the stock has generally traded
within one standard deviation of its five-year average one-year forward EV/EBITDA of 4.2x.
450
600
750
900
1,050
1,200
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15
IFAR (SGD, LHS) CPO price (USD/MT, RHS)
-102
-50-20
020
50
100
-57-28
-11
0 1128
55
-150.0
-100.0
-50.0
0.0
50.0
100.0
150.0
-10% -5% -2% 0% 2% 5% 10%
Change in CPO price assumption
Change in 2016 EPS Change in 2017 EPS
IFAR’s one-year forward EV/EBITDA peaked at around 5.9x in mid-2014
Source: Thomson Reuters Datastream, HSBC
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
8.0x
9.0x
Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15
IFAR -2σ -σ Avg. +σ +2σ
77
EQUITIES PALM PLANTATIONS
20 January 2016
However, it has powered through this level on the upside in the case of a strong CPO price
recovery. Given our forecast of a rebound in CPO prices in 2016-17, we think that the stock is
likely to trade closer to its recent peak than within its typical range. Consequently, we establish
our target price of SGD0.56 based on a one-year forward EV/EBITDA of 5.9x, which is 1.5
standard deviations above the five-year average of this metric and close to its peak one-year
forward EV/EBITDA in the recent past. With our target price set at SGD0.56, we initiate a Buy
rating on the stock.
Our choice of EV/EBITDA over other valuation metrics, such as PE and PB, is driven by the fact
that EBITDA will not be impacted by the company’s switch to IAS 16 from 1 January 2016 and
the calculation EBITDA will remain consistent with history. On the other hand, both earnings
and book value are set to contract due to IAS 16, skewing historical comparisons.
While the accounting change will result in lower earnings and book value, it would have no
impact on the company’s cash flows. As a result, we expect PE and PB multiples for Singapore-
listed plantations stocks to rise. Indeed, our target price implies a 2016e PE of 18.4x, which is
more than two standard deviations (17.6x) above the five-year average one-year forward PE.
IFAR: One-year forward PE relative to historical average
Source: Thomson Reuters Datastream, HSBC
IFAR: Long-term one-year forward PE trading band on consensus estimates
Source: Thomson Reuters Datastream, HSBC
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
16.0x
18.0x
20.0x
Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15
PE -2σ -1σ Avg +1σ +2σ
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15
P 8.0x 10.0x 12.0x 14.0x 16.0x
IAS 16 adoption leaves only
EV/EBITDA consistent with
history but PE/PB would be
higher as EPS/BV decline
EQUITIES PALM PLANTATIONS
20 January 2016
78
TP discounts CPO price of USD700-750/tonne at CoE of 15.7%
Since historical PE and PB trading range are likely to be less relevant in assessing the fair value
of the stock after IAS 16 adoption, we back-test our EV/EBITDA-based target price using a DCF
methodology. Our medium-term forecasts for CPO price (FOB, Malaysia) are in the range of
USD700-750/tonne and we estimate that these would generate a FCFE yield of 7-10% at our
target price of SGD0.56. In other words, our target price discounts CPO price of USD700-
750/tonne at a relatively high cost of equity of almost 16%. Such a modest cost of equity implies
there is upside to what may be considered a conservative EV/EBITDA-based valuation,
particularly due to the stock’s high correlation to CPO prices.
