At the crossroads - Mirae Asset

Analysts who prepared this report are registered as research analysts in Indonesia but not in any other jurisdiction. PLEASE SEE

ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.

Plantation At the crossroads

Initiate coverage on the planation sector with a neutral stance

Palm oil is one of vegetable oil which is consumed by people around the world. US

Department of Agriculture (USDA) estimates 75% of palm oil is used for food and 25%

for non-food purposes, such as biofuel. However, we expect clouded financial

performance outlook of palm oil companies in the near horizon given lingering

challenges. Our key concerns are: La Nina may potentially place negative impact on palm

oil production while prolonged low commodity prices (in particular, crude oil) could keep

palm oil less attractive. We initiate coverage on the plantation sector with a neutral call.

We forecast global palm oil price to reach USD636/ton and USD674/ton in 2016F and

2017F, respectively. Our global palm oil projection is based on Brent crude oil price of

USD45/barrel and USD47/barrel in 2016F and 2017F, respectively.

Indonesia has a competitive advantage vs. Malaysia in terms of CPO supply

Global palm oil production has been dominated by Indonesia and Malaysia which

accounted for 85.4% of total global production (2015). Indonesia and Malaysia’s crude

palm oil (CPO) production stood at 33.0mn tons and 20.5mn tons, respectively. We

believe that Indonesia can maintain its position as the top-producer over the longer term

on the back of improving oil palm yield and also larger oil palm plantation area compared

to Malaysia. We predict that Indonesia’s palm oil production will reach 34.3mn tons and

35.7mn tons in 2016F and 2017F, respectively. We underscore that Indonesian palm

production grew 6.8% CAGR from 2011 to 2015.

Global palm oil consumption drivers are Indonesia and India

We predict that global palm oil consumption will reach 63.3mn tons and 66.5mn tons in

2016F and 2017F, respectively, in-line with increasing population. Furthermore, we

consider the key countries behind the robust global palm oil consumption to be

Indonesia and India. Meanwhile, our key concern is that China’s palm oil consumption

growth will decelerate, as the country’s vegetable oil consumption is shifting to rape and

soybean oil. We predict that Indonesia’s palm oil consumption will reach 9.3mn tons and

10.0mn tons in 2016F and 2017F, respectively. We are less convinced that India would

be independent from palm oil imports (chiefly due to the unfavorable geographic

limitations) despite Indian government’s efforts to promote oil palm cultivation.

Our top picks are LSIP and SSMS

Within our plantation coverage, our top picks are: London Sumatra Indonesia (LSIP/ Buy)

for its healthy balance sheet and Sawit Sumbermas Sarana (SSMS/ buy) for its high CPO

yield. Meanwhile, we rate Sampoerna Agro (SGRO) a Hold due to its high interest

expense burden and also call Astra Agro Lestrari (AALI) a Hold due to its old-age oil palm

profile and diversification to the downstream business (which is expected to dilute its

profitability margins). Risks to our call are 1) global CPO supply/demand imbalance, 2)

volatility in global crude oil prices, 3) unpredictable regulation risks, 4) unexpected

weather changes, and 5) weak infrastructure situations.

Palm oil companies covered in this report

Company name Ticker Rating TP

(IDR)

ROE (%) P/E (x) P/B (x)

2016F 2017F 2016F 2017F 2016F 2017F

Astra Agro Lestari AALI HOLD 15,850 2.9 3.3 78.5 66.7 2.3 2.2

PP London Sumatra LSIP BUY 2,040 7.3 7.4 19.0 18.1 1.4 1.3

Sampoerna Agro SGRO HOLD 1,875 6.0 6.0 18.3 17.5 1.1 1.0

Sawit Sumbermas Sarana SSMS BUY 2,150 17.0 16.8 26.5 23.4 4.5 3.9

Source: Daewoo Securities Research

Neutral (Initiate)

Initiation

August 30, 2016

PT Daewoo Securities Indonesia

Agriculture

Andy Wibowo Gunawan

+62-21-515-1140

[email protected]

Plantation

2

August 30, 2016

Daewoo Securities Indonesia Research

Palm oil at glance

Palm oil is an important, yet versatile vegetable oil which is used by raw materials for both food

and non-food industries. US Department of Agriculture (USDA) estimates that 75% of palm oil is

used for food, and the remaining 25% for non-food. Palm oil can be extracted from both the fruit

(mesocarp) and the seed (kernel). Crude palm oil (CPO) is extracted from the mesocarp and is

mainly used for cooking purposes, while palm kernel oil is extracted from the kernel and is mainly

used in non-edible products such as detergents, cosmetics and plastics.

Quick facts about palm oil:

1. Palm oil trees can grow up to 20 meters tall with an average life of 25 years.

2. Palm oil tress grow across or 10 degrees north or south of the equator.

3. The tree starts to bear fresh fruit bunches (FFB) after three years.

4. Palm oil can be harvested every 12 months of the year.

Figure 1. Cross section of an oil palm fruit Figure 2. Palm oil usage

Source: Centre for International Forestry Research, Daewoo Securities Research

Source: USDA, Daewoo Securities Research

Figure 3. Fresh fruit bunch picture Figure 4. Palm oil tree

Source: greenstokmedia.com, Daewoo Securities Research

Source: tdg24.com, Daewoo Securities Research

A young palm tree produces about 30 leaves a year. Established palms over 10 years produce

about 20 leaves a year. The flowers are produced in dense clusters and each individual flower is

small, with three sepals and three petals. The palm fruit takes five to six months to mature from

pollination to maturity. It is reddish, about the size of a large plum, and grows in large bunches.

Each fruit is covered up with an oily, fleshy outer layer (the pericarp), with a single seed (the palm

kernel), which is also rich in oil. When ripe, each fruit bunch weighs between 5–30kg depending on

the age.

75

25

Food

Non-food

(%)

Plantation

3

August 30, 2016


Oil palms generally begin to produce fruits three years after being planted in the fields with

commercial harvest able to be commenced six months later. However, the yield of an oil palm is

relatively low at this stage. As the oil palm continues to mature, its yield increases and it reaches

peak production during ages from 7 to 13 years old. Yield starts to gradually decrease after 14

years. The typical commercial lifespan of an oil palm is approximately 25 years.

Fully mature oil palms produce 18 to 30 metric tons of FFB per hectare. The yield depends on a

variety of factors, including age, seed quality, soil and climatic conditions, quality of plantation

management and the timely harvesting and processing of FFB. The ripeness of FFB harvested is

critical in maximizing the quality and quantity of palm oil extracted. Harvested fruits must be

processed within 24 hours to minimize the build-up of free fatty acids (FFA).

Figure 5. Palm oil yield & age profile Figure 6. CPO usage based on FFA

Source: Palmoilworld, Daewoo Securities Research

Source: Nippon-cnpc, Daewoo Securities Research

Milling of FFB takes place within 24 hours from the harvesting of FFB. They are initially transferred

to the palm oil mills for sterilization by applying high-pressure steam, whereupon the palm fruits

are enzyme-deactivated and separated from the palm bunches.

After steaming, the palm fruitlets are crushed in a pressing machine to obtain CPO and palm kernel.

Waste and water is then cleared and separated from the CPO by means of a centrifuge. The

cleared crude palm oil emerging from the centrifuge is then sent for refining while the palm kernel

nut is sent for crushing. The empty fruit bunches and liquid waste arising from the processing are

recycled as fertilizer in the plantations.

Figure 7. Palm oil supply chain

Source: Alibaba, Daewoo Securities Research

Palm oil mill

High FFA CPO

(FFA: 20% - 30% )

CPO

(FFA: <5% )Palm acid oil (PAO)

(FFA: >30% )

Non Food Food Non Food

Plantation

4

August 30, 2016


Indonesia to maintain its position as the top producer

Global palm oil production had been dominated by Indonesia and Malaysia which accounted to

85.4% of global total production by 2015. Last year, Indonesia and Malaysia produced 33.0mn tons

and 20.5mn tons respectively. Rewinding back to 1980, Indonesia palm oil production represented

a mere 14.3% of total global production (702,000 tons), while Malaysia dominated up to 51.9% of

total global production (2.5mn tons). 26 years later, Indonesia overtook the first place as the top

global palm oil producer. The mainly reason was dramatically increased area under plantation.

In terms of amount, Indonesia’s palm oil production jumped more than double to 33.0mn tons in

2015, compared to a decade ago which stood at 13.6mn tons. Meanwhile, Malaysia palm oil

production increased to 20.5mn tons in 2015, from 15.2mn tons in 2005. This was mainly because

Indonesia has larger plantation area compared to Malaysia. All in all, Indonesia is expected to

produce more than 40.0mn tons of palm oil by 2020 without any expansion plans, according to

Indonesia Sustainable Palm Oil (ISPO). Furthermore, smallholders palm oil plantation in Indonesia is

known to own an average farm size of 4.0~ 6.0 ha which would equate to an aggregate total of

1.0mn ha~ 1.5mn ha across the nation.

Figure 8. Indonesia & Malaysia palm oil production trends Figure 9. Indonesia the first rank as producer since 2006

Source: Bloomberg, Daewoo Securities Research


Indonesia oil palm yield improved, despite lower than Malaysia

By 2015, Indonesia oil palm yield had increased to 3.7ton/ha – an improvement by 0.6ton/ha

compared to 1979. However this improvement fell slightly below Malaysian oil palm yield which

stood at 3.8ton/ha, last year. We ascribe the more sophisticated cultivation technique to be one of

the reasons why Malaysian oil palm yield was higher than Indonesia. Meanwhile, younger palm oil

age in Indonesia is another reason why Indonesian oil palm yield was lower, in our view. We

consider Malaysia’s early palm oil cultivation (vs. Indonesia) to be a key advantage of its stellar yield.

Figure 10. Malaysia has higher palm oil yield Figure 11. However Indonesia palm oil yield improved

Source: USDA, MPOB, Daewoo Securities Research

Source: USDA, Utrecht University, Daewoo Securities Research

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

('000 tons) Indonesia Malaysia

-

20.0

40.0

60.0

80.0

100.0

120.0

(%) Indonesia Malaysia Others

3.7

3.8

3.6

3.7

3.7

3.8

3.8

3.9

3.9

Indonesia Malaysia

(ton/ha)

3.1

3.6

3.5 3.5

3.7

2.8

2.9

3

3.1

3.2

3.3

3.4

3.5

3.6

3.7

3.8

1979 1989 1999 2005 2015

(ton/ha)

Plantation

5

August 30, 2016


Indonesia has larger oil palm plantation area than Malaysia

Malaysia’s oil palm planted area reached 5.6mn ha, an increase of 4.6% YoY. This was mainly due to

the increase in new planted areas especially in Sarawak, which recorded an increase of 13.9% YoY.

Sabah is still the largest palm oil planted area, with 1.5mn ha, or 27.0% of total palm oil planted

area in Malaysia. In the meanwhile, Indonesia’s palm oil planted area stood at 10.8mn ha which is

almost double compared to Malaysia’s planted area (5.6mn ha).

During 1978~ 2003, Indonesia’s oil palm land area under palm oil production was boosted by

4.6mn ha. However, we underscore that the new oil palm plantation area was recently added.

2.6mn ha worth of new plantation land was added recently from 1997~ 2003. Unfortunately, the

pace of addition was much lower compared to Malaysia which jumped from 600,000 ha in 1975 to

4.2mn ha in 2006.

Figure 12. Higher planted area palm oil in Indonesia Figure 13. Malaysia planted area slightly increased by 2015


Source: MPOB, Daewoo Securities Research

Indonesian farmers prefer oil palm plantation over others

Not only was Indonesia’s oil palm plantation dominated by large-scale conglomerates, small

holders also favored oil palm plantation. 28.3% of Indonesia plantation was dominated by palm oil,

followed by coconut (22.3%), rubber (19.0%), cocoa (10.2%), and coffee (7.4%) in 2014.

Furthermore, Indonesia’s palm oil plantation area which was operated by small holders doubled to

2.5mn ha in 2006 from1.2mn ha in 2000. The plantation area grew to 4.5mn ha in 2014. This

increase in the plantation area was triggered by the commodity boom which lasted for several

years.

Additionally, small holders sell their palm oil to nearby large-scale plantation companies in the form

of bunches (also called FFB). FFBs are sold through an auction scheme, where the benchmark price

changes daily in respective areas. The benchmark price also factors in the global oil palm price

movement.

Figure 14. Palm oil dominated in smallholders plantation Figure 15. Indonesia smallholders palm oil area trends

Source: BPS, Daewoo Securities Research

Source: BPS, Daewoo Securities Research

10,325 10,640 10,800

8,115 8,540

8,965

-

2,000

4,000

6,000

8,000

10,000

12,000

2013 2014 2015

('000 ha) Planted Area Harvested Area

5,230

5,329

5,643

5,000

5,100

5,200

5,300

5,400

5,500

5,600

5,700

2013 2014 2015

('000 ha)

19.0

22.3

28.3

7.4

10.2

12.8

Rubber

Coconut

Palm Oil

Coffee

Cocoa

Others

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

('000 ha)

Plantation

6

August 30, 2016


Cooperation with external parties to secure FFB stocks

Occasionally, palm oil companies experience supply shortage in FFBs. Thus, palm oil companies

must secure FFBs from third parties to keep the mills running. However, purchase from third

parties is unsustainable and thus cannot be a long-term resolution. Hence, palm oil companies

additionally secure their long-term FFB supplies through cooperation with local farmers who reside

around the plantation area. This cooperation is called plasma scheme. The following is an example

of a plasma cooperation scheme:

1. Bank will assess the capability of farmers (plasma)

2. Both parties will sign a MoU and explain the rights and obligations

3. After the signing of MoU, palm oil companies will provide debt facilities to finance the

plasma plantation

4. Plasma farmers will receive the funds from palm oil companies (nucleus)

5. Plasma farmers will pay installment to nucleus by selling their FFB to nucleus

Figure 16. Plasma plantation schemes flow

Source: Agrindo Group, Daewoo Securities Research

Figure 17. Plasma plantation work periods

Source: Agrindo Group, Daewoo Securities Research

BANK

Nucleus

(Palm Oil

Company)

Cooperative

Farmers

(Plasma)

Memorandum of

Understanding

1

2

3

4

5

Development Stage Mature Plantation Stage

Tolerance period Return period

0 – 5 year 6 – 13 year

Plantation

7

August 30, 2016


A stepping stone to securing new land bank

On May 20, 2011, Indonesian government released presidential instruction No.10/2011 on “The

postponement of issuance of new licenses and improving governance of primary resources natural

forest and peatland”. The presidential instruction had effectively imposed a 2-year moratorium on

new forest concession licenses. President Jokowi will also issue a moratorium policy for peatland

through instructional president, but it has yet to be declared. This new policy will place negative

implications on palm oil companies as it would be tougher to acquire new land-bank. That being

said, the new policy should act as a key obstacle for expansion of palm oil companies.

According to the Ministry of Agriculture, most of Indonesia peatland are located in Sumatra Island

which contributed to 43.2% of total peatland, followed by Kalimantan and Papua islands which

contributed 32.1% and 24.8%, respectively in 2011. In Indonesia, peatland is categorized into four

tiers based on the thickness of peatland soil. Tiers 1 is the lowest level which has 50 – 100cm of

thickness, whereas tiers 2, 3, and 4 have 101 – 200cm, 201 – 400cm and >400cm thickness,

respectively.

Figure 18. Sumatra peat-land spots Figure 19. Kalimantan peat-land spots

Source: Wetlands International, Daewoo Securities Research

Source: Wetland International, Daewoo Securities Research

Table 1. Indonesia pet-land area with its thickness (‘000 hectare)

Region Thickness Large (%) of total

D1 D2 D3 D4

Sumatra 1,767.3 1,707.8 1,243.0 1,718.6 6,436.6 43.2

Kalimantan 1,048.6 1,389.8 1,072.8 1,266.8 4,778.0 32.1

Papua 2,425.5 817.7 447.7 - 3,690.9 24.8

Total 5,241.4 3,915.3 2,763.5 2,985.4 14,905.6 100.0

Source: Indonesia Agriculture Ministry, Daewoo Securities Research

Plantation

8

August 30, 2016


After dry El Nino, will La Nina occur?

Last year, it was a dry season for Indonesia where palm oil production dropped more than 5% YoY

compared to previous periods. We ascribe this dryness to the El Nino phenomenon. El Nino is a

band of warm ocean water that develops in the central and east-central equatorial pacific. El Nino

is accompanied by high air pressure in the western pacific and low air pressure in the eastern

pacific. There have been approximately 30 El Nino events since 1900, with the 1982-83, 1997-98,

and 2014-16 events which were among the strongest in history.

Figure 20. Southern oscillation index trend

Source: NOAA, Daewoo Securities Research

However, some meteorologists elsewhere (i.e., Australia, USA & Indonesia) predict that the

chances of La Nina in 2016 has increased. According to Australian Bureau Meteorology (BOM),

climate models are indicating 50% possibility of the wet weather event emerging this year (La Nina

is the opposite of the dry El Nino).

We predict that it could further disrupt supply of palm oil this year, as we think La Nina could

cause logistic problems during harvesting seasons. Generally, as the plantation area’s earth is soft

nature, this acts as challenge for farmers to transport FFB down to the main road. Given Indonesia

and Malaysia are the largest palm oil producers, we believe the supply disruptions should drive

global palm oil prices higher.

Figure 21. Rainfall probability distribution Figure 22. Character rainfall probability distribution

Source: BMKG, Daewoo Securities Research

Source: BMKG, Daewoo Securities Research

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Jan-

90

Aug

-90

Mar

-91

Oct

-91

May

-92

Dec

-92

Jul-9

3

Feb-

94

Sep

-94

Apr

-95

Nov

-95

Jun-

96

Jan-

97

Aug

-97

Mar

-98

Oct

-98

May

-99

Dec

-99

Jul-0

0

Feb-

01

Sep

-01

Apr

-02

Nov

-02

Jun-

03

Jan-

04

Aug

-04

Mar

-05

Oct

-05

May

-06

Dec

-06

Jul-0

7

Feb-

08

Sep

-08

Apr

-09

Nov

-09

Jun-

10

Jan-

11

Aug

-11

Mar

-12

Oct

-12

May

-13

Dec

-13

Jul-1

4

Feb-

15

Sep

-15

Plantation

9

August 30, 2016


Palm oil dominated vegetable oils consumption around the world

Edible vegetable oils are some of the most crucial cooking oil ingredients in the world and the

world vegetable oil consumption increased continuously to 173.3mn tons in 2015, or 4.5% CAGR

2011-2015 which was in-line with the global population growth (0.7% CAGR 2011~ 2015). By 2015,

palm oil still dominated as the key vegetable oil consumption which accounted for 35.0% of total

global vegetable oil consumption, followed by soybean, canola, sunflower, and others which

represented 27.0%, 15.6%, 8.8% and 13.6%, respectively.

Figure 23. Global vegetables oil consumption Figure 24. Palm oil was the largest vegetables oil consumption

Source: Statista, Daewoo Securities Research

Source: Statista, Daewoo Securities Research

Global palm oil consumption will be driven by India & Indonesia

Overall, global palm oil consumption increased to 60.3mn tons, or up 5.2% CAGR during 2011 –

2015. This growth was triggered by higher consumption of palm oil in India, Indonesia, and

Eurozone which reached 10.1mn, 8.6mn, and 6.6mn tons, respectively. By contrast, Malaysia and

China palm oil consumption decreased by 5.1% and 1.8% CAGR during 2011 – 2015, respectively

to 3.4mn and 5.8mn tons. Malaysia and China palm oil consumption accounted for 5.6% and 9.5%

of total global consumption in 2015 (vs. 8.4% and 12.5% of total global consumption in 2011). In

addition, the decline in China’s palm oil consumption was largely due to higher soybean import,

which amounted to 81.7mn tons (+14.5% YoY) in 2015 compared to its previous year.

We believe that global palm oil consumption growth will be driven by India and Indonesia on the

back of robust population growth and rising biodiesel consumption in Indonesia. Therefore, we are

optimistic that global consumption of palm oil will reach 63.3mn tons and 66.5mn tons in 2016F

and 2017F, respectively. Meanwhile, our main concern is the potential sharp decline in China’s palm

oil consumption on the back of shifting to rape and soybean oil consumption.

Figure 25. Global palm oil consumption still grow Figure 26. Global portfolio consumption palm oil by 2015



35.0

27.0

15.6

8.8

13.6

Palm Oil

Soybean

Canola

Sunflower

Others

(%)

145.3

151.8

157.7

166.3

173.3

130.0

135.0

140.0

145.0

150.0

155.0

160.0

165.0

170.0

175.0

180.0

2011 2012 2013 2014 2015

(mn tons)

-

50.0

100.0

150.0

200.0

250.0

India Indonesia China Eurozone Malaysia Others

2011 2012 2013 2014 2015(%)

49,343

54,125 57,044 57,393

60,324

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2011 2012 2013 2014 2015

('000 tonnes)

Plantation

10

August 30, 2016


Figure 27. China palm oil consumption decreased Figure 28. The lowest level inventory since 2012



Malaysia’s palm oil consumption to improve

The low palm oil consumption in Malaysia is caused mostly by Malaysia palm oil producers that

export most of their palm oil abroad. We expect that Malaysia palm oil consumption will not

decrease further on the back of higher biodiesel blended rate mandate to 10%, from 7%. We also

think that Malaysia will gradually raise it blended rate mandate program for longer, given Malaysia

thinks that their biodiesel blend rate mandate is too low compared to other peer countries such as

Indonesia, Brazil, Argentina, and etc. With this new blending rate standard, additional palm oil

consumption of 709,000 tons (around 20.0% of total consumption in 2015) annually will be

consumed, according to Jakarta Post.

Total Malaysian palm oil export reached to 18.2mn tons in 2015 (+0.8%YoY). India maintained its

position as the largest export market, with an intake of 29.0% of total palm oil exports, followed

by EU, China, and USA which represented 14.9%, 9.0% and 8.4% of total exports, respectively.

Furthermore, Malaysian government also imposed higher palm oil export duty by 50 bps to 6.0%,

which would lead palm oil exports less attractive. In our view, Malaysian government aims to

secure its biodiesel raw material stock.

Figure 29. Malaysia palm oil export Figure 30. India is dominating Malaysia market export



13.6 13.7 13.8 15.0

15.8 16.1 15.9 16.7

17.5 18.0 18.2

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

(mn tonnes)

9.0

14.9

29.0 8.4

38.7 China

EU

India

USA

Others

150

250

350

450

550

650

750

850

950

1,050

('000 tonnes)

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

('000 tonnes)

Plantation

11

August 30, 2016


Figure 31. Malaysia export duty rate by April 2016 Figure 32. Significant increase in biodiesel consumption



Lower palm oil import in India due to abundant stock

India, with its population more than 1bn, is one the largest vegetable oil consuming destination. In

the first five months of the current oil year (November 2015 – March 2016), India imported

vegetable oils of 6.3mn tons, from 5.4mn tons during the previous oil year (November 2014 –

March 2015). In contrast, during November 2015 – March 2016, palm oil imports have decreased

to 3.3mn tons, from 4.3mn tons during the same previous period a year earlier. We suspect that

lower palm oil imports in India were due to high ending stock still until May 2016. On a monthly

basis, India’s palm oil ending stock stood at 2.4mn tons, or slightly higher than the previous month

which stood at 2.3mn tons.

Figure 33. India palm oil and its derivative import trend


Figure 34. Palm oil dominated oil palm products Figure 35. Higher ending inventory



-

100

200

300

400

500

600

700

800

900

1,000

6/14

8/14

10/14

12/14

2/15

4/15

6/15

8/15

10/15

12/15

2/16

4/16

('000 tonnes)Crude Palm Oil RBD Palmolein

39.0

26.0

0.4

CPO

RBD Palolein

Crude Palm Kernel Oil

(%)

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

6/14

7/14

8/14

9/14

10/14

11/14

12/14

1/15

2/15

3/15

4/15

5/15

6/15

7/15

8/15

9/15

10/15

11/15

12/15

1/16

2/16

3/16

4/16

(mn tonnes)

4.5 5.0

5.5 6.0

6.5 7.0

7.5 8.0

8.5

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

(%)

6,002 6,002 15,006

110,000

150,000

240,000

-

50,000

100,000

150,000

200,000

250,000

300,000

2010 2011 2012 2013 2014 2015

(Tonnes)

Plantation

12

August 30, 2016


Can India break free from palm oil imports?

On the other hand, in order to bolster its edible oil security, India is aggressively pushing for oil

palm cultivation in the country despite its well documented deleterious socio-economy and

ecological impact. Furthermore, India’s edible oil import bill (around USD10bn in 2015) often

remains a focus for business and policy debates and once again policy makers have taken up the

gauntlet to make India self-sufficient in its edible oil requirements. On August 18, 2015, Prime

Minister Modi’s plan to commit USD1.5bn over three years pushed palm oil cultivation higher in

India. This stated target is to take India’s production of palm oil to 8mn tons. We are however less

optimistic that the target will be achieved in the longer term due to structural problems which has

been faced by India, while we believe that India is still a net importer of palm oil products.

Our first argument why India would be hard for India to meet its target in palm oil cultivation is

the unfavorable geographic location. As mentioned above, the ideal locations for oil palm trees are

within ten degrees latitude north and south equator. However, India’s geographic location is not

near the equatorial zone. The geographic location is also related with a climate of a country, while

major India’s climate is four-seasons which definitely it is not appropriate for palm oil tree

cultivation. In addition, long gestation period for palm oil is also our concern because farmers

would have to wait for four years for the trees in India to start yielding FFB.

Figure 36. India geography above equatorial zone

Source: Google maps, Daewoo Securities Research

Table 2. Oil palm plantation area in India (hectares)

State Potential Area Covered Area

Andaman & Nicobar - 1,593

Andhra Pradesh 400,000 96,563

Assam - 10

Chhattisgarh 40,000 -

Goa 2,000 874

Gujarat 90,000 2,175

Karnataka 250,000 18,906

Kerala 6,500 5,501

Maharashtra - 1,000

Mizoram 61,000 7,881

Orissa 25,000 3,775

Tamil Nadu 162,000 16,394

Tripura - 530

West Bengal - -

Total 1,036,500 155,202

Source: Chadha committee, Daewoo Securities Research

Plantation

13

August 30, 2016


How about Indonesia palm oil consumption?

Indonesia palm oil consumption jumped fourfold over the last two decades to 8.6mn tons in 2015.

This amazing growth was chiefly driven by increased population which reached 256mn people in

2015, from 198mn people in 1995. More than 50% of palm oil was used for cooking oil and

remaining was used for the margarine, and biodiesel. We believe that Indonesia’s palm oil

consumption will reach 9.3mn tons and 10.0mn tons in 2016F and 2017F, respectively on the back

of steady population growth and higher biodiesel consumption.

Figure 37. Indonesia palm oil consumption in-line with population


Palm oil is one of the biofuel alternatives for Indonesia

Since 1Q12 Indonesia’s current account deficit (CAD) to GDP crossed the negative territory

beginning with -0.51% and gradually fell deeper to -3.62% in 3Q13. Since the trough, Indonesia’s

CAD to GDP has gradually improved to -2.12% by 1Q16. Our assessment is that the current

account deficit was mainly driven by higher crude oil import stemming from increased car sales

which led to higher gasoline consumption. Indonesia’s daily crude oil consumption increased to

1.6mn barrels/day in 2015 from 1.3mn barrels/day in 2005. Meanwhile, daily production of crude

oil decreased to 825,000barrels/day in 2015, from 1.1mn barrels/day in a decade earlier. Because

of this structural problem, Indonesian government began to promote biodiesel as one of the fuel

alternatives which is mainly taken from palm oil. Indonesia’s biofuel policy is governed by a number

of regulations and decrees. Government regulation 1/2006 was an important first step for the

development of biofuels in Indonesia. In 2008, Indonesian government created a biofuel blending

rate mandate through Ministry of Energy & Mineral (MEMR) regulation 32. The blending rate

mandate regulation has been revised several times, most recently through MEMR regulation 12,

released in March 2015. Additionally, biofuel is energy made from living matter, usually plants.

Bioethanol, biogas and biodiesel are types of biofuels.

Biodiesel is used in standard diesel engine and is thus distinct from the vegetable and waste oils

converted for diesel engines. Biodiesel can be used alone, or blended with petro diesel in any

proportions. Biodiesel blends also can be used as heating oil. Blends of biodiesel and conventional

hydrocarbon-based diesel are products most commonly distributed for use in the retail diesel fuel

marketplace. Much of the world uses a system known as the “B” factor to state the amount of

biodiesel in any fuel mix. A 100% biodiesel is referred to as B100, A 20% of biodiesel and 80%

petro-diesel is labeled B20, and so on. A 55% of biodiesel can be used from palm oil and remaining

be used from other vegetable oils such as soybean, rapeseed, and etc.

50

100

150

200

250

1,000

2,000

3,000

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1995

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2011

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2015

(mn people)('000 tonnes)

Indonesia CPO Consumption Population

Plantation

14

August 30, 2016


Figure 38. Indonesia CAD trends Figure 39. Widening gap between daily cons & prod crude oil


Source: British Petroleum, Daewoo Securities Research

Palm oil export levy is a new funding biodiesel subsidy scheme

Indonesia biodiesel mandates historically have been aggressive. In 2014, blending rates were set at

10.0% and was revised up to 15.0% according to MEMR regulation 12/2015. Historically, Indonesia

biofuel consumption has grown swiftly and has yet reached it blending rate mandates. Industry

sources confirm that blending has remained below target due to supply shortages, caused by

infrastructure weakness and funding shortfalls for subsidies.

Furthermore, Indonesia has created a new funding mechanism for its biodiesel subsidy. The new

program will impose a levy on palm oil exports and is expected to provide a stable funding source

for biodiesel subsidies, thereby increasing domestic biodiesel consumption. The levy was

implemented on July 16, 2015, and was established by regulations 24/2015 and 61/2015, which

created a “plantation fund” paid by a levy on palm oil exports. According to regulation 61, the fund

will be used for the for the procurement and utilization of biodiesel in order to fill the gap between

the market index price of conventional diesel of conventional diesel and the market index price of

biodiesel. The fund will be collected at a rate of USD50/ton of CPO and USD20-USD30 each ton of

processed palm oil products. The fund will be managed by a public service agency appointed by

Ministry of Finance.

If the levy generates sufficient revenue to bridge the gap between fossil fuels and biodiesel prices,

the levy will have significant implications for the Indonesian palm oil and biodiesel industries. CPO

production, which continues to grow, will face increased demand from domestic biodiesel

producers. As a result, CPO stocks are expected to moderate. Thus CPO exports may soften

slightly due to higher export prices resulted from the levy, according to Indonesia Palm Oil

Association (GAPKI).

Figure 40. Lower palm oil export Figure 41. Lower inventory due to El Nino



-

200

400

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800

1,000

1,200

1,400

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2015

('000 barrels) Production Consumption

-5.00

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(%)

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('000 tonnes)

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1993

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2003

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2011

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2013

2014

2015

('000 tonnes)

Plantation

15

August 30, 2016


Changing in the reference rate of biodiesel

Indonesian biodiesel producers incurred heavy losses following the 2014 drop in crude oil prices.

This led to the abandonment of previous subsidy programs in February 2015 and the enactment of

a new biofuels price index formula in March 2015 through MEMR regulation 726/2015. Previously,

Indonesia’s biodiesel reference price was based on the Mean of Platts Singapore (MOPS) price.

According to MEMR 726, the MOPS price has been replaced by the current market price of CPO.

The new price formula covers biodiesel production costs and a 3% of margin. The government

expects the new biofuels price index formula to more accurately reflect market dynamics. Post

notes that revisions to the reference price have been ongoing throughout 2015, and as a result,

biofuel subsidies have not been provided for most of the calendar year. The reference price

formula is critical in determining the size of the payment subsidy to bridge the gap between

biodiesel and diesel, and therefore it is critical to meeting the new mandates. With this

implementation of the palm oil levy in July, the Indonesian Biofuel Producers Association expects

that the subsidy will be fully implemented in September at a 15% blended rate.

Figure 42. Crude oil price trend


Indonesia biodiesel consumption outlook

The new biofuels mandatory program is expected to increase domestic biodiesel consumption. If

Indonesia continues on track with its blending mandate, it can consume 2.7bn liters in 2016F

(2015: 1.45bn liters), according to USDA. Under the new regulation, targeted blending rate for the

transportation and industrial sectors was lifted from 10% to 15% as of April 2015. However, some

concerns have been raised by industry associations and state electricity operator (PLN) regarding

the 25% targeted blending rate for electricity, noting that the mandated blend rate exceeds the

capacity of their generators.