DCF discounts our CPO price & FCFE forecasts at relatively high CoE of 15.7%
CoE 15.7% Terminal growth rate of FCFE 0.0% CPO Price - FOB Malaysia - USD/tonne 567 656 688 708 729 751
YE December, USDm 2015e 2016e 2017e 2018e 2019e 2020e
EBITDA 2,508 3,435 4,281 4,790 5,159 5,612 Capex -2,939 -2,336 -2,419 -2,548 -2,700 -2,868 Δ Wkg. Cap. 992 -389 31 -89 -115 -138 Tax paid -684 -418 -582 -724 -811 -921 Interest paid, Net -593 -679 -677 -655 -636 -618
FCFE -716 -388 633 774 897 1,066
FCFE Yield % -6.7 -3.4 5.8 7.3 8.7 10.3 PV of explicit FCFE (2015-20e) - USDm 936 PV of terminal value - USDm 6,791
Fair Market Value (USDm) 7,727
FX (SGD/USD) 9,784
Fair Value/share (SGD) 0.56
Source: HSBC estimates
Cash flow statement
IDRbn 2012a 2013a 2014a 2015e 2016e 2017e
PBT 2,464 1,338 2,009 374 1,223 2,080 Depreciation & Amortization 590 783 813 1,002 1,372 1,463 Net Interest Expense 267 354 529 591 680 678 Others/Wkg. Cap. -117 773 663 477 -238 91 Interest received 269 185 234 122 94 95 Interest paid -524 -518 -734 -715 -774 -773 Income tax paid -820 -749 -725 -681 -418 -582 CFO 2,128 2,166 2,790 1,171 1,939 3,051 Capex -3,144 -3,369 -3,418 -2,938 -2,336 -2,419 Investment in Associates/JVs -171 -978 -151 -836 0 0 Others -162 -484 -145 438 0 0 CFI -3,477 -4,830 -3,714 -3,336 -2,336 -2,419 Dividends paid -32 -96 -68 -72 -99 -99 Minority dividends -386 -292 -177 -246 -39 -165 Stocks issued 0 0 0 0 0 0 Stocks bought back -43 0 0 -152 0 0 Other Financing 57 -83 -61 505 0 0 Debt repaid -2,040 -3,116 -2,838 -3,521 -134 -706 Debt issued 1,560 4,707 3,833 3,872 669 338 CFF -884 1,119 690 385 397 -633
Source: Company, HSBC estimates
The company’s net debt is likely to decline after 2016 as cash flows from operations rise to a
level to exceed capex and dividend payout.
79
EQUITIES PALM PLANTATIONS
20 January 2016
Balance sheet
IDRbn 2012 2013 2014 2015e 2016e 2017e Cash and equivalents 5,082 3,803 3,586 1,900 1,900 1,900 Trade and other receivables 1,223 1,140 1,056 1,255 1,613 1,599 Inventories 1,889 1,568 1,773 2,313 2,954 2,919 Prepaid taxes 123 134 231 343 343 343 Short term investments 0 293 166 319 319 319 Total current assets 8,318 6,938 6,812 6,130 7,130 7,081 Property, plant and equipment 8,461 9,781 11,027 11,532 11,989 12,593 Biological assets 12,586 13,893 15,061 15,930 13,277 13,628 Other non-current assets 5,447 7,093 7,255 7,939 7,779 7,719 Total non-current assets 26,493 30,767 33,342 35,400 33,044 33,940 Interest-bearing loans and borrowings 2,664 4,490 4,749 6,151 6,151 6,151 Trade payables and accruals 1,854 1,937 2,058 2,078 2,680 2,661 Income taxes payable + others 92 77 144 449 449 552 Total current liabilities 4,609 6,504 6,951 8,678 9,279 9,364 Interest-bearing loans and borrowings 4,116 4,305 5,068 4,572 5,107 4,738 Others 3,258 4,062 4,418 4,546 4,046 4,046 Total non-current liabilities 7,374 8,367 9,486 9,118 9,153 8,784 Shareholders’ Equity 13,796 14,007 14,629 14,113 11,778 12,386 Minority interests 9,032 8,826 9,088 9,622 9,965 10,486
Source: Company, HSBC estimates
IFAR: P&L