Figure 43. Indonesia biodiesel consumption trend Figure 44. Biodiesel mandatory target history



220 258

670

1,048

1,600

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2010 2011 2012 2013 2014

(mn liters)

1,076 1,297

1,641

2,017

4,000

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2010 2011 2012 2013 2014

(mn liters)

-

20.0

40.0

60.0

80.0

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120.0

11/1

0

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3/16

(USD/barrel) WTI Brent

Plantation

16

August 30, 2016


Global palm oil prices outlook?

Global palm oil consumption is expected to increase and we expect supply disruption on the back

of La Nina. At the same time, we believe that global palm oil price movement shows positive

correlation with global crude oil price. We suspect that biofuel production has created a new

linkage between crude oil and palm oil. As a natural resource that is not renewable, market has

been concerned about the declining crude oil reserves; given crude oil is one of human needs which

cannot be discharged in our daily lives. Thus, during the search for new energy alternatives that

can be renewable, it turns out that palm oil can be used as an alternative to cater energy needs in

the future. We predict that global palm oil will reach USD636/ton and USD674/ton in 2016F and

2017F, respectively. Our global palm oil prediction is based on crude oil (Brent crude) price outlook

of USD45.0/barrel and USD47.0/barrel in 2016F and 2017F, respectively.

A 2016 survey of the academic literature finds that “most major oil price dating back to 1973 was

largely explained by shifts in the demand for crude oil”. As the global economy expands, so does

demand for crude oil. On supply side, crude oil is dependent on geological discovery, the legal and

tax framework for oil extraction, the cost of extraction, the availability and cost of technology for

extraction, and the political situation in oil-producing countries.

Figure 45. Strong correlation between palm oil price and Brent crude oil


Figure 46. Vegetables oil price trend


-

200.0

400.0

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800.0

1,000.0

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(USD/ton) Palm Oil Soybean Rapessed Oil

-20.0

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4/16

(%) CPO Brent

Plantation

17

August 30, 2016


Astra Agro Lestari (AALI IJ)

The old dinosaur

Initiate coverage on AALI with a Hold rating

We initiate coverage on Astra Agro Lestari (AALI) with a Hold rating and target price of

IDR15,850. AALI is the largest oil palm plantation area under our plantation coverage,

however, we believe that AALI will find it challenging to organically grow due to its old age

oil palm profile and its diversification to downstream business which offers lower gross

margin compared to upstream palm oil business (AALI’s gross margin for downstream: 4%

vs upstream: 23%). AALI has secured IDR4.8tr funds through the recent rights issue, which

will be used to reduce its USD debt exposures. While we are less optimistic that the

proceeds from the new shares issuance will boost AALI’s net profit margin going forward,

we believe reduced leverage should act as a positive impact on its share price.

Old plantation profile, a drag on productivity

A large portion of AALI’s plantation profile is old aged which represents 59.1% of the total

planted area. Our view is that this will squeeze FFB yield over the longer horizon. AALI’s

average plantation age stood at 14.7 years in 2015 (vs. 14.2 years in 2011). We suspect this

old age profile will rise further as moratorium in new oil palm plantation will act as a key

hurdle for the company to acquire new land bank. We forecast that AALI’s FFB yield will

reach 21.7 ton/ha and 21.5 ton/ha in 2016F and 2017F, respectively. As a consequence, FFB

harvest from external parties (plasma & smallholders) will dominate AALI’s FFB harvest, in

our view. We are factoring in external parties’ FFB harvest to reach 4.20mn tons and

4.84mn tons in 2016F and 2017F. FFB harvest from external parties will weaken AALI’s CPO

and palm kernel extraction, given nucleus plantation is more efficient.

Improving in solvability could not help a much boost profitability margin

As a large portion of its proceeds from the recent rights issue will be used to pay off its

existing USD denominated debt, we believe AALI’s balance sheet will turn healthier. We are

modeling AALI’s net debt-to-equity ratio to reach 0.3x throughout 2016F and 2017F, down

from 0.6x in 2015. However, we are concern that AALI’s profitability margin will remain

challenged on the back of its focus on downstream business. Overall, we predict that AALI

gross, operating and net profit margin will reach 19.8%, 10.4% and 4.1%, from 23.6%,

14.2%, and 4.7% in 2015.

Valuations and target price at IDR15,850

We derive our target price of IDR15,850 on AALI using our DCF approach, assuming WACC

of 10.2% and terminal growth of 5.0% and PE target. In addition, we factored in the right

issue impact to deriving our valuation. Risks to our call are 1) sudden price spike/plunge in

global palm oil prices, 2) unexpected weather changes, 3) crude oil price fluctuations, and 4)

regulation risks.

FY (Dec.) 12/13 12/14 12/15 12/16F 12/17F

Revenue (IDRbn) 12,675.0 16,305.8 13,059.2 11,246.8 14,401.7

Gross profit (IDRbn) 4,081.9 4,951.8 3,082.1 2,227.7 2,731.5

Operating profit (IDRbn) 3,004.5 3,722.4 1,853.2 1,169.4 1,376.3

NP (IDRbn) 1,801.4 2,503.7 619.1 461.3 542.9

EPS (IDR) 935.9 1,300.8 321.7 202.8 238.7

BPS (IDR) 5,334.8 6,150.3 6,078.2 7,028.0 7,176.8

P/E (x) 25.6 17.8 47.0 78.5 66.7

ROE (%) 17.5 21.2 5.3 2.9 3.3

ROA (%) 12.0 13.5 2.9 2.0 2.2

Note: NP refers to net profit attributable to controlling interests

Source: Company data, Daewoo Securities Indonesia Research estimates

Agriculture

(Initiate) Hold

Target Price (12M, IDR) 15,850

Share Price (8/29/16, IDR) 15,925

Expected Return -0.5%

OP (16F, IDRbn) 1,169

Consensus OP (16F, IDRbn) 2,249

EPS Growth (16F, %) -37.0

Market EPS Growth (16F, %) 122.2

P/E (16F, x) 78.5

Market P/E (16F, x) 19.6

JCI (8/29/2016) 5,370.8

Market Cap (IDRbn) 30,650.7

Shares Outstanding (mn) 1,924.7

Free Float (%) 20.3

Foreign Ownership (%) 4.6

Beta (5Y) 1.0

52-Week Low (IDR) 13,126

52-Week High (IDR) 21,058

(%) 1M 6M 12M

Absolute 9.8 12.5 -7.5

Relative 6.9 0.0 -28.3

Plantation

18

August 30, 2016


Old age plantation profile dominates

As the one of the key crude palm oil (CPO) producers in Indonesia, AALI’s oil palm plantation is

spreading across Indonesia in Sumatera, Kalimantan, and Sulawesi regions. We note that AALI is

the only CPO operator with our CPO universe which has oil palm plantation exposure in Sulawesi.

AALI’s total mature oil palm area (nucleus and plasma) reached 258,536 ha in 2015, from 217,343

ha in 2011.

However, AALI’s immature plantation area decreased by 10,037 ha to 39,326 ha in 2015, from

49,363 ha in 2011. This reduction was largely due to the government’s moratorium policy of

opening new oil palm plantation implemented several years ago. In our opinion, AALI will find it

hard to organically grow as the government plans to extend its oil palm plantation moratorium. A

large portion of AALI’s plantation profile is old aged which represents 59.1% of the total planted

area. However, we note that AALI’s old aged plantation portfolio showed improvement (from 65%

(2012) to 59.1% (2015)) which was largely due to the replanting program which had been

implemented several years ago. Based on our discussion with AALI, the company is not expecting

to add new land banks (due to moratorium issue).

Figure 47. Old age profile dominated oil palm plantation Figure 48. Immature area down to 39,325ha in 2015

Source: Company data, Daewoo Securities Research


Old age plantation profile = lower FFB yield

The combination of old aged plantation profile and government’s moratorium on new palm

plantation, AALI’s average plantation age increased to 14.7 years in 2015 from 14.2 years in 2011.

We are concerned that AALI’s average age will rise further going forward and reach 14.8 years and

15.0 years in 2016F and 2017F, respectively. We also note that AALI’s FFB yield decreased further

to 21.7tons/ha in 2015, from 23.5tons/ha in 2012. Thus, we think that AALI’s FFB yield will only

reach 21.7ton/ha and 21.5ton/ha in 2016F and 2017F, respectively.

Figure 49. Average age stood at 14.7 years in 2015 Figure 50. FFB yield only reached 21.7 ton/ha in 2015



37.4 35.0 37.2 39.2 40.9

62.6 65.0 62.8 60.8 59.1

0.0

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2011 2012 2013 2014 2015

(%)

Productive Old Age

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33,891

42,662 39,326

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2011 2012 2013 2014 2015

(ha)

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2011 2012 2013 2014 2015

(Years)

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2011 2012 2013 2014 2015

(ton/ha)

Plantation

19

August 30, 2016


Both CPO and palm kernel extraction rates will decline further

In 2011, AALI’s CPO extraction rate stood at 22.6% while palm kernel extraction rate stood at

4.6%. By 2015, AALI’s CPO extraction rate decreased further and reached 21.6%, falling below its

5-year average at 22.1%. Furthermore, AALI’s palm kernel extraction rate had improved to 4.9%,

and gradually slipped to 4.6% in 2015. Looking forward, we predict that AALI’s CPO extraction rate

will reach 21.5% and 21.4% in 2016F and 2017F, respectively, on the back of larger contribution of

external party harvest. We underscore that CPO and palm kernel extraction rates of external

parties (plasma & smallholder plantation) generally have lower efficiencies compared to nucleus

plantation due to the fact that nucleus plantation has better cultivation management than

external parties. We also forecast AALI’s palm kernel extraction rate to reach 4.5% and 4.4% in

2016F and 2017F.

Figure 51. CPO extraction rate below 5-years average Figure 52. Palm kernel extraction rate down significantly



Lower CPO production outlook in 2016F

We predict that AALI’s FFB harvest to reach 7.82mn tons and 8.39mn tons in 2016F and 2017F,

respectively. Furthermore, FFB harvest will be dominated by external parties which are expected to

reach 4.20mn tons and 4.83mn tons in 2016F and 2017F. At the same time, FFB harvest from

nucleus plantation is expected to fall to 3.61mn tons and 3.56mn tons in 2016F and 2017F on the

back of old aged plantation profile. Overall, we predict that AALI’s CPO production to reach

1.68mn tons and 1.79mn tons in 2016F and 2017F, respectively.

Figure 53. External parties will dominate FFB harvest Figure 54. Lower CPO production outlook in 2016F



22.6

22.322.3

21.9

21.6

21.0

21.2

21.4

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21.8

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22.2

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2011 2012 2013 2014 2015

(%)

5-years average4.8

4.9

4.8

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4.5

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4.6

4.7

4.7

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2011 2012 2013 2014 2015

(%)

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2013 2014 2015 2016F 2017F

('000 tonnes) Nucleus External Parties

1,400.0

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2013 2014 2015 2016F 2017F

('000 tonnes)

Plantation

20

August 30, 2016


Sales and net profit to contract in 2016F

We predict that AALI’s CPO sales volume to increase to 1.26mn tons and 1.44mn tons in 2016F

and 2017F, respectively (vs. 1.04mn tons in 2015). Meanwhile, we are less optimistic that AALI’s

revenue growth will expand due to moderate outlook in global palm oil prices. Therefore, we

predict that AALI’s revenue will only reach IDR11.3tr and IDR14.4tr in 2016F and 2017F,

respectively (-13.9% YoY and +28.1% YoY). On the bottom-line, we estimate AALI’s net profit to

reach IDR461.3bn and IDR542.9bn in 2016F and 2017F, respectively (-25.5% YoY and +17.7% YoY).

Figure 55. Higher CPO sales volume outlook Figure 56. Negative growth revenue in 2016F



Diversification to downstream will hamper AALI’s profitability over the long-term

In January 2015, the company had acquired a 50.0% in KL-Kepong Plantation Holdings Sdn, Bhd

which focuses more on downstream palm oil business. This refinery is located in Dumai, Riau

province. Yet, we are pessimistic that AALI’s profitability will improve over the long-term, given

CPO downstream business only offers thin gross margin at 4.0% compared to the upstream

business which yields 23.6%. We predict AALI’s gross, operating and net profit margins will decline

to 19.8%, 10.4% and 4.1% in 2016F.

Figure 57. Downstream business has lower gross margin Figure 58. Profitability margin



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200.0

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2013 2014 2015 2016F 2017F

('000 tonnes)

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2013 2014 2015 2016F 2017F

(%)Gross Operating Net Profit

23.6

4.0

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Upstream Downstream

(%)

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2013 2014 2015 2016F 2017F

(%)Revenue Net profit

Plantation

21

August 30, 2016


Figure 59. Lower net debt equity after right issue Figure 60. Improves in interest coverage ratio



Figure 61. ROE stand at single digit Figure 62. ROA will improve after 2016F



Figure 63. Current ratio will at 1.0x in 2016F & 2017F Figure 64. Lower capex going forward



12.0

13.5

2.92.0 2.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2013 2014 2015 2016F 2017F

(%)

17.5

21.2

5.3

2.9 3.3

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5.0

10.0

15.0

20.0

25.0

2013 2014 2015 2016F 2017F

(%)

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0.6

0.8

1.0 1.0

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0.4

0.6

0.8

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2013 2014 2015 2016F 2017F

(x)

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0.6

0.30.3

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0.3

0.4

0.5

0.6

0.7

2013 2014 2015 2016F 2017F

(x)

41.538.7

14.8

22.124.1

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5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

2013 2014 2015 2016F 2017F

(x)

2,861.5

3,278.2

2,586.3

915.4

682.1

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500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

2013 2014 2015 2016F 2017F

(IDR bn)

Plantation

22

August 30, 2016


Valuation

We use DCF approach to derive AALI’s 12-months forward target price at IDR13,350 with WACC

of 10.2% and terminal growth of 5.0%. Our target price reflects 78.2x and 66.4x P/E in 2016F and

2017F. We also use discounted to equity value by 60.0% with the assumption that AALI’s oil palm

productive profile only remains 40.0% of the total planted area.

Table 3. DCF valuation assumption

WACC (%)

Equity portion of capital 75.1

Ke 12

Debt portion of capital 24.9

Kd 4.7

Average WACC 10.2

Terminal value

Perpetual growth rate 5.0

Wacc-g 5.2

NPV 8,732.3

PV of TV 72,230.6

Net debt -5,024.9

Equity value 75,938.0

Equity value 30,375.2

Shares Outstanding (bn shares) 2.275

DCF Weighted 40.0%

PE Weighted 60.0%

DCF Target Price 13,352

PE Target Price 2,506

Blended Target Price 15,858

Source: Daewoo Securities Research

Figure 65. PE band


0

5

10

15

20

25

30

35

9/11

12/1

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6/15

9/15

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5

3/16

6/16

(x)

Plantation

23

August 30, 2016


AALI at a glance

Company profile

AALI is a subsidiary of PT Astra International Tbk which was established in 1980, engages in the

agribusiness, specifically in the management of oil palm plantation and the production of palm oil.

The company manages oil palm plantation with locations spread over Sumatra, Kalimantan, and

Sulawesi, producing to meet the demands of both the domestic and export markets.

In 1997, the company became public by listing its shares on the Indonesia Stock Exchange.

Currently, public ownership of the shares reached 20.3% (out of 1.57bn shares in circulation) at

the end of 2015. In addition to strengthening its position at the upstream sector by managing an

area more than 200,000 hectare comprising nucleus and plasma plantation, the company has also

been strengthening its palm oil downstream business. Owning a palm oil refinery, PT Tanjung

Sarana Lestari in the Mamuju Utara regency, West Sulawesi and 50% shares in PT Kreasijaya

Adhikarya in Dumai, Riau Province, has significantly strengthened the company competitiveness

advantages in palm oil business chain.

Figure 66. AALI brief history


Figure 67. AALI’s ownership structure before right issue


Established in

1988, namely PT

Suryaraya

Cakrawala

Changed its

name to PT Astra

Agro Niaga in

1989

Merge between

PT Astra Agro

Niaga and

Suryaraya

Bahtera and

changed to PT

Astra Agro Lestari

in 1997

Go public in 1997

Plantation

24

August 30, 2016


Management

AALI is managed by an experienced management team. The profiles of the management team are

presented below as we cited from AALI’s annual report:

Prijono Sugiarto (President Commissioner)

An Indonesian citizen, he has been appointed as president commissioner of the company

since 2010. Currently, he is also PT Astra International Tbk (ASII) president director since

March 2010, president commissioner of PT United Tractors Tbk (UNTR), PT Astra Honda

Motor and PT Menara Astra. Previously, he was a director of ASII (2001 – 2010) and sales

engineering manager of Daimier-Benz Indonesia. He holds a diploma degree in

mechanical engineering from the University of A. Sc. Konstanz, German in 1984 and also

diploma degree in business administration from the University of A. Sc. Bochum, German

in 1986.

Chiew Sin Cheok (Vice President Commissioner)

A Malaysian citizen, he has been the vice president commissioner of the company since

2007. He is also commissioner of ASII and PT Astra Otoparts Tbk (AUTO), a member of

the advisory committee of PT Tunas Ridean Tbk (TURI) and alternate director of Cycle &

Carriage Bintang. He is on the Board of Governors of the Keswick Foundation, a

charitable body in Hong Kong. He graduated from the London School of Economics and

Political Science with a bachelor science degree and obtained a Master of Management

Scinece degree from the Imperial College of Science & Technology, London.

Johannes Loman (Commissioner)

An Indonesian citizen, he is appointed as a Commissioner of the Company in 14 April

2015. He is also a Commissioner of PT Musashi Auto Parts Indonesia, PT Showa Indonesia

Manufacturing since 2009 and PT Federal International Finance since 2007. In addition,

he also serves as President Commissioner of PT Suryaraya Rubberindo Industries, Vice

President Commissioner PT Astra Otopart Tbk, Executive Vice President Director in PT

Astra Honda Motor and Director in PT Astra International Tbk. He joined Astra in 1984

and previously held the position of CEO Honda Sales Operation, CEO Daihatsu Sales

Operation, Marketing Director of PT Astra Daihatsu Motor and PT Astra Honda Motor.

He graduated from the Parahyangan Catholic University in 1984.

Anugerah Pekerti (Independent Commissioner)

An Indonesian citizen, he has been an Independent Commissioner of the Company since

April 2011. Currently he serves as Independent Commissioner of UNTR and PT Samudera

Indonesia Tbk (SMDR), member of the Advisory Board of the National Human Rights

Commission and advisor to the Indonesian Physics Olympic Team. He was a lecturer at

the PPM Management Institute from 1968 and its President Director in 1988-1998. Since

1998 he has been actively involved in the implementation of good corporate governance

in various companies and non-profit organizations. He graduated from the Universitas

Indonesia in 1967, majoring in Psychology and acquired his Doctor of Philosophy degree

in Business Administration from the University of Southern California, USA in 1985.

Soemadi Djoko Moerdjono Brotodiningrat (Independent Commissioner)

Indonesian citizen, he was appointed as the Independent Commissioner of the Company

in April 2015. Currently, Soemadi is entrusted to head Indonesian Delegation to the EFTA

Indonesia Comprehensive Economic Partnership Agreement negotiation. He also serves

as Advisor on International Affairs to the Defense Minister and is a member of the Asia-

Europe Foundation Board of Governors and a lecturer at the Foreign Affairs Ministry’s

Center for Education and Training. Soemadi graduated from Department of International

Relations, Faculty of Social & Political Sciences, Gadjah Mada University in Yogyakarta in

1965 and from the Institut International d’Administration Publique–Section Diplomatique,

Paris in 1969.

Plantation

25

August 30, 2016


Widya Wiryawan (President Director)

An Indonesian citizen, he has been the Company President Director since May 2007.

Currently he also serves as a Director of ASII since May 2008. He joined Astra Group in PT

ASII in 1994. Previously, he served as Finance Director of PT Federal International Finance

(1997 - 2000), Finance Director of AUTO (2000-2005) and appointed as Vice President

Director of PT AUTO in 2006. He graduated from Bogor Institute of Agriculture and

holds a Master of Business Administration from the University of Sydney, Australia.

Rudy (Independent Director)

An Indonesian citizen, he has been the Company Director since April 2013 and he was

appointed as the Company Independent Director since 14 April 2015. Previously he

served as a Finance Director of PT Asuransi Astra Buana (2009 – 2013) and Chief

Corporate Planning and Strategy of PT Astra International Tbk (2007 - 2009). He joined

Astra Group in 2000 and started his career in PT Charoen Pokphand Indonesia Tbk, Inti

Salim Corpora and PT Trimegah Securities. He graduated from University of Trisakti

majoring in Economic and holds a Master of Applied Finance from the University of

Melbourne, Australia.

Bambang Palgoenadi (Director)

An Indonesian citizen, he has been the Company Director since May 2000. He served as

the project leader in implementation of the plantation information system of the Astra

Agro Lestari Group (1995-1996) and served as the Company Deputy Director for

Production (1996 - 1998). He joined the Company in 1981. He completed his education

at the Bogor Institute of Agriculture in 1981, majoring in Agricultural Technology.

Juddy Arianto (Director)

An Indonesian citizen, he has been the Company Director since May 2007. He was

President Director of PT Menara Terus Makmur (2005 - 2007), he served as Director of

Federal Nittan Industries (2001-2004), previously appointed as Division Head of Bearing

Production of PT SKF Indonesia (1984-2000). He joined Astra Group in 1983. He

graduated from Universitas of Indonesia, majoring in Metallurgy.

Joko Supriyono (Director)

An Indonesian citizen, he has been a Company Director since May 2007. At the Company,

he was Deputy Director of Plantations and Mills Operation (2005 - 2007), he served as

Area Director (2002 - 2005), Division Head of Human Resources (2000 - 2002) and as

Personnel Department Head (1999 - 2000) after previously serving as Training &

Recruitment Department Head (1996 - 1997). He joined the Company in 1995 as

Training Department staff. He was an Instructor of Quality Management Consultant of

PT Wahana Kendali Mutu (1994 - 1995) and was Head of Afdeling at PT Perkebunan

Nusantara II, Medan (1986 - 1993). He graduated from Gadjah Mada University,

Yogyakarta majoring in Agriculture.

Jamal Abdul Nasser (Director)

An Indonesian citizen, he has been the Company Director since April 2011. Previously he

served as the Company Director of PT Denso Indonesia from 2008, after serving as the

Director of PT Kayaba Indonesia and PT Toyoda Gosei Safety System Indonesia. He joined

Astra Group in 1985 and started his career in PT SKF Indonesia, PT Federal Adiwira Serasi

and PT Adiwira Presisi Industri. He had served as Division Head of PT Astra Otoparts Tbk

in 2003 and was appointed as Deputy Chief Operation Officer in 2007. He graduated

from Bogor Institute of Agriculture in 1982, majoring in Agricultural Mechanization.

Plantation

26

August 30, 2016


Profit & Loss

Balance sheet

Year end Dec 31 (IDRbn) 2015 2016E 2017E 2018E


Revenue 13,059.2 11,246.8 14,401.7 16,371.1

Current assets

Cost of goods sold -9,977.1 -9,019.0 -11,670.2 -13,037.1

Cash & equivalents 294.4 275.1 185.6 184.3

Gross profit 3,082.1 2,227.7 2,731.5 3,334.0

Short-term financial asset - - - -

SG&A -1,228.9 -1,058.4 -1,355.3 -1,540.6

Account receivable 88.0 75.8 97.1 110.3

EBIT (Adj.) 1,853.2 1,169.4 1,376.3 1,793.4

Inventory 1,691.6 1,529.1 1,978.6 2,210.4

EBIT 1,853.2 1,169.4 1,376.3 1,793.4

Other current assets 740.1 572.4 689.9 898.5

Net interest income (loss) -97.7 -24.8 -27.1 -35.4

Non-current assets

Income (loss) from associcates 0.0 0.0 0.0 0.0

Net fixed assets 9,361.7 11,097.0 10,994.3 11,092.7

Others -579.9 -268.8 -318.4 -345.9

Investment 109.2 109.2 109.2 109.2

Recurring profit 1,175.5 875.8 1,030.8 1,412.1

Other long-term assets 9,227.3 9,423.5 10,260.2 11,217.7

Income tax -479.8 -357.5 -420.7 -576.4 Total assets 21,512.4 23,082.1 24,314.9 25,823.2

Net profit 619.1 461.3 542.9 743.7 Current liabilities

Net profit (Controlling Interest) 695.7 518.3 610.0 835.7 Account payable 733.5 663.1 858.0 958.5

Short-term debt 700.0 200.0 300.0 700.0

Growth & margins 2015 2016E 2017E 2018E Other current liabilities 2,088.6 1,538.4 1,704.7 1,948.7

Revenue growth -19.9 -13.9 28.1 13.7 Non-current liabilities

Gross profit growth -37.8 -27.7 22.6 22.1 Long-term debt 5,708.0 4,200.0 4,500.0 4,700.0

EBIT growth -50.2 -36.9 17.7 30.3 Other long-term liabilities 583.5 494.3 627.5 727.8

Net profit growth -75.3 -25.5 17.7 37.0 Total liabilities 9,813.6 7,095.8 7,990.3 9,035.0

EPS growth -75.3 -37.0 17.7 37.0 Controlling interests 11,284.8 15,572.3 15,910.6 16,374.2

Gross margin 23.6 19.8 19.0 20.4 Non-controlling Interest 414.0 414.0 414.0 414.0

EBIT margin 14.2 10.4 9.6 11.0 Shareholder's equity 11,698.8 15,986.3 16,324.6 16,788.1

Net profit margin 4.7 4.1 3.8 4.5 BVPS (IDR) 6,078.2 7,028.0 7,176.8 7,380.6

Cash Flow (Summarized)

Ratio analysis


Year end Dec 31 2015 2016E 2017E 2018E

Cash flow from operations

ROE (%) 5.3 2.9 3.3 4.4

Net profit 619.1 461.3 542.9 743.7

ROA (%) 2.9 2.0 2.2 2.9

Depr. & amortization 885.1 -1,250.2 814.7 847.3

Inventory days 17.0 17.0 17.0 17.0

Others -398.3 42.4 48.8 -64.7

Receivables days 2.5 2.5 2.5 2.5

Change in working capital -643.4 104.2 -275.8 -144.5

Payable days 26.8 26.8 26.8 26.8

Cash flow from investing

Net debt/equity (x) 0.6 0.3 0.3 0.4

Capital expenditure -2,189.5 -915.4 -682.1 -904.8

Interest cover (x) 14.8 22.1 24.1 28.0

Others -1,239.2 234.1 -866.8 -998.3

Cash flow from financing

Dividends -743.3 -173.8 -204.5 -280.2

Increase in equity -4.1 4,000.0 0.0 0.0

Increase in debt 3,305.9 -2,432.8 400.0 700.0

Others 90.9 -89.2 133.2 100.2

Beginning cash 611.2 294.4 275.1 185.6

Ending cash 294.4 275.1 185.6 184.3


Plantation

27

August 30, 2016


PP London Sumatra Indonesia (LSIP IJ)

Prime time to bear fruit

Initiate coverage on LSIP with a Buy rating

We initiate coverage on LSIP with a Buy rating and a target price of IDR2,040. PP London

Sumatra Indonesia (LSIP) is the plantation arm of Indofood Group (Indofood Sukses

Makmur; INDF) - or grandchild company of the Salim Group - focusing on the upstream palm

oil businesses. Salim Group is one of the largest conglomerates in Indonesia. We favor LSIP

due to its above industry average CPO extraction and also prime age oil palm plantation

profile. Furthermore, LSIP boasts a healthy balance sheet with zero interest bearing debt.

LSIP is our top pick among the plantation coverage.

LSIP has more than 30 plantation areas which are spread across Indonesia. LSIP has

diversified plantation areas including oil palm, rubber, cocoa and tea plantations. Meanwhile,

LSIP has 11 palm oil mills, which are located in North and South Sumatra provinces and also

in East Kalimantan province.

Stable CPO extraction rate outlook

LSIP’s CPO extraction rate reached 22.9% which stands above our CPO universe average of

22.3% as of 2015. We predict that LSIP’s CPO extraction will stabilize at 22.9% in 2016F

and 2017F, respectively. In addition, we believe that the company’s FFB nucleus will reach

1.47mn tons and 1.49mn tons in 2016F and 2017F, respectively on the back of its oil palm

plantation reaching the prime age category. We underscore that LSIP’s oil palm plantation

prime age will reach 59,778 ha.

Solid balance sheet with zero interest bearing debt

We predict that LSIP will have net cash position in its net gearing ratio over the long term

(i.e., zero interest bearing debt). That being said, we believe its liquid balance sheet is a key

advantage for the company. Although LSIP’s current ratio is expected to slip to 2.0x and

1.9x in 2016F and 2017F, respectively, we argue that it would remain far above 1.0x. We

also predict that LSIP’s ROA will remain stable at 6.3% in 2016F and 2017F, respectively.

LSIP is our pop pick among the CPO space

We value LSIP using the P/E multiple approach which is derived from our target P/E at 25.0x,

implying +2 standard deviation over the 5-year average. Our 12MF price target of IDR2,040

is undemanding due to its prime age oil palm plantation profile and net cash position. Our

target price embeds 25.0x 2016F P/E and 23.9x 2017F P/E. Risks to our call are 1) Sudden

price spike/plunge in global palm oil prices, 2) unexpected weather changes, 3) crude oil

price fluctuations, and 4) regulation risks.

FY (Dec.) 12/13 12/14 12/15 12/16F 12/17F

Revenue (IDRbn) 4,133.7 4,726.5 4,189.6 4,124.4 4,613.1


Operating profit (IDRbn) 818.2 1,191.8 764.4 699.5 745.6

NP (IDRbn) 769.5 916.7 623.3 556.2 583.6

EPS (IDR) 112.8 134.4 91.4 81.5 85.5

BPS (IDR) 969.4 1,058.0 1,075.5 1,110.9 1,154.7

P/E (x) 17.1 14.1 14.4 19.0 18.1

ROE (%) 11.6 12.7 8.5 7.3 7.4

ROA (%) 9.6 10.6 7.0 6.3 6.3



Agriculture

(Initiate) Buy


Share Price (8/29/16, IDR) 1,545

Expected Return 32.0%

OP (16F, IDRbn) 699.5

Consensus OP (16F, IDRbn) 698.1


Market EPS Growth (16F, %) -12.9

P/E (16F, x) 19.0


JCI (8/29/2016) 5,370.8



Free Float (%) 40.4


Beta (5Y) 0.6



(%) 1M 6M 12M

Absolute 10.0 8.0 44.4

Relative 7.0 -4.5 23.6

Plantation

28

August 30, 2016


Above average CPO extraction rate

LSIP’s CPO extraction rate stood at 22.9% as of 2015, which was slightly higher than our coverage

CPO universe (22.3%; excluding LSIP, average extraction rate: 22.1%). In our view, LSIP’s good

quality seed is one of the key reasons why LSIP’s extraction rate is higher compared to its peers.

Nonetheless, AALI and SGRO’s extraction rate was below average, which stood at 21.6% and

21.0%, respectively. Meanwhile, the highest extraction rate was SSMS which stood at 23.7%. We

believe that LSIP’s current extraction rate will remain steady at 22.9% in 2016F and 2017F,

respectively.

LSIP is one of the few CPO manufacturers in Indonesia that operates oil palm seed cultivation,

namely SumBio. Sumbio is also sold to external parties. During 2015, LSIP’s R&D facility in oil palm

seeds continued to establish its reputation as premium oil palm seeds producing 15.3mn seeds

(+12.5% YoY) in 2015 SumBio R&D facility is located in North Sumatera.

Figure 68. CPO extraction rate in 2015 Figure 69. LSIP’s seeds production trends



FFB and CPO production trends

In 2011, LSIP’s FFB nucleus production stood at 1.29mn tons. In the following year (2012), the

company’s FFB nucleus production increased marginally to reach 1.31mn tons. By 2013, LSIP’s FFB

nucleus production shrank to 1.25mn tons – which was the lowest level in 5-years. This low FFB

production was chiefly due to the unfavorable weather conditions, FFB logistic problems, and

social issues in some areas. This led the company’s total CPO production to slip to 396,500 tons in

2013. By 2015, LSIP was able to demonstrate a solid recovery. Despite the El Nino effect, LSIP’s

FFB nucleus production came in at 1.39mn tons (+4.1% YoY) in 2015. The robust nucleus

production performance is clear evidence that LSIP was able to well-manage its plantation area.