IDRbn 2012a 2013a 2014a 2015e 2016e 2017e Plantations 8,388 8,450 10,278 8,644 9,523 10,721 y-o-y % -1.1 0.7 21.6 -15.9 10.2 12.6 Edible oils & fats 9,561 8,627 9,835 8,462 9,979 10,904 y-o-y % 5.4 -9.8 14.0 -14.0 17.9 9.3 Eliminations -4,105 -3,798 -5,149 -3,685 -4,708 -5,316
Total revenue 13,845 13,279 14,964 13,421 14,794 16,310 y-o-y % 9.8 -4.1 12.7 -10.3 10.2 10.2 Cost of Sales -9,658 -10,076 -10,595 -10,377 -11,080 -11,699 Gross Profit 4,187 3,203 4,369 3,043 3,714 4,611 Gross margin (%) 30.2 24.1 29.2 22.7 25.1 28.3 y-o-y % -9.0 -23.5 36.4 -30.3 22.0 24.2 EBITDA (Co. Reported excl. gains/(loss) from FX & biological assets) 3,224 2,609 3,401 2,160 3,275 4,221
includes JV & Associate contribution -37 -6 -121 -246 -160 -60 Plantations 2,600 2,263 3,212 2,216 3,177 4,005 Edible oils & fats 515 393 200 226 257 276 Eliminations 109 -41 110 -36 0 0
Others 0 0 0 0 0 0 Plantation EBITDA margin% 31.0 26.8 31.3 25.6 33.4 37.4 Edible oils & fats margin% 5.4 4.6 2.0 2.7 2.6 2.5 Operating Profit 2,693 1,836 2,709 1,493 2,062 2,818 Operating margin % 19.4 13.8 18.1 11.1 13.9 17.3 y-o-y % -18.6 -31.8 47.5 -44.9 38.2 36.6 JV and Associates -37 -6 -121 -246 -160 -60 Forex gains/(losses) 19 -201 -111 -282 0 0 Gains from sale of Biological assets 56 62 60 0 0 0 EBIT 2,731 1,691 2,538 965 1,902 2,758 EBIT margin % 19.7 12.7 17.0 7.2 12.9 16.9 y-o-y % -18.6 -38.1 50.0 -62.0 97.1 45.0 Financial income 249 185 228 118 94 95 Interest rate% 3.8 3.6 6.0 3.3 5.0 5.0 Financial expenses -516 -539 -757 -709 -774 -773 Interest rate% 7.1 8.0 8.6 7.2 7.2 6.9 Others income/(expenses) 0 0 0 0 0 0 PBT 2,464 1,338 2,009 374 1,223 2,080 Tax -596 -380 -679 -224 -418 -582 Tax rate % 24.2 28.4 33.8 59.8 34.2 28.0 PAT 1,868 958 1,330 150 805 1,498 Minorities -786 -408 -569 -90 -382 -686 Net Profit 1,082 549 760 61 423 811 Net Margin % 7.8 4.1 5.1 0.5 2.9 5.0 y-o-y % -8.6 -49.2 38.4 -92.0 597.3 91.8 Net Profit Adjusted 1,007 689 811 342 423 811 Net Margin Adjusted % 7.3 5.2 5.4 2.6 2.9 5.0 y-o-y % -11.5 -31.6 17.8 -57.8 23.5 91.8 Basic EPS (IDR) 754 388 536 43 298 572 DPS (IDR) 95.6 67.8 71.9 70.0 70.0 143.1 Payout (%) - on adjusted income 13.6 14.0 12.6 29.0 23.5 25.0
Source: Company, HSBC estimates
EQUITIES PALM PLANTATIONS
20 January 2016
80
Key downside risks to target price and rating
Volatility in CPO prices: Higher prices are better for earnings and multiples
Weather: Changes in rainfall patterns (caused by either El Niño or La Niña) would affect
FFB yields and CPO prices with some lag.
Stronger USD vs. IDR is typically supportive of earnings since costs are largely in IDR
whereas CPO price trades as a USD-denominated commodity. The margin gains from USD
strength are most significant, if IDR weakness doesn’t spark cost inflation.
Change in expansion plans could result in material changes to our volume growth, capex,
leverage and interest expense forecasts.
Regulatory tariffs: IFAR primarily sells its products in Indonesia so it is not directly
impacted either by either the Indonesian export tax/levies or the import duties imposed in
key markets, like India. However, an indirect impact cannot be ruled out. Higher cross-
border tariffs increase competition in higher margin local market.
Macro-environment and investor sentiment regarding emerging market equities:
Changes in fund flows in or out of emerging markets would affect valuations.
81
EQUITIES PALM PLANTATIONS
20 January 2016
Financials & valuation: Indofood Agri Resources Buy Financial statements
Year to 12/2014a 12/2015e 12/2016e 12/2017e
Profit & loss summary (IDRbn)
Revenue 14,964 13,421 14,794 16,310
EBITDA 3,523 2,495 3,435 4,281
Depreciation & amortisation -813 -1,002 -1,372 -1,463
Operating profit/EBIT 2,709 1,493 2,062 2,818
Net interest -529 -591 -680 -678
PBT 2,009 374 1,223 2,080
HSBC PBT 1,490 566 841 1,394
Taxation -679 -224 -418 -582
Net profit 760 61 423 811
HSBC net profit 811 342 423 811
Cash flow summary (IDRbn)
Cash flow from operations 2,790 1,171 1,939 3,051
Capex -3,418 -2,938 -2,336 -2,419
Cash flow from investment -3,714 -3,336 -2,336 -2,419
Dividends -68 -72 -99 -99
Change in net debt 1,240 2,591 535 -368
FCF equity 552 -256 -397 633
Balance sheet summary (IDRbn)
Intangible fixed assets 3,254 3,254 3,254 3,254
Tangible fixed assets 29,678 30,321 28,125 29,081
Current assets 6,812 6,130 7,130 7,081
Cash & others 3,586 1,900 1,900 1,900
Total assets 40,155 41,530 40,175 41,021
Operating liabilities 6,620 7,073 7,174 7,259
Gross debt 9,817 10,722 11,257 10,889
Net debt 6,232 8,822 9,357 8,989
Shareholders’ funds 14,629 14,113 11,778 12,386
Invested capital 29,538 30,732 29,435 30,256
Ratio, growth and per share analysis
Year to 12/2014a 12/2015e 12/2016e 12/2017e
Y-o-y % change
Revenue 12.7 -10.3 10.2 10.2
EBITDA 34.5 -29.2 37.7 24.6
Operating profit 47.5 -44.9 38.2 36.6
PBT 50.2 -81.4 226.6 70.1
HSBC EPS 17.8 -57.8 23.5 91.8
Ratios (%)
Revenue/IC (x) 0.5 0.4 0.5 0.5
ROIC 6.3 2.0 4.5 6.8
ROE 5.7 2.4 3.3 6.7
ROA 4.7 1.1 3.2 5.1
EBITDA margin 23.5 18.6 23.2 26.2
Operating profit margin 18.1 11.1 13.9 17.3
EBITDA/net interest (x) 6.7 4.2 5.1 6.3
Net debt/equity 26.3 37.2 43.0 39.3
Net debt/EBITDA (x) 1.8 3.5 2.7 2.1
CF from operations/net debt 44.8 13.3 20.7 33.9
Per share data (IDR)
EPS Rep (diluted) 536.40 42.79 298.42 572.36
HSBC EPS (diluted) 572.34 241.55 298.42 572.36
DPS 71.87 70.00 70.00 143.09
Book value 10321.65 9958.06 8310.15 8739.42
Key forecast drivers
Year to 12/2014a 12/2015e 12/2016e 12/2017e
Mature planted area (ha) 185,181 196,128 205,130 211,264
CPO production (’000 tonnes) 956 977 959 1,053
PKO production (’000 tonnes) 241 281 265 309
Plantation EBITDA Margin (%) 31 26 33 37
Edible Oils & Fats EBITDA Marg (%) 2 3 3 3
Biological Asset Value/ha (USD) 3,822 3,539 2,877 2,919
Valuation data
Year to 12/2014a 12/2015e 12/2016e 12/2017e
EV/sales 1.2 1.5 1.4 1.3
EV/EBITDA 5.3 8.1 6.1 4.9
EV/IC 0.6 0.7 0.7 0.7
PE* 7.7 18.2 14.7 7.7
PB 0.4 0.4 0.5 0.5
FCF yield (%) 4.5 -2.3 -3.4 5.2
Dividend yield (%) 1.6 1.6 1.6 3.3
* Based on HSBC EPS (diluted)
Issuer information
Share price (SGD) 0.46 Free float 28%
Target price (SGD) 0.56 Sector Food & Staples Retailing
Reuters (Equity) IFAR.SI Country Indonesia
Bloomberg (Equity) IFAR SP Analyst Shishir Singh
Market cap (USDm) 457 Contact +852 2822 4292
Price relative
Source: HSBC
Note: Priced at close of 15 Jan 2016
0.37
0.47
0.57
0.67
0.77
0.87
0.97
1.07
1.17
0.37
0.47
0.57
0.67
0.77
0.87
0.97
1.07
1.17
2014 2015 2016 2017Indofood Agri Resources Rel to STRAITS TIMES INDEX
EQUITIES PALM PLANTATIONS
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82
Notes
83
EQUITIES PALM PLANTATIONS
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Notes
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84
Notes
85
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20 January 2016
Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Shishir Singh
Important disclosures
Equities: Stock ratings and basis for financial analysis
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons
when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different
securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and
therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should