We forecast that LSIP’s FFB nucleus production to reach 1.47mn tons and 1.49mn tons in 2016F

and 2017F, respectively.

Figure 70. FFB nucleus production Figure 71. CPO production



21.6

22.9

21.0

23.7

19.5

20.0

20.5

21.0

21.5

22.0

22.5

23.0

23.5

24.0

AALI LSIP SGRO SSMS

(%)

26.4 27.4

24.1

13.8 15.3

-

5.0

10.0

15.0

20.0

25.0

30.0

2011 2012 2013 2014 2015

(mn seeds)

1,150.0

1,200.0

1,250.0

1,300.0

1,350.0

1,400.0

1,450.0

2011 2012 2013 2014 2015

('000 tonnes)

340.0

360.0

380.0

400.0

420.0

440.0

460.0

480.0

500.0

2011 2012 2013 2014 2015

('000 tonnes)

Plantation

29

August 30, 2016


LSIP’s oil palm plantation is in its prime category

One of LSIP’s key advantage is that most of its oil palm plantation profile (59,778ha) falls within 7~

20 years – which is considered prime age profile. In addition, its young (4~ 6 years) oil palm

plantation area stood at 13,883ha. LSIP has more than 30 plantation areas spread across Indonesia

including oil palm, rubber, cocoa and tea plantation. Meanwhile, LSIP has 11 palm oil mills, which

are located in North and South Sumatra province and in East Kalimantan province as of 2015.

Figure 72. Oil palm plantation profile Figure 73. Plantation area distribution



Figure 74. Oil palm planted area Figure 75. Rubber planted area



4,995

59,778

13,883

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

4 - 6 years 7 - 20 years >20 years

(hectare)

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2011 2012 2013 2014 2015

(hectare) Mature Immature

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2011 2012 2013 2014 2015

(hectare) Mature Immature

Plantation

30

August 30, 2016


Palm oil still the backbone of LSIP’s revenue

The largest contributor to LSIP’s revenue is palm products, comprising 90.3% as of 2015. What’s

notable is that palm-related revenue contribution grew significantly which accounted for 80.5% in

2011. We highlight that its rubber segment contribution decreased from 12.7% of total revenue in

2011 to 5.9% in 2015. We ascribe the prolonged price deterioration of rubber to be the main

reason for the contribution squeeze. According to the management’s guidance, LSIP will continue

to focus on palm oil as the outlook for palm oil is relatively benign compared to rubber. That being

said, we predict rubber contribution to the company’s revenue to decline further.

Figure 76. Revenue portfolio in 2011 Figure 77. Revenue portfolio in 2015



Healthy balance sheet with zero debt

LSIP cash to total assets reached 8.3% in 2015 (vs. SGRO 10.4%, SSMS 7.5% and AALI 1.4% of

total asset). Since 2010, LSIP maintained its net cash position until 2015. We believe that LSIP will

be able to maintain its net cash status over the long-term due to its solid capital structure. We also

highlight that LSIP is the only palm oil company under our coverage which do not have interest

bearing liabilities.

Figure 78. Average cash to total asset at 6.9%

Source: Companies data, Daewoo Securities Research

80.5

12.7

5.8 0.9

Palm product

Rubber

Seeds

Others

90.3

5.9 2.31.5

Palm product

Rubber

Seeds

Others

1.4

8.3

10.4

7.5

0.0

2.0

4.0

6.0

8.0

10.0

12.0

AALI LSIP SGRO SSMS

(%)

Plantation

31

August 30, 2016


Figure 79. Revenue & net profit trend Figure 80. Profitability margin



Figure 81. ROE improves in 2017F Figure 82. ROA stable at 6.3% in 2016F and 2017F



Figure 83. Lower current ratio but still more than 1.0x Figure 84. Positive cash flow from operating activities



-

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

4,500.0

5,000.0

2013 2014 2015 2016F 2017F

(IDR bn) Revenue Net Profit

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2013 2014 2015 2016F 2017F


11.6

12.7

8.5

7.3 7.4

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2013 2014 2015 2016F 2017F

(%)

9.6

10.6

7.0

6.3 6.3

-

2.0

4.0

6.0

8.0

10.0

12.0

2013 2014 2015 2016F 2017F

(%)

2.5 2.5

2.2 2.0

1.9

-

0.5

1.0

1.5

2.0

2.5

3.0

2013 2014 2015 2016F 2017F

(x)

-

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

2013 2014 2015 2016F 2017F

(IDR bn)

Plantation

32

August 30, 2016


Valuation

We use P/E valuation approach to derive LSIP’s target P/E of 25.0x implying +2 standard deviation

of its 5-year average P/E and present a target price of IDR2,040. Our P/E valuation approach is

justified by its prime age oil palm plantation profile and net cash position. Our target price is

reflects 25.0x 2016F P/E and 23.9x 2017F P/E.

Key risks to our investment thesis are unexpected changes in weather conditions where

transportation disruption may lead the company to be unable to deliver its FFB to the mills.

Furthermore, regulation risks both central and local government related to acquiring new land-

bank could also act as hurdles. Volatility in global palm oil price and global palm oil supply-demand

imbalance is also considered key risks.

Figure 85. PE band


Figure 86. PBV band


8

10

12

14

16

18

20

9/11

12/1

1

3/12

6/12

9/12

12/1

2

3/13

6/13

9/13

12/1

3

3/14

6/14

9/14

12/1

4

3/15

6/15

9/15

12/1

5

3/16

6/16

(x)

0

0.5

1

1.5

2

2.5

3

3.5

9/11

12/1

1

3/12

6/12

9/12

12/1

2

3/13

6/13

9/13

12/1

3

3/14

6/14

9/14

12/1

4

3/15

6/15

9/15

12/1

5

3/16

6/16

(x)

Plantation

33

August 30, 2016


LSIP at a glance

Company profile

The origin of LSIP, dates back to over more than a century ago in 1906, when the London-based

Harrisons & Crosfield Plc, a general trading and plantation management services firm, was

established near the city of Medan in North Sumatra, over the years, LSIP has evolved and grown

to become one of the world’s renowned plantation companies.

LSIP became publicly owned company since 1996 and included as part of Indofood Group in 2007

when IndoAgri, a subsidiary of PT Indofood Sukses Makmur Tbk (INDF IJ) in agribusiness, became

LSIP’s majority shareholders through its subsidiary in Indonesia, PT Salim Ivomas Pratama Tbk

(SIMP IJ). From the acquisition, LSIP becomes part of the synergy with other companies in

Indofood Group.

LSIP manages over 114,000 hectares of nucleus plantation estates in Sumatra, Java, Kalimantan,

and Sulawesi. LSIP also manages oil palm plantations under the plasma program. The palm oil mills

facilities in Sumatra and Kalimantan have a combined FFB processing capacity of 2.4mn tons per

annum. LSIP also operates several rubber processing facilities, a cocoa factory and tea factory.

Figure 87. LSIP brief history


Figure 88. LSIP’s ownership structure


Established in

1906 as a

general trading

and plantation

service

management firm

Developed oil

palm plantation in

1980

Go public in 1996

Included part of

Indofood Group

in 2007

IndoAgri

PT Salim Ivomas Pratama Tbk (SIMP)

London Sumatera Tbk (LSIP)

73.5%

59.5%

Public

40.4%

Plantation

34

August 30, 2016


Management

LSIP is managed by a qualified and experienced management team. The profiles of the

management team are presented below as cited by the company:

Paulus Moleonoto (President Commissioner)

Mr. Paulus Moleonoto was appointed as the President Commissioner of Lonsum based on

the resolution of AGM in 2015. Prior appointed as President Commissioner, he was first

appointed as a Director of Lonsum based on the resolution of the EGM in 2007 and re-

elected as Director of Lonsum based on the resolution of the AGM in 2010, and 2013,

and also as Vice President Director I based on the resolution of AGM in 2014. He is

concurrently a Director of PT Indofood Sukses Makmur Tbk, Executive Director and Head

of Finance & Corporate Services of Indofood Agri Resources Ltd., Vice President Director

of PT Salim Ivomas Pratama Tbk, and Commissioner of PT Indofood CBP Sukses Makmur

Tbk. He began his career in 1984 with Drs. Hans Kartikahadi & Co., a public accounting

firm in Jakarta. Mr. Paulus Moleonoto is a registered accountant in Indonesia. Before

joining the Plantations Division of the Indofood Group as Chief Financial Officer, he held

various management positions in the Salim Plantations Group. He has a Bachelor of

Accountancy degree from the University of Tarumanegara, and a Bachelor’s degree in

Management and a Master of Science degree in Administration & Business Policy from

the University of Indonesia. In 2015, he participated in training programs, workshops and

seminars, including “Indonesia Economic Outlook 2016” on 4 December 2015. He has no

affiliation with the members of the BOC, BOD of the Company, but he has affiliation with

the Company’s shareholders.

Axton Salim (Commissioner)

Mr. Axton Salim was first appointed as Commissioner of Lonsum based on the resolution

of the AGM in 2009 and re-elected in 2010 and 2013. He is concurrently Director of PT

Indofood Sukses Makmur Tbk, Director of PT Indofood CBP Sukses Makmur Tbk, where

he heads the Dairy Division and oversees the Beverages Division; Director of Pacsari Pte.

Ltd. and PT Indofood Asahi Sukses Beverage; Non-Executive Director of Indofood Agri

Resources Ltd. and Gallant Venture Ltd.; Vice President Director I of PT Indolakto; and

Commissioner of PT Salim Ivomas Pratama Tbk and PT Nestlé Indofood Citarasa

Indonesia. He also serves as Global Co-chair of Scaling Up Nutrition (SUN) Business

Network Advisory Group. Mr. Axton Salim has a Bachelor of Science in Business

Administration from the University of Colorado, USA. In 2015, he participated in training

programs, workshops and seminars, including “Indonesia Economic Outlook 2016” on 4

December 2015. He has no affiliation with the members of the BOC, BOD of the

Company, but he has affiliation with the Company’s shareholders.

Hendra Widjaja (Commissioner)

Mr. Hendra Widjaja was appointed as a Commissioner of Lonsum based on the resolution

of the AGM in 2009 and re-elected in 2010 and 2013. He concurrently serves as Director

of PT Indofood CBP Sukses Makmur Tbk, Director IV of PT Indolakto, Non-Executive

Director of China Minzhong Food Corporation Limited, and Commissioner of PT Salim

Ivomas Pratama Tbk. He was previously Director and Chief Financial Officer of PT

Indomarco Adi Prima. Mr. Hendra Widjaja has a Bachelor’s degree in Management and

Finance from the Catholic University of Atma Jaya in Jakarta. In 2015, he participated in

training programs, workshops and seminars, including “Indonesia Economic Outlook

2016” on 4 December 2015.

Plantation

35

August 30, 2016


Werianty Setiawan (Commissioner)

Ms. Werianty Setiawan was first appointed as a Commissioner of Lonsum based on the

resolution of the AGM in 2010 and was re-elected in 2013. She concurrently serves as a

Director of PT Indofood Sukses Makmur Tbk, Director of PT Indofood CBP Sukses

Makmur Tbk and Commissioner of PT Indofood Fritolay Makmur, PT Surya Rengo

Containers, PT Nestlé Indofood Citarasa Indonesia, PT Indolakto, and PT Inti Abadi

Kemasindo. Prior to joining Indofood she was Vice President, Treasury Marketing of

Chase Manhattan Bank N.A., Jakarta; Finance Director of SCTV; Managing Director of

various securities companies, including PT Natura Pacific Sekuritas, PT Danpac Sekuritas

and PT Victoria Kapitalindo International Sekuritas; and Commissioner of PT Jakarta

Setiabudi Internasional Tbk. Ms. Werianty Setiawan has a Bachelor of Science in

Accounting from San Francisco State University, California, USA. In 2015, she

participated in training programs, workshops and seminars, including “Indonesia

Economic Outlook 2016” on 4 December 2015.

Edy Sugito (Independent Commissioner)

Mr. Edy Sugito was appointed as Independent Commissioner of Lonsum based on the

resolution of the AGM in 2012 and was re-elected as Commissioner of Lonsum based on

the resolution of the AGM in 2013. Mr. Edy Sugito was awarded Bachelor of Accountancy

degree from Trisakti University, Jakarta. In 2015, he participated in training programs,

workshops and seminars, including A New Era of Transparency and Indonesian Tax

Amnesty on June 11, 2015.

Monang Silalahi (Independent Commissioner)

Mr. Monang Silalahi was appointed as Independent Commissioner of Lonsum based on

the resolution of the AGM in 2013. He concurrently serves as Director of PT Danpac

Sekuritas since 2003. Previously, he served as Director and Senior Management at PT

Victoria Kapitalindo International, PT Danasupra Erapacific, PT Natura Pacific and PT

Putra Swareka Perdana. He holds a Bachelor degree in Agriculture from Universitas

Sumatera Utara, Medan. In 2015, he participated in training programs, workshops and

seminars, including “Indonesia Economic Outlook 2016” on 4 December 2015. He has no

affiliation with the members of the Board of Commissioners or the Board of Directors

and shareholders of the Company.

Plantation

36

August 30, 2016


Benny Tjoeng (President Director)

Mr. Benny Tjoeng was appointed as the President Director of Lonsum based on the

resolution of the AGM in 2009 and was re-elected as President Director of Lonsum based

on the resolution of the AGM in 2010 and 2013. He oversees day to day operation of the

Company in North Sumatra area, East Kalimantan area, and other commodities. He

currently a President Director of several Company’s subsidiaries. He started his career

with SGV Prasetio Utomo Co as a Senior Auditor during 1984-1989 prior to joining PT

United Tractors Tbk as the Head of Accounting Department in 1990 and Head of

Accounting & Budgeting Division of PT Astra International Tbk in 1993. He subsequently

became Director of PT Astra Grafia Tbk in 1996, Director of PT Astro Agro Lestari Tbk

and held various Commissioner positions in several subsidiaries of PT Astra Agro Lestari

Tbk. He was later appointed as Vice President Director at that company from 2000 to

2006. His last position before joining Lonsum was President Director at PT Astra Sedaya

Finance from 2006 to 2008. Mr. Benny Tjoeng holds a Diploma Degree in Accountancy

from Jayabaya Accounting Academy an a Bachelor Degree from the University of

Indonesia, majoring in Financial Management. In 2015, he participated in training

programs, workshops and seminars, including “Indonesia Economic Outlook 2016” on 4

December 2015. He has no affiliation with the members of the Board of Commissioners

or the Board of Directors and shareholders of the Company.

Tan Agustinus Dermawan (Vice President Director)

Mr. Tan Agustinus Dermawan was first appointed as a Vice President Director I of

Lonsum based on the resolution of the AGM in 2015. Mr. Tan Agustinus Dermawan

oversees financial function of the Company. Mr. Tan Agustinus Dermawan is currently a

Director of PT Salim Ivomas Pratama Tbk and as a Director of several Company’s

subsidiaries. He previously worked as a Senior Auditor Accounting Firm Drs. Hans

Kartikahadi & Co. – Registered Public Accountant, Funding Supervisor at Sadang Mas

Group, Funding Manager and Assistant Vice President - Funding and Chief Operating

Officer (COO) of Sumatra Region at Salim Plantations Group). He was awarded a

Bachelor of Accountancy degree from the University of Tarumanegara Jakarta. During

2015, he participated in training programs, workshops and seminars, including “Indonesia

Economic Outlook 2016” on 4 December 2015. He has no affiliation with the members of

the BOC, BOD of the Company, but he has affiliation with the Company’s shareholders.

Tio Eddy Hariyanto (Vice President Director 2)

Mr. Tio Eddy Hariyanto was appointed as Vice President Director II of Lonsum based on

the resolution of the AGM in 2012 and was re-elected as Vice President Director II of

Lonsum based on the resolution of the AGM in 2013. Mr. Tio Eddy Hariyanto was

educated at Universitas Kristen Indonesia in major of Civil Engineering. In 2015, he

participated in training programs, workshops and seminars, including “Indonesia

Economic Outlook 2016” on 4 December 2015.

Mark Julian (Director)

Mr. Mark Julian Wakeford was first appointed as a Director of Lonsum based on the

resolution of the EGM in 2007 and was re-elected as a Director of Lonsum based on the

resolution of the AGM in 2010 and 2013. Mr. Mark Julian Wakeford trained and qualified

as a Chartered Accountant in London, England and attended the Senior Executive

Program at the London Business School.

Joefly Joesef Bahroeny (Director)

Mr. Joefly Joesoef Bahroeny was appointed as Director of Lonsum based on the

resolution of the EGM in 2007 and was re-elected as Director of Lonsum based on the

resolution of the AGM in 2010 and 2013, previously served as a Commissioner of Lonsum

based on the resolution of the EGM in 2004. Mr. Joefly Joesoef Bahroeny has graduated

from the University of New South Wales, Sydney, and has a Magister Management in

Agrobusiness from the University of North Sumatera, Medan.

Plantation

37

August 30, 2016


Profit & Loss

Balance sheet

Year end Dec 31 (IDR bn) 2015 2016E 2017E 2018E Year end Dec 31 (IDR bn) 2015 2016E 2017E 2018E

Revenue 4,189.6 4,124.4 4,613.1 5,187.5 Current assets

Cost of goods sold -3,073.8 -3,036.9 -3,433.5 -3,827.5 Cash & equivalents 737.1 923.1 956.3 980.1

Gross profit 1,115.8 1,087.5 1,179.6 1,360.0 Short-term financial asset - - - -

SG&A -351.5 -388.0 -434.0 -488.0 Account receivable 112.3 73.8 82.6 92.8

EBIT (Adj.) 764.4 699.5 745.6 871.9 Inventory 398.4 373.8 422.6 471.1

EBIT 764.4 699.5 745.6 871.9 Other current assets 1,042.2 928.1 1,046.5 1,168.8

Net interest income (loss) 52.9 80.6 76.9 76.4 Non-current assets

Income (loss) from associcates 0.0 0.0 0.0 0.0 Net fixed assets 3,428.0 3,591.3 3,782.2 4,006.5

Others 10.6 -58.7 -65.6 -73.8 Investment 806.5 806.5 806.5 806.5

Recurring profit 827.9 721.4 756.9 874.6 Other long-term assets 3,345.7 3,062.0 3,230.1 3,436.3




Short-term debt - - - -

Growth & margins 2015 2016E 2017E 2018E Other current liabilities 262.0 250.4 277.7 313.4


Gross profit growth -31.8 -2.5 8.5 15.3 Long-term debt - - - -

EBIT growth -35.9 -8.5 6.6 16.9 Other long-term liabilities 939.7 596.8 666.9 750.2

Net profit growth -32.0 -10.8 4.9 15.5 Total liabilities 1,510.8 1,283.6 1,438.0 1,613.6





Cash Flow Ratio analysis

Year end Dec 31 (IDRbn) 2015 2016E 2017E 2018E Year end Dec 31 2015 2016E 2017E 2018E

Cash flow from operations ROE (%) 8.5 7.3 7.4 8.2

Net profit 623.3 556.2 583.6 674.3 ROA (%) 7.0 6.3 6.3 6.9

Depr. & amortization 321.8 345.2 369.7 397.3 Inventory days 47.3 44.9 44.9 44.9

Others -20.7 -23.7 24.0 30.9 Receivables days 9.8 6.5 6.5 6.5

Change in working capital -180.6 190.3 -0.6 -2.2 Payable days 36.7 52.5 52.5 52.5

Cash flow from investing Net debt/equity (x) N.A N.A N.A N.A

Capital expenditure -514.3 -506.3 -566.3 -636.8 Interest cover (x) N.A N.A N.A N.A

Others -596.1 281.6 -162.4 -190.9


Dividends -361.5 -273.2 -286.7 -331.3

Increase in equity 21.3 -41.2 1.7 -0.9

Increase in debt 0.0 0.0 0.0 0.0

Others 87.4 -342.9 70.1 83.3

Beginning cash 1,356.5 737.1 923.1 956.3

Ending cash 737.1 923.1 956.3 980.1


Plantation

38

August 30, 2016


Sampoerna Agro (SGRO IJ)

Challenges in the short term

Initiate coverage on SGRO with a Hold rating

We initiate coverage on Sampoerna Agro (SGRO) with a Hold recommendation and target

price of IDR1,875. SGRO is the CPO arm of Sampoerna family through Sampoerna Agri

Resources Pte Ltd. Sampoerna group is one of the largest conglomerate groups in Indonesia.

We believe SGRO has ample room to grow over the long-term on the back of stable CPO

extraction rate and its prime age plantation profile. However, we are concerned with its

high financial expenses burden, which should act as a key drag on earnings. Our earnings

projections over the next two years stand at IDR204.9bn (2016F) and IDR213.5bn (2017F)

from IDR247.6bn in 2015.

Higher nucleus FFB production lead higher CPO extraction rate

In 2007, SGRO’s FFB production was largely from plasma plantation which accounted for

64.0% of the total FFB production. The company realized that plasma plantation was

inefficient (i.e., low extraction and yield), thus, the company steered its strategy and

increased its nucleus FFB production through massive new planting. By 2014, SGRO’s FFB

production from nucleus plantation represented 52.0% of total FFB production. We credit

the company’s efforts and project higher FFB production contribution from nucleus, going

forward. All in all, we forecast SGRO’s CPO extraction rate to improve from 21.2% in 2015

to 22.1% in 2016F and 2017F, respectively,

Bleak outlook in the short-term, but rosy long-term outlook

Although SGRO’s top-line is expected to improve on the back of higher ASP, we are

concerned with the potential squeeze to its bottom-line due to high interest expenses. We

predict that SGRO’s revenue will reach IDR3.1tr and IDR3.4tr (+4.7% and +9.3% YoY) in

2016F and 2017F. However we expect SGRO’s net profit to fall to IDR204.9bn and

IDR213.5bn in 2016F and 2017F, respectively, from IDR247.6bn in 2015. Thus, SGRO’s net

profit margins are expected decline to 6.5% and 6.2% in 2016F and 2017F, respectively.

Lower ROE and has a downside potential

We use the P/E valuation methodology to derive our 12MF target price of SGRO given most

of SGRO’s plantation falls into the prime age category. We set our P/E target at 17.3x and

reflecting its mean 5-years average P/E. Furthermore, we project SGRO’s ROE will slip to

6.0% in 2016F and 2017F, respectively, from 7.2% in 2015.

FY (Dec.) 12/13 12/14 12/15 12/16F 12/17F

Revenue (IDRbn) 2,560.7 3,242.4 2,999.4 3,139.7 3,432.8

Gross profit (IDRbn) 498.1 868.6 833.6 872.5 962.6

Operating profit (IDRbn) 200.7 542.2 467.2 495.7 550.6

NP (IDRbn) 119.1 340.3 247.6 204.9 213.5

EPS (IDR) 63.0 180.1 131.0 108.4 113.0

BPS (IDR) 1,427.9 1,596.5 1,807.8 1,793.6 1,897.6

P/E (x) 31.7 11.7 13.0 18.3 17.5

ROE (%) 4.4 11.3 7.2 6.0 6.0

ROA (%) 2.6 6.2 3.4 2.5 2.6



Agriculture

(Initiate) HOLD



Expected Return -5.3%

OP (16F, IDRbn) 495.7




P/E (16F, x) 18.3


JCI (8/29/2016) 5,370.8



Free Float (%) 27.2


Beta (5Y) 0.4



(%) 1M 6M 12M

Absolute -0.5 8.8 41.4

Relative -3.5 -3.8 20.6

Plantation

39

August 30, 2016


Higher FFB production from nucleus party

Since operating its CPO milling in 1996, most of SGRO’s FFB production was dominated by plasma

plantation. In 2014, the company’s FFB production was steered away from plasma to nucleus

through massive new planting. This strategic adjustment was in-line with the management’s long-

term plan before 2012 and we credit SGRO’s commitment to the strategy. We believe that FFB

production from nucleus will continue to dominate over the longer term.

Since 2007, Kalimantan region was SGRO’s key area of FFB production which represented 89.0% of

the company’s total FFB production. However, by 1H16, Kalimantan FFB production contribution

gradually decreased to 57.0% of SGRO’s total production. According to the management, the

company aims to balance out the geographical diversification between Sumatra and Kalimantan,

going forward.

Figure 89. FFB production nucleus versus plasma


Figure 90. Significant jumped in FFB production from Kalimantan by 1H16


0.0

20.0

40.0

60.0

80.0

100.0

120.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 1H15 1H16

(%)Nuclues Plasma

0.0

20.0

40.0

60.0

80.0

100.0

120.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 1H15 1H16

(%)Sumatra Kalimantan

Plantation

40

August 30, 2016


Improvement in its CPO extraction rate

As a result of increased nucleus FFB production, SGRO’s CPO extraction rate improved to 22.1% in

1H16 (vs. 21.8% in 1H15). We also believe that SGRO’s CPO extraction rate will remain high at

22.1% in 2016F and 2017F, respectively compared to its previous year at 21.2%. Furthermore, we

also predict that SGRO’s palm kernel extraction rate will reach 6.0% in 2016F and 2017F,

respectively.

Figure 91. CPO extraction rate history Figure 92. Lower CPO production from February…



Plantation Profile

SGRO also produces sago and rubber commodities which are located in Sumatra, Kalimantan, and

Papua. For rubber, SGRO has 6,000ha of planted area and 100,000ha land banks. Meanwhile, SGRO

has 11,000ha of planted area and 85,000 ha land banks for sago production, respectively.

For oil palm, SGRO has 136,731ha (inclusive of nucleus & plasma) as of 1H16. Total planted nucleus

area stood at 83,438ha, representing 61.0% of total planted area. Based on the age profile

category, SGRO’s prime age plantation amounted to 41,460ha. Thus, we believe that SGRO has

ample room to grow over the long-term.

Figure 93. SGRO operational area Figure 94. Plantation area profile



20.7

21.7

21.2

21.8

22.1

20.0

20.5

21.0

21.5

22.0

22.5

2013 2014 2015 1H15 1H16

(%)

1,000

6,000

11,000

16,000

21,000

26,000

31,000

36,000

41,000

46,000

51,000

1/15

2/15

3/15

4/15

5/15

6/15

7/15

8/15

9/15

10/1

5

11/1

5

12/1

5

1/16

2/16

3/16

4/16

5/16

6/16

('000 tonnes)CPO Palm Kernel

17,815 18,959

32,531

14,133

5,326 4,858

8,929

34,180

-

10,000

20,000

30,000

40,000

50,000

60,000

Immature Young Prime Old

(hectare) Nucleus Plasma

Plantation

41

August 30, 2016


Diversification is yet to bear fruit

SGRO claimed that they are a diversified plantation company in Indonesia that has seed, rubber,

and also sago businesses. However, our judgement is that this diversification is yet to bear fruit

given the segments have low contribution to SGRO’s total revenue. By 1H16, SGRO main revenue

contributor was palm oil products such as palm oil and palm kernel which accounted for 80.0% and

11.0%, respectively. Meanwhile, the others only represented less than 10.0% to SGRO’s total

revenue.

Figure 95. Revenue from sago starch less significant to the total revenue


Low earnings visibility on higher interest expenses

We predict that SGRO’s revenue will reach IDR3.1tr and IDR3.4tr, growing 4.7% and 9.3% YoY in

2016F and 2017F, respectively. However, we predict that SGRO’s net profit will shrink to

IDR204.9bn and IDR213.5bn in 2016F and 2017F, respectively, from IDR247.6bn in 2015. We

forecast the company’s net profit margin to decline to 6.5% and 6.2% in 2016F and 2017F,

respectively. Our expectation for lower net profit margin is mainly due to higher interest expense

outlook.

Figure 96. SGRO’s monthly ASP Figure 97. Revenue and net profit outlook



4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

8,000

8,500

(IDR/kg)

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

2013 2014 2015 2016F 2017F

(IDR bn)Revenue Net Profit

Plantation

42

August 30, 2016


Figure 98. Profitability margin Figure 99. ROA reach 2.5% and 2.6% in 2016F & 2017F



Figure 100. ROE stable at 6.0% in 2016F & 2017F Figure 101. Stable net debt to equity in 2016F & 2017F



Figure 102. Lower interest coverage Figure 103. Lower capex going forward



0.0

5.0

10.0

15.0

20.0

25.0

30.0

2013 2014 2015 2016F 2017F


2.6

6.2

3.4

2.5 2.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2013 2014 2015 2016F 2017F

(%)

4.4

11.3

7.2

6.0 6.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2013 2014 2015 2016F 2017F

(%)

0.40.5

0.6

1.01.0

0.0

0.2

0.4

0.6

0.8

1.0

1.2

2013 2014 2015 2016F 2017F

(x)

3.1

8.3

3.5

2.9 2.7

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2013 2014 2015 2016F 2017F

(x)

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

2013 2014 2015 2016F 2017F

(IDR bn)

Plantation

43

August 30, 2016


Valuation

We use the P/E valuation methodology to derive SGRO’s 12MF target price given most of SGRO’s

plantation falls into the prime age category. We set our P/E target at 17.3x and reflecting its mean

5-years average P/E. Furthermore, we project SGRO’s ROE will slip to 6.0% in 2016F and 2017F,

respectively, from 7.2% in 2015.

Key risks to our investment thesis are drop in both CPO and palm kernel extraction rate from

plasma plantation. Furthermore, regulation risks both central and local government related to

acquisition of new land banks could act as hurdles. Volatility in global palm oil price and global palm

oil supply-demand imbalance is also considered key risks.

Figure 104. PE band


Figure 105. PBV band


0

5

10

15

20

25

30

9/11

12/1

1

3/12

6/12

9/12

12/1

2

3/13

6/13

9/13

12/1

3

3/14

6/14

9/14

12/1

4

3/15

6/15

9/15

12/1

5

3/16

6/16

(x)

0

0.5

1

1.5

2

2.5

3

9/11

12/1

1

3/12

6/12

9/12

12/1

2

3/13

6/13

9/13

12/1

3

3/14

6/14

9/14

12/1

4

3/15

6/15

9/15

12/1

5

3/16

6/16

(x)

Plantation

44

August 30, 2016


SGRO at a glance

Company profile

SGRO and subsidiaries is a plantation company that strives to become an integrated and diversified

plantation with sustainable long-term interests. Together with its 31 subsidiaries, the company

engages in the production of oil palm products, superior oil pam seeds (DxP Sriwijaya seeds), and

non-palm products that include sago (Prima Starch) and rubber products. Among the company’s

key products, crude palm oil and palm kernel made up the biggest share of total consolidated

revenue for the company, at 95% of total.

For SGRO, sustainability is articulated through green initiatives, including adhering to the highest

criteria for sustainable palm oil development and other environmentally-friendly benchmarks. At

the moment, SGRO has obtained various certifications in palm oil sector such as the Roundtable on

Sustainable Palm Oil (RSPO) and International Sustainability & Carbon Certification (ISCC)

certificates. SGRO has also complied with the local best practices under the Indonesian Sustainable

Palm Oil (ISPO) certification.

Fundamentally, the company has grown substantially within the last several years. For instance, at

the time of SGRO initial public offering (IPO) in 2007, the company had managed palm oil crop

with nucleus plantation size of 35,000 hectares. By end of 2015, SGRO palm oil plantation has

more than doubled, comprising over 80,000 hectares of nucleus plantation.

Figure 106. SGRO brief history


Figure 107. SGRO’s ownership structure


Establishment of

PT Aek Tarum,

the first company

within

Sampoerna

Group in 1976

First operation

CPO mill in 1996

Acquired PT

Sungai Rangit

Go public in 2007

Plantation

45

August 30, 2016


Management

SGRO is managed by a qualified and experienced management team. The profiles of the


Michael Sampoerna (President Commissioner)

An Indonesian citizen born on August 23, 1978, 37 years old, domiciled in Jakarta,

Indonesia. Mr. Sampoerna studied in London School of Economics, United Kingdom. Prior

to joining the Company, he served as the President Director of PT HM Sampoerna Tbk

from 2001 to 2005. He has served as the President Commissioner of the Company since

2007. He was reappointed as President Commissioner based on Deed No. 71, dated June

18, 2012, drawn by Mala Mukti, SH, LL. M. Currently, he also serves as the President

Commissioner, Commissioner and Director in a number of companies within Sampoerna

Strategic Group such as Samko Timber Ltd. and PT Sampoerna Strategic.