carefully read the entire research report and not infer its contents from the rating because research reports contain more
complete information concerning the analysts' views and the basis for the rating.
From 23rd March 2015 HSBC has assigned ratings on the following basis:
The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12
months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will
be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a
Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is
between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more
than 20% below the current share price, the stock will be classified as a Reduce.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage,
change in target price or estimates).
Upside/Downside is the percentage difference between the target price and the share price.
Prior to this date, HSBC’s rating structure was applied on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate,
regional market established by our strategy team. The target price for a stock represented the value the analyst expected the
stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as
Overweight, the potential return, which equals the percentage difference between the current share price and the target price,
including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the
succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight,
the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or
10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.
*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12
months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However,
stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the
past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
EQUITIES PALM PLANTATIONS
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86
Rating distribution for long-term investment opportunities
As of 20 January 2016, the distribution of all ratings published is as follows:
Buy 47% (31% of these provided with Investment Banking Services)
Hold 39% (29% of these provided with Investment Banking Services)
Sell 14% (18% of these provided with Investment Banking Services)
For the purposes of the distribution above the following mapping structure is used during the transition from the previous to
current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current
model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis
for financial analysis” above.
Share price and rating changes for long-term investment opportunities
Indofood Agri Resources (IFAR.SI) share price
performance SGD Vs HSBC rating history
Rating & target price history
From To Date
Underweight Neutral 06 February 2013 Neutral Underweight 15 August 2013 Underweight Neutral 09 October 2014 Neutral Overweight 26 January 2015 Overweight Buy 31 March 2015 Buy N/A 12 May 2015
Target price Value Date
Price 1 1.41 06 February 2013 Price 2 0.72 15 August 2013 Price 3 0.69 18 September 2013 Price 4 0.76 28 January 2014 Price 5 0.81 03 March 2014 Price 6 0.93 08 June 2014 Price 7 0.86 09 October 2014 Price 8 0.90 19 October 2014 Price 9 0.85 26 January 2015 Price 10 0.84 27 February 2015 Price 11 0.89 31 March 2015 Price 12 N/A 12 May 2015 Source: HSBC
Source: HSBC
First Resources (FRLD.SI) share price performance SGD
Vs HSBC rating history
Rating & target price history
From To Date
Overweight Buy 31 March 2015 Buy N/A 12 May 2015
Target price Value Date
Price 1 2.74 06 February 2013 Price 2 2.67 27 February 2013 Price 3 2.28 18 September 2013 Price 4 2.47 13 November 2013 Price 5 2.72 28 January 2014 Price 6 2.75 25 February 2014 Price 7 2.92 08 June 2014 Price 8 2.54 13 August 2014 Price 9 2.45 19 October 2014 Price 10 2.31 13 November 2014 Price 11 2.41 26 January 2015 Price 12 2.37 26 February 2015 Price 13 2.35 31 March 2015 Price 14 N/A 12 May 2015 Source: HSBC
Source: HSBC
0
0.5
1
1.5
2
2.5
3
Jan-
11
Jan-
12
Jan-
13
Jan-
14
Jan-
15