Hendra Prasetya (Commissioner)

An Indonesian citizen born on April 8, 1950, 65 years old, domiciled in Jakarta, Indonesia.

Mr. Prasetya received his Bachelor degree majoring in Civil Engineering in 1978 from

Petra Christian University, Surabaya. He has served as a Commissioner since 2012 based

on Deed No. 73 dated October 18, 2012, drawn by Mala Mukti, SH, LL. M. Currently, he

also serves as a Director at several companies within Sampoerna Strategic Group, one of

which is PT Sampoerna Bio Energi. Prior to joining the Company, he worked at PT HM

Sampoerna Tbk from 1980 to 2005 with last position as a Director.

Phang Cheow Hock (Independent Commissioner)

A Singaporean citizen born on September 1, 1932, 83 years old, domiciled in Singapore.

Mr. Phang received his Bachelor degree in 1950 from University of Cambridge, Australia.

He has served as an Independent Commissioner since 2007. He was reappointed as

Independent Commissioner based on Deed No. 71 dated June 18, 2012, drawn by Mala

Mukti, SH, LL. M. He has also served as an Independent Commissioner at PT HM

Sampoerna Tbk since 2001 up to present.

RB Permana Agung Dradjattun (Independent Commissioner)

An Indonesian citizen born on October 27, 1952, 63 years old, domiciled in Jakarta,

Indonesia. Mr. Dradjattun received his Doctor of Philosophy (Ph.D) in Public Policy from

University of Notre Dame, United States, in 1989. He has served as an Independent

Commissioner since 2013. He was appointed as Independent Commissioner based on

Deed No. 77 dated June 18, 2013, drawn by Mala Mukti, SH, LL. M. He has more than 24

years of professional life in the Directorate General of Customs and Excise, having last

position as the Director General of Customs and Excise.

Plantation

46

August 30, 2016


Ekadharmajanto Kasih (President Director)

An Indonesian citizen born on March 19, 1951, 64 years old, domiciled in Jakarta,

Indonesia. Mr. Kasih received his Bachelor degree majoring in Economics from University

of Indonesia in 1975. He has served as the President Director of the Company since 2008.

He was reappointed as President Director based on Deed No. 71 dated June 18, 2012,

drawn by Mala Mukti, SH, LL. M. Currently, he also serves as Non-Executive Director of

Samko Timber Ltd. Previously, he worked as a Commissioner at PT Sampoerna Agro Tbk

from 2007 to 2008. Since 1990, he has been working at PT HM Sampoerna Tbk and held

various positions included Commissioner, Chief Financial Officer, Director and Financial

Controller.

Marc Stephan Louis Loutte (Vice President Director)

A Belgian citizen born on December 14, 1965, 50 years old, domiciled in Jakarta,

Indonesia. Mr. Louette received his Master degree in Bio Agricultural Science from K.U.

Leuven, Belgium, in 1988, as well as Master of Business Administration from IMI, Belgium,

in 2004. He has served as the Vice President Director since 2012 based on Deed No. 71

dated June 18, 2012, drawn by Mala Mukti, SH, LL. M. Prior to joining PT Sampoerna

Agro Tbk, more than 23 years of his professional life was spent in multinational

companies, namely Asian Agri Group as the Managing Director and Socfin Group as the

Director of Plantation.

Budi Setiawan Halim (Finance Director)

An Indonesian citizen, born on January 19, 1971, 44 years old, domiciled in Jakarta,

Indonesia. Mr. Halim received his Bachelor degree majoring in Accounting from

Tarumanagara University in 1995. He has served as the Finance Director since 2012.

Hero Djajakusumah (Human Resources Director)

An Indonesian citizen born on March 31, 1966, 49 years old, domiciled in Jakarta,

Indonesia. Mr. Djajakusumah received his Master of Business Administration degree from

Western Michigan University, United States, in 1993. He has served as Human Resources

Director since 2011.

Dwi Asmono (Research & Development Director)

An Indonesian citizen born on April 6, 1965, 50 years old, domiciled in Jakarta, Indonesia.

Mr. Asmono received his Doctor of Philosophy (Ph.D) on Plant Breeding and Genetics

from Iowa State University, United States, in 1998. He has served as the Research and

Development Director since 2007.

Lim King Hui (Commercial Director)

An Indonesian citizen born on January 8, 1964, 51 years old, domiciled in Jakarta,

Indonesia. Mr. Lim received his Bachelor of Science degree in Finance and Management

Information Systems from State University of New York, United States, in 1989. He has

served as the Commercial Director since 2012.

Plantation

47

August 30, 2016


Profit & Loss

Balance sheet

Year end Dec 31 (IDR bn) 2015 2016E 2017E 2018E Year end Dec 31 (IDR bn) 2015 2016E 2017E 2018E


Cost of goods sold -2,165.9 -2,267.3 -2,470.3 -2,689.8 Cash & equivalents 759.6 652.2 431.3 464.5

Gross profit 833.6 872.5 962.6 1,119.1 Short-term financial asset 0.0 0.0 0.0 0.0

SG&A -366.4 -376.8 -411.9 -457.1 Account receivable 314.7 375.1 410.1 455.0

EBIT (Adj.) 467.2 495.7 550.6 662.0 Inventory 469.4 881.7 960.7 1,046.0

EBIT 467.2 495.7 550.6 662.0 Other current assets 62.3 213.6 233.5 259.1

Net interest income (loss) -112.4 -161.0 -191.2 -187.4 Non-current assets


Others 41.4 -62.8 -68.7 -152.4 Investment 0.0 0.0 0.0 0.0

Recurring profit 396.2 271.8 290.8 322.2 Other long-term assets 3,779.3 3,879.1 3,771.8 3,579.7




Short-term debt 475.9 654.0 789.0 1,000.0

Growth & margins 2015 2016E 2017E 2018E Other current liabilities 383.8 140.0 156.5 173.3

Revenue growth -7.5 4.7 9.3 11.0 Non-current liabilities

Gross profit growth -4.0 4.7 10.3 16.3 Long-term debt 2,122.8 3,490.4 3,191.8 3,011.4

EBIT growth -13.8 6.1 11.1 20.2 Other long-term liabilities 490.5 140.9 154.9 171.9

Net profit growth -27.3 -17.2 4.2 10.8 Total liabilities






Year end Dec 31 (IDR bn) 2015 2016E 2017E 2018E Year end Dec 31 2015 2016E 2017E 2018E


Net profit 247.6 204.9 213.5 236.6 ROA (%) 3.4 2.5 2.6 2.8

Depr. & amortization 224.0 -294.3 148.4 155.2 Inventory days 79.1 141.9 141.9 141.9

Others -31.8 -220.6 -3.4 -8.8 Receivables days 38.3 43.6 43.6 43.6

Change in working capital -206.1 -560.5 -85.6 -99.6 Payable days 68.2 51.0 51.0 51.0

Cash flow from investing Net debt/equity (x) 0.6 1.0 1.0 0.9

Capital expenditure -411.7 -892.6 -373.3 -410.9 Interest cover (x) 3.5 2.9 2.7 3.3

Others -818.6 865.9 46.2 130.8


Dividends -68.0 -17.1 -17.8 -19.7

Increase in equity 194.6 -214.7 0.8 2.0

Increase in debt 1,082.8 1,371.2 -163.6 30.6

Others 326.9 -349.6 14.0 16.9

Beginning cash 194.6 759.6 652.2 431.3

Ending cash 759.6 652.2 431.3 464.5


Plantation

48

August 30, 2016


Sawit Sumbermas Sarana (SSMS IJ)

Young and energetic

Initiate coverage on SSMS with a Buy rating

We initiate coverage on Sawit Sumbermas Sarana (SSMS) with Buy recommendation and

present a target price of IDR2,150/share. SSMS is the CPO unit of PT Citra Borneo Indah. All

its oil palm plantation area are located in South Kalimantan, which we consider to be a key

advantage for the company as Kalimantan has stable weather conditions compared to

Sumatra. SSMS has the highest CPO yield within our CPO universe. This competitive

advantage will lead SSMS’ profitability margin on track to continued expansion. Given SSMS

has young oil palm age at 7.5 years as of 1H16, we are optimistic that SSMS has ample

potential to grow over the longer term.

The highest CPO yield among peers

We like the company’s fundamental as it boasts the highest CPO yield (5.4 tons/ha) among

our CPO universe (average at 4.0 tons/ha) as of 1H16. With good cultivation management

through using high-yielding 2nd generation seeds from major providers, such as London

Sumatera (LSIP/ Buy), Socfin, Damimas, and Topas AsianAgri, we believe that SSMS’ CPO

yield will remain on a stable trajectory, going forward. We notice that SSMS’ CPO extraction

jumped by 200bps to 23.8% in 1H16, from 21.8% in 2013. With abundant production

capacity and good infrastructures (e.g., short distance between oil palm plantation areas to

mill), we forecast SSMS’ CPO extraction will remain stable at 23.0%, going forward.

Double-digit profitability margins despite lower revenue in 2016F

Even though we predict that SSMS’ revenue will decline to IDR2.30tr in 2016F, from

IDR2.37tr in 2015, we believe SSMS is able to deliver double-digit profitability margin in the

mid-term supported by its high CPO yield. We underscore that SSMS is relatively efficient

compared to other CPO companies under our coverage. Our lower revenue projection

factors in lower sales volume which is expected to decline to 259,400 tons in 2016F, from

301,200 tons in 2015.

Upside potential more than 20.0%, compare to current price

We use the P/E valuation methodology to derive our 12MF target price of IDR2,150/share,

implying an upside of 30.7%. Supported by its young oil palm age profile (at 7.5 years), we

believe SSMS has huge leg room to fill, going forward. Our key investment risks are 1)

sudden price spike/plunge in global palm oil prices, 2) crude oil price fluctuations, and 3)

infrastructure disruptions.

FY (Dec.) 12/13 12/14 12/15 12/16F 12/17F

Revenue (IDRbn) 1,962.4 2,616.4 2,371.9 2,301.5 2,850.8


Operating profit (IDRbn) 889.2 991.5 880.0 992.0 1,118.4

NP (IDRbn) 576.8 736.3 559.0 591.8 669.1

EPS (IDR) 60.6 77.3 58.7 62.1 70.2

BPS (IDR) 238.6 287.7 318.5 365.0 417.7

P/E (x) 13.5 21.5 33.2 26.5 23.4

ROE (%) 25.4 26.9 18.4 17.0 16.8

ROA (%) 15.6 10.9 8.0 7.7 7.9



Agriculture

(Initiate) Buy



Expected Return 30.7%

OP (16F, IDRbn) 992.0


EPS Growth (16F, %) 5.9


P/E (16F, x) 26.5


JCI (8/29/2016) 5,370.8



Free Float (%) 26.7


Beta (5Y) 0.9



(%) 1M 6M 12M

Absolute -1.8 -16.9 2.2

Relative -4.8 -29.5 -18.6

Plantation

49

August 30, 2016


Young and energetic

43.0% of SSMS’ total planted area is prime-age oil palm which means that theoretical FFB

yield at peak could reach until 32.0tons/ha. Furthermore, 28.0% of total planted area is

categorized as young trees (maximum FFB yield could at 28.0tons/ha) and 29.0% of total

planted area which falls into the immature category. The oil palm demographic shows SSMS’

average tree age of 7.5 years, which we believe should award the company with stable

longer term growth outlook.

Figure 108. Average age at 7.5 years Figure 109. SSMS’ theoretical FFB yield



The highest CPO yield among others

Even though SSMS’ FFB yield (21.5tons/ha) falls below AALI (21.7tons/ha), its FFB yield

remains above our CPO universe average which stands at 17.6tons/ha. Surprisingly, SSMS’

CPO yield is the highest (5.4tons/ha) among peers, followed by LSIP, AALI and SGRO that

reach 4.1, 3.5, and 3.0 tons/ha, respectively. A good cultivation through high-yielding 2nd

generation seeds from major providers, such as London Sumatra (LSIP/ Buy), Socfin,

Damimas, and Topas AsianAgri is the key reason behind SSMS’ high CPO yield, in our view.

Figure 110. Higher than average Figure 111. The highest CPO yield among peers



21.7

17.8

9.3

21.5

0.0

5.0

10.0

15.0

20.0

25.0

AALI LSIP SGRO SSMS

(tonnes/ha)

Average 17.6 tonnes/ha

3.5

4.1

3.0

5.4

0.0

1.0

2.0

3.0

4.0

5.0

6.0

AALI LSIP SGRO SSMS

(tonnes/ha)

Average 4.0tonnes/ha

43.0

28.0

29.0

Prime

Young

Immature

(%)

Average Age at 7.5 years

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

(tonnes/ha)

High growth phase

Prime ageDecline phase

Plantation

50

August 30, 2016


Table 4. SSMS’ land area

Subsidiary Area (ha) Infrastructure (ha) Total (ha)

Planted Unplanted

Sawit Sumbermas Sarana 20,124 14 2,611 22,749

Mitra Mendawai Sejati 8,389 50 1,909 10,348

Kalimantan Sawit Abadi 5,982 929 361 7,272

Sawit Multi Utama 15,571 1,014 863 17,448

Tanjung Sawit Abadi 10,833 2,544 1,532 14,909

Menteng Kencan Mas 7,258 7,674 5,868 20,800

Mirza Pratama Putra 2,782 1,764 1,879 6,425


Lower FFB production due to El Nino effects

Since going public in 2013, SSMS underwent massive expansion through organic and

inorganic growth. Therefore, the company’s immature planted area jumped to 20,141

hectares in 1h16, from 678 hectares in 2013. Furthermore, young oil palm plantation area

increased to 20,082 hectares in 1H16, from 14,611 hectares in 2013. We underscore that

the company’s prime-age oil palm area almost doubled to 30,717 hectares in 1H16, from

17,951 hectares in 2013.

Unfortunately, SSMS’ nucleus FFB production came down to 499,893 tons in 1H16 (-22.9%

YoY). This lower production was mainly due to El Nino which occurred last year. Going

forward, SSMS predicts that FFB production will decline 10.0% - 12.0% YoY, compared to a

year earlier. Using conservative assumptions, we predict that SSMS’ FFB nucleus production

will be reduced to 942,951 tons and 1.05mn tons in 2016F and 2017F, respectively.

Figure 112. Massive growth Figure 113. Nucleus FFB production trends



0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2013 2014 2015 1H15 1H16

(hectares)Immature Young Prime

711.1

808.3

1,094.5

648.3

499.9

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

2013 2014 2015 1H15 1H16

('000 tonnes)

Plantation

51

August 30, 2016


Higher production capacity despite palm oil production fell in 1H16

SSMS has six palm oil mills which are located in Sulung, Natai Raya, Suayap, Selangkun,

Malata, and Nanga Kiu. The aggregated capacity of the six mills are 375 tons/hour as of

1H16 (vs. 315 tons/hour as of 1H15), which represents a utilization rate of 52%. While the

utilization rate seems relatively low, SSMS cited that the company aims to prepare for the

peak harvesting season.

We notice that SSMS’ CPO extraction jumped by 200bps to 23.8% in 1H16, from 21.8% in

2013. With abundant production capacity and good infrastructures (e.g., short distance

between oil palm plantation areas to mill), we forecast SSMS’ CPO extraction will remain

stable at 23.0%, going forward. Furthermore, one of the benefits of high production

capacity is that it tends to reduce FFA of palm oil, award the company to be labeled

premium quality (<5% of FFA). We note that SSMS’ products are priced slightly higher

compared to its peers (which has higher FFA).

Figure 114. Production capacity per hour trends Figure 115. Lower palm oil prod. was due to lower FFB prod.



Figure 116. CPO extraction rate jumped more than 200bps until 1H16


255 255

375

315

375

0

50

100

150

200

250

300

350

400

2013 2014 2015 1H15 1H16

(tonnes/hour)

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

2013 2014 2015 1H15 1H16

('000 tonnes)CPO PK CPKO

21.8

23.523.7 23.7

23.8

20.5

21.0

21.5

22.0

22.5

23.0

23.5

24.0

2013 2014 2015 1H15 1H16

(%)

Plantation

52

August 30, 2016


Revenue contraction to reverse in 2017F

We project SSMS’ CPO ASP to reach IDR7,876/kg and IDR8,663/kg in 2016F and 2017F,

respectively (13.3% and 10.0% YoY). However, we predict that the company’s sales volume

will slip to 259,400 tons and 292,500 tons in 2016F and 2017F, respectively. Therefore,

SSMS’ revenue is expected to drop to IDR2.3tr in 2016F and improve to IDR2.8tr by 2017F.

Even though SSMS’ revenue is expected to contract, but we believe that SSMS’ net profit

will reach to IDR591.8bn and IDR669.1bn in 2016F and 2017F, respectively.

Figure 117. CPO sales volume will improve in 2017F Figure 118. Average selling price trend



Figure 119. Lower revenue in 2016F Figure 120. Revenue & net profit growth



242.7

289.8301.2

259.4

292.5

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

2013 2014 2015 2016F 2017F

('000 tonnes)

7,353

8,249

6,954

7,876

8,663

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2013 2014 2015 2016F 2017F

(IDR/kg)

1,962.4

2,616.4

2,371.9 2,301.5

2,850.8

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

2013 2014 2015 2016F 2017F

(IDR bn)

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

2013 2014 2015 2016F 2017F

(%)Revenue Net Profit

Plantation

53

August 30, 2016


Figure 121. Operating profit improves Figure 122. Higher net profit in 2016F and 2017F



Figure 123. Profitability margin Figure 124. Lower capex in 2016F



Figure 125. Improves in net debt to equity Figure 126. Lower interest coverage ratio



0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

2013 2014 2015 2016F 2017F

(IDR bn)

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

2013 2014 2015 2016F 2017F

(IDR bn)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

2013 2014 2015 2016F 2017F


0.1

0.5

0.9

0.8 0.8

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

2013 2014 2015 2016F 2017F

(x)

7.2

4.9

4.3

3.3 3.3

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2013 2014 2015 2016F 2017F

(x)

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

2013 2014 2015 2016F 2017F

(IDR bn)

Plantation

54

August 30, 2016


Valuation

We use P/E valuation approach to derive SSMS’ 12MF target price as most of SSMS’

plantation falls into the prime age category with average plantation age profile at 7.5 years.

We set our P/E target at 34.2x which was derived by applying +2 standard deviation of the

5-year average P/E.

Key risks to our investment thesis are infrastructure disruptions that could weaken its

logistics. Furthermore, regulation risks both central and local government related to

acquiring new land-bank could also act as hurdles. Volatility in global palm oil price and

global palm oil supply-demand imbalance is also considered key risks.

Figure 127. PE band


Figure 128. PBV band


20

25

30

35

40

45

12/15 1/16 2/16 3/16 4/16 5/16 6/16

(x)

2

3

4

5

6

7

8

12/13

2/14

4/14

6/14

8/14

10/14

12/14

2/15

4/15

6/15

8/15

10/15

12/15

2/16

4/16

6/16

(x)

Plantation

55

August 30, 2016


SSMS at a glance

Company profile

SSMS was established at Pangkalan Bun, Central Kalimantan, on 22 November, 1995, with

an aim to grow the business and a commitment to become world class manufacturer. The

company has carried out an Initial Public Offering (IPO) on December 12, 2013 and listed its

shares on the Indonesian Stock Exchange (IDX).

In carrying out its integrated business activities, the company manages eleven palm oil

plantations, four mills, and a palm kernel processing plant. Through the implementation of

plantation management which is based on the best business practices, the company is

committed to boosting sustainable business growth, and further maintaining environmental

sustainability and community development. Supported by competent human resources,

effective business processes, and innovation excellence, the company is optimistic in

realizing its vision to become a world-class plantation company while creating added value

for shareholders.

Figure 129. SSMS brief history


Figure 130. SSMS’ ownership structure


Established in

1995

Go public in 2013

Acquiring 26,400

ha of oil palm

plantation on

February 2015

Acquiring 5,857

ha of oil palm

plantation on

November 2015

Plantation

56

August 30, 2016


Management

SSMS is managed by a qualified and experienced management team. The profiles of the


Bungaran Saragih (President Commissioner)

Bungaran Saragih is an Indonesian citizen. He was born in Siantar on 1945 (70

years). He serves as the President Commissioner of the Company since August

2013 and at the same time also serves as President Commissioner of PT Citra

Borneo Indah, Commissioner of PT Rea Kaltim Plantations, and Chairman of the

Board of Trustees at The Borneo Orangutan Survival Foundation (BOSF).

Previously, he also served as Minister of Agriculture in the Ministry of Agriculture

of the Republic of Indonesia (‘Gotong Royong’ Cabinet for the period of 2001 -

2004), Minister of Agriculture and Forestry in the Ministry of Agriculture and

Forestry of the Republic of Indonesia (‘Persatuan’ Cabinet for the period of 2000 -

2001), Director of Development Studies Center, Bogor Agricultural University

(1992 - 2000), Lecturer and Researcher at the same University (1968-2015). He

received a Doctor of Philosophy in Economics from the North Carolina State

University, Raleigh, USA in 1980.

Marzuki Usman (Independent Commissioner)

Marzuki Usman is an Indonesian citizen who was born in Mersam, Jambi, on 1943

(72 years). He served as a Commissioner/Independent Commissioner at the

Company since August 2013 and at the same time also serves as a Commissioner

of PT Cipaganti Group, President Commissioner of PT Restoration Habitat

Orangutan Indonesia (RHOI), the Board of Commissioners of PT AIA Financial,

Chairman of the Advisory Board of Mazars Asia Pacific,Commissioner of PT Cahaya

Pelangi Persada, President Commissioner of PT Nusantara Plantation VI (Persero),

Commissioner of PT Alam Sutera, Advisor to the PT Moores Rowland Indonesia

Advisory, Chairman’s Advisor and member of the Duke University Islamic Studies

Centre up to now. He used to hold several important positions namely,

Commissioner of the Futures Exchange (2001-2006), Minister of Forestry in the

Ministry of Forestry of the Republic of Indonesia (March 2001-Aug 2001), Head of

the Representative Faction in the Parlement (MPR) (1999-2002), State Minister of

Investment/Chairman of the Investment Coordinating Board (BKPM) (May -

October 1999), Minister of Tourism, Arts and Cultureof the Republic of Indonesia

(1998-1999). He got his Master of Arts of Economy from Duke University Durham,

North Carolina, USA, in 1975.

Plantation

57

August 30, 2016


Rimbun Situmorang (President Director)

Rimbun Situmorang is an Indonesian citizen and was born in Banaera on 1967 (48

years). He serves as Chief Director since August 2013 and currently also serves as

Director of PT CBI (2011 - present), Chief of Commissioner of PT KSA (2011 -

present) and PT SMU (2009 - present). Previously, he had active career as Director

of PT ASP (2009 - 2011), Commissioner of PT SMU (2009 - 2011), Director of PT

TSA (2009 - 2011), Director of PT SML (2005-2007), Director of PT SMU (2005 -

2007), Director of PT CBI (2005 - 2007), Director of PT KSA (2000 - 2007), Director

of the Company (2005 - 2007), Director of PT TSA (2005-2007), Director of PT

MMS (2005-2007), Commissioner of PT CBI (2000 - 2003), Marketing Manager at

PT Mendawai Putri(1997 - 1999), Head of Commerce of PT Barito Putra Nirvana

(1994-1997), Forestry & Shipping Staff at PT Rimba Karya Borneo (1992 - 1994).

He received degree in Mechanical Engineering from the Institute of Technology

Tumpal Dorianus Pardede in 1989.

Harry M. Nadir (Non-affiliated Director)

Harry M. Nadir is an Indonesian citizen and was born in Jakarta on 1960 (55 years).

He serves as Non-Affiliated Director since August 2013. Previously, he served as

Director (CFO) of PT Bakrie Sumatera Plantations (2001 - 2012).

Vallauthan Subraminam (Director)

Vallauthan Subraminam is a Malaysian citizen and was born in Johor, Malaysia on

1954 (61 years). He serves as Director at the Company since August 2013.

Previously, he served as Regional Head of PT CBI (2007-2012).

Ramzy Sastra (Director)

Ramzi Sastra is an Indonesian citizen. He was born in Pematang Siantar on 1971

(44 years). He serves as Director of the Company since August 2013. Concurrently,

he serves as Director of PT Kalimantan Sawit Abadi and Commissioner of PT

Tanjung Sawit Abadi since December 2013 until now and also serves as Director of

PT Citra Borneo Utama since March 2013 until now.

Plantation

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August 30, 2016


Profit & Loss

Balance sheet

Year end Dec 31 (IDRbn) 2015 2016E 2017E 2018E Year end Dec 31 (IDRbn) 2015 2016E 2017E 2018E


Cost of goods sold -1,124.0 -920.7 -1,259.4 -1,639.9 Cash & equivalents 521.8 747.9 485.8 220.4

Gross profit 1,247.9 1,380.7 1,591.4 1,825.9 Short-term financial asset 0.0 0.0 0.0 0.0

SG&A -367.9 -388.7 -473.0 -537.6 Account receivable 822.7 798.3 988.8 1,202.1

EBIT (Adj.) 880.0 992.0 1,118.4 1,288.3 Inventory 164.2 -134.5 -184.0 -239.5

EBIT 880.0 992.0 1,118.4 1,288.3 Other current assets 224.3 223.9 229.9 239.8

Net interest income (loss) -110.1 -213.1 -238.4 -183.7 Non-current assets


Others 5.5 5.3 6.6 8.0 Investment 0.0 0.0 0.0 0.0

Recurring profit 775.4 784.2 886.6 1,112.7 Other long-term assets 2,942.0 2,907.9 3,104.0 3,025.8




Short-term debt 16.6 18.2 19.0 18.5

Growth & margins 2015 2016E 2017E 2018E Other current liabilities 1,238.6 1,200.6 1,405.7 1,586.6


Gross profit growth -5.4 10.6 15.3 14.7 Long-term debt 2,538.6 2,789.2 2,908.7 2,833.0

EBIT growth -11.2 12.7 12.7 15.2 Other long-term liabilities 98.6 95.8 118.4 144.0

Net profit growth -24.1 5.9 13.1 25.5 Total liabilities 3,939.8 4,142.7 4,505.1 4,651.5

EPS growth -24.1 5.9 13.1 25.5 Controlling interests 3,034.1 3,447.7 3,945.3 4,577.3



Net profit margin 23.6 25.7 BVPS (IDR) 318.5 365.0 417.7 483.8


Year end Dec 31 (IDRbn) 2015 2016E 2017E 2018E Year end Dec 31 2015 2016E 2017E 2018E


Net profit 559.0 591.8 669.1 839.7 ROA (%) 8.0 7.7 7.9 9.0

Depr. & amortization 222.5 92.3 302.1 351.0 Inventory days 53.3 -53.3 -53.3 -53.3

Others 327.1 -94.7 169.7 189.5 Receivables days 126.6 126.6 126.6 126.6

Change in working capital -630.5 314.5 -126.7 -141.6 Payable days 15.4 15.4 15.4 15.4

Cash flow from investing Net debt/equity (x) 0.9 0.8 0.8 0.7

Capital expenditure -1,214.3 -855.5 -1,097.7 -1,162.7 Interest cover (x) 4.3 3.3 3.3 4.4

Others -226.2 -72.7 -196.2 -78.5


Dividends 0.0 -148.0 -167.3 -209.9

Increase in equity -49.5 0.0 0.0 0.0

Increase in debt 1,317.3 309.2 149.6 -94.8

Others -256.9 89.1 35.2 42.1

Beginning cash 473.3 521.8 747.9 485.8

Ending cash 521.8 747.9 485.8 220.4


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Key Investment Risks

Global CPO supply-demand imbalance: We are concerned that global CPO supply-demand

imbalance could hamper global CPO price, placing negative impact on the financial

performance of CPO manufacturers.

Volatility in global crude oil price: We believe that global crude oil price - mainly Brent crude

oil – shows strong correlation with the global CPO price as biofuel production created a new

linkage between crude oil and palm oil. During times when global crude oil is low-priced,

biodiesel is less attractive to consume as an alternative.

Regulatory risks: Regulatory risks are unpredictable because regulators such as the central

government and local government are less communicative with the market. Furthermore, in

the short-term, our key concerns lie on the extension of the moratorium for oil palm

plantation which will act as key hurdles for CPO companies to acquire new land banks.

Weather and geographic risk: Weather for CPO business is one of the main risks and is

directly related to the production side. Extreme weather conditions such as El Nino and La

Nina could drive CPO production lower for palm oil companies.

Weak infrastructure: Infrastructure is one of critical factors in oil palm plantation. Bad

infrastructure such as bad roads could lead higher cost for CPO players.

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APPENDIX 1

Important Disclosures & Disclaimers

Stock Ratings Industry Ratings

Buy Relative performance of 20% or greater Overweight Fundamentals are favorable or improving

Trading Buy Relative performance of 10% or greater, but with volatility Neutral Fundamentals are steady without any material changes

Hold Relative performance of -10% and 10% Underweight Fundamentals are unfavorable or worsening

Sell Relative performance of -10%

* Ratings and Target Price History (Share price (----), Target price (----), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆))

* Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months.

* Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material

development.

* The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of

future earnings.

The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic

conditions.

Analyst Certification

The research analysts who prepared this report (the “Analysts”) are registered with the Indonesian jurisdiction and are subject to Indonesian securities

regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in

this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Except

as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and

have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related

to the specific recommendations or views contained in this report but, like all employees of PT Daewoo Securities Indonesia, the Analysts receive

compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment

banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any

actual, material conflict of interest of the Analyst or PT Daewoo Securities Indonesia except as otherwise stated herein.

Disclaimers

This report is published by PT Daewoo Securities Indonesia (“Daewoo”), a broker-dealer registered in the Republic of Indonesia and a member of the

Indonesia Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such

information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness,

accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Bahasa Indonesia. If this

report is an English translation of a report prepared in the Indonesian language, the original Indonesian language report may have been made available to

investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising

from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to

effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have

substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this

report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive

or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or

reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and

their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale,

or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case

either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to

provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the

investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past

performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur.

Disclosures

As of the publication date, PT Daewoo Securities Indonesia, and/or its affiliates do not have any special interest with the subject company and do not own

1% or more of the subject company's shares outstanding.

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Distribution

United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within

Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other

persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant

Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its

contents.

United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional

investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance

thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that

they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed

herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The

securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or

sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements.

Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong

Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for

distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws

of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person.

All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or

its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its

affiliates to any registration or licensing requirement within such jurisdiction.

Daewoo Securities International Network

PT. Daewoo Securities Indonesia Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd.

Equity Tower 50th Floor

Jl.Jend Sudirman, SCBD Lot 9

Jakarta 12190

Head Office

14, Eunhaeng-ro, Yeongdeungpo-gu

Seoul 150-973

Korea

Suites 2005-2012

Two International Finance Centre

8 Finance Street, Central

Hong Kong

Tel: 62-21-515-1140 Tel: 82-2-768-3026 Tel: 85-2-2514-1304

Daewoo Securities (America) Inc. Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd.

320 Park Avenue, 31st Floor.

New York, NY 10022

United States

41st Floor, Tower 42

25 Old Broad Street

London EC2N 1HQ

United Kingdom

Six Battery Road #11-01

Singapore, 049909

Tel: 1-212-407-1000 Tel: 44-20-7982-8000 Tel: 65-6671-9845

Tokyo Representative Office Beijing Representative Office Shanghai Representative Office

7F, Yusen Building, 2-3-2

Marunouchi, Chiyoda-ku

Tokyo 100-0005

Japan

2401A, 24th Floor. East Tower

Twin Tower, B-12 Jianguomenwai Avenue

Chaoyang District, Beijing 100022

China

Room 38T31, 38F SWFC

100 Century Avenue, Pudong New Area,

Shanghai, 200120

China

Tel: 81-3- 3211-5511 Tel: 86-10-6567-9699 Tel: 86-21-5013-6392

Ho Chi Minh Representative Office Daewoo Investment Advisory (Beijing) Co., Ltd Daewoo Securities (Mongolia) LLC

Suites 901B. Centec Tower

72-74 Nguyen Thi Minh Khai St, Ward 6

District 3, HCMC

2401B,24th Floor. East Tower

Twin Tower, B-12 Jianguomenwai Avenue

Chaoyang District, Beijing 100022

China

#406, Blue Sky Tower, Peace Avenue 17

1 Khoroo, Sukhbaatar District

Ulaanbaatar 14240

Mongolia

Tel: 84-8-3910-6000 Tel: 86-10-6567-9699 Tel: 976-7011-0807

At the crossroads - Mirae Asset

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