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16
0
0.5
1
1.5
2
2.5
3
Jan-
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Jan-
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Jan-
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87
EQUITIES PALM PLANTATIONS
20 January 2016
Wilmar International (WLIL.SI) share price performance
SGD Vs HSBC rating history
Rating & target price history
From To Date
Underweight Neutral 28 January 2014 Neutral Hold 24 March 2015 Hold N/A 12 May 2015
Target price Value Date
Price 1 3.36 06 February 2013 Price 2 3.25 08 May 2013 Price 3 2.96 18 September 2013 Price 4 3.17 07 November 2013 Price 5 3.49 28 January 2014 Price 6 3.60 20 February 2014 Price 7 3.46 11 May 2014 Price 8 3.35 10 August 2014 Price 9 3.26 19 October 2014 Price 10 3.46 26 January 2015 Price 11 3.39 12 February 2015 Price 12 3.29 24 March 2015 Price 13 N/A 12 May 2015 Source: HSBC
Source: HSBC
Golden Agri-Resources (GAGR.SI) share price
performance SGD Vs HSBC rating history
Rating & target price history
From To Date
Neutral Overweight 06 February 2013 Overweight Neutral 04 August 2013 Neutral Underweight 12 November 2013 Underweight Overweight 28 January 2014 Overweight Neutral 14 August 2014 Neutral Hold 01 April 2015 Hold N/A 12 May 2015
Target price Value Date
Price 1 0.75 06 February 2013 Price 2 0.69 13 May 2013 Price 3 0.59 04 August 2013 Price 4 0.58 18 September 2013 Price 5 0.55 12 November 2013 Price 6 0.65 28 January 2014 Price 7 0.67 03 March 2014 Price 8 0.58 14 August 2014 Price 9 0.53 19 October 2014 Price 10 0.46 26 January 2015 Price 11 0.43 01 April 2015 Price 12 N/A 12 May 2015 Source: HSBC
Source: HSBC
2
3
4
5
6
7
8
Jan-
11
Jan-
12
Jan-
13
Jan-
14
Jan-
15
Jan-
16
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Jan-
11
Jan-
12
Jan-
13
Jan-
14
Jan-
15
Jan-
16
EQUITIES PALM PLANTATIONS
20 January 2016
88
HSBC & Analyst disclosures
Disclosure checklist
Company Ticker Recent price Price date Disclosure
GOLDEN AGRI-RESOURCES GAGR.SI 0.36 19-Jan-2016 6
INDOFOOD AGRI
RESOURCES
IFAR.SI 0.44 19-Jan-2016 2
WILMAR INTERNATIONAL WLIL.SI 2.78 19-Jan-2016 2, 5, 6
Source: HSBC
1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months.
2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3
months.
3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company.
4 As of 31 December 2015 HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5 As of 30 November 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services.
6 As of 30 November 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-investment banking securities-related services.
7 As of 30 November 2015, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-securities services.
8 A covering analyst/s has received compensation from this company in the past 12 months.
9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below.
10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below.
11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of
companies covered in HSBC Research on a principal or agency basis.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking revenues.
Whether, or in what time frame, an update of this analysis will be published is not determined in advance.
Economic sanctions imposed by the EU and OFAC prohibit transacting or dealing in new debt or equity of Russian SSI entities.
This report does not constitute advice in relation to any securities issued by Russian SSI entities on or after July 16 2014 and as
such, this report should not be construed as an inducement to transact in any sanctioned securities.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.
Additional disclosures
1 This report is dated as at 20 January 2016.
2 All market data included in this report are dated as at close 15 January 2016, unless otherwise indicated in the report.
3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.
89
EQUITIES PALM PLANTATIONS
20 January 2016
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