PT. Jaya Agra Wattie Tbk.

JAWA.IJ Buy - TP: 600

Company Update

Strong Growth Profile

Right Timing for Rubber High
PT J.A. Wattie has a total of 67,697.33 Ha under Cultivation Right (HGU) and Location Permit. The number above includes plasma plantation where as much as 29,339.38 Ha or 43% of total area had been planted. As of 2010, their palm oil plantation had an age profile consisting of 11,321 Ha or 72% of total planted under the immature classification, 3,409 Ha or 22% under the young period classification and 1,010 Ha or 6% under peak period classification. (Refer to chart on page 9). Their FFB yield had recorded a CAGR (compounded annual growth rate) of 39% for the years starting from 2006 to 2010. As for J.A. Wattie rubber plantation, their age profile as of 2010 had 5,004 ha or 53% of total planted classified into immature category, 624 ha or 7% into young category, 3,143 ha or 34% into peak period category and 583 ha or 6% into off-peak category (read: plantation with maturity age of 20 and above years). Their plantations age profile for both rubber and palm oil are entering their peak productive period and are relatively still young compared to the other plantations. Peak production period coupled with strong average selling price for both commodities translated into boosted revenue. In plantation, timing is everything, and J.A. Wattie in our view had the right timing.

Just in Time

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PT. Jaya Agra Wattie Tbk.

October 31, 2011

Downstream Products of Rubber - Rubber and Its Uses

stethoscope tubing

latex

medical devices & laboratory

gloves
tire bycycles pedal

rubber latex

other vehicle equipment

windshield trim

shoes, sandals

crumb rubber

apparel
diving suit

oil seal

industrial equipment

tubes

Rubber Trees

baby gear

belt conveyor / transmission

resin

oil

oil paint

varnish

rubber seeds
shell

filler

briquettes

oilcake
furniture

cattle feed

rubber wood
building materials

PT. Jaya Agra Wattie Tbk.

October 31, 2011

Potential Area of Rubber Processing Industry

Source: BPKM

JAWA Plantation Locations

Source: Company

Strategically Located
J.A. Wattie is quite strategically located as you compare JAWAs plantation with the first picture where Indonesia Investment Coordinating Board (BPKM) had drawn a map for potential rubber processing cluster. Logistic wise, they are strategically located. With the moratorium law out and a denser market, JAWA could be an asset play in terms of strategically located land ownership. 3

PT. Jaya Agra Wattie Tbk.

October 31, 2011

Getting You from A to B Rubber does it.

The Bull in Rubber
Emerging Market Growing Consumption Car Sales
Bridgestone Corp., the worlds largest tire maker, stated that it would spend a record of 300 billion yen next year to boost production to meet rising demand from emerging markets. Demand from China, India, and Malaysia, representing 45% of the global total, is likely to grow 0.7% in 2011 compared with a 4.7% gain in 2010. Production in Indonesia is predicted at 2.96 million tons versus 2.74 million tons, while in Malaysia output is e stimated at 1.02 million tons compared with 939,000 tons, according to Association of Natural Rubber Producing Countries. While there is little impact of rains and floods in Thailand (the biggest grower) as rubber plantations are located on the other part of the country, floods in Thailand have reportedly disrupted some movemen ts to ports. This condition if prolonged may have an upward drive toward natural rubber remembering that Thailand is one of the main suppliers of natural rubber in the world.
Other Countries 21,000,000

Auto Sales

Indonesia 900,000.00 750,000.00

Chinas

18,000,000 15,000,000 12,000,000 9,000,000

6,000,000 3,000,000 2005 2006 2007 2008 2009 2010 2011*

600,000.00
450,000.00

300,000.00
150,000.00 -

CAGR for their auto sales from year 2005 2010 is 28%, followed by India 13% and then by Indonesia 7%. Rubber downstream product is tires. Auto sale is pretty much correlated with tire sales thus rubber industry has rooms to grow.

US
Source: Bloomberg

Japan

China

India

Indonesia

Indonesian Natural Rubber Exports by Country of Destination

Country of Destination United States Japan China India Korea May 2011 Volume (Kg) Total Value (US$)
52,914,389 34,022,049 28,547,732 12,118,964 10,536,678 256,749,134 164.990,557 136,257,002 57,102,654 50,348,860

January May 2011 Volume (Kg) Total Value (US$)

263,408,920 165,787,317 158,786,695 29,142,938 47,356,497 1,281,671,425 818,989,141 776,178,662 138,176,460 229,688,988

China Natural Rubber Imports by Country of Origin

Country of Origin Thailand Indonesia Malaysia Vietnam Total
Source: Gapkindo

July 2011 Ton

66,927 30,833 23,308 4,896 130,451

Change (%) %
18.33 (24.71) (27.55) (57.72) (11.81)

Jan Jul 2011 Ton

500,229 225,557 194,431 34,048 1,004,732

Change (%) %
0.12 4.44 (1.16) (5.07) 2.11

PT. Jaya Agra Wattie Tbk.

October 31, 2011

Tire Industry Outlook

There are two types of rubber tires: 1solid tires used on industrial machinery and on military vehicles and 2 pneumatic tires tire used for almost all free-moving vehicles including automobiles, trucks and buses, motorcycles, airplanes and off-road tires. In general, the larger the tire the greater the share of natural rubber (Market Information In The Commodities Area, 2011) Looking back to Dow Jones as a historical reference, rubber companies were doing fine since Goodyears invented vulcanization which made the uses of rubber more practical in the production of clothing. But the turnaround story in rubber was when FORD mass-produced automobile, producing a boom for the two of the four listed rubber companies at the time: Goodrich BF and US Rubber. Typical Tire Composition by Weight Synthetic Rubber Carbon black 27% 28% 14% 28%

Passenger Tire Truck Tire

Natural Rubber 14% 27%

Steel 14-15% 14-15%

Filler 16-17% 16-17%

Source: Rubber Manufacturers Association (RMA)

Mn

China & US Tire Output

Bn

800
600 400

90 75
60 45 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09

Chinas

200
0

GDP growth for year 2010 is 3 times US GDP and as you can see from the China & US Tire Output chart beside us that Chinas tire industry is growing at a very steep pace compared to US.

China Industrial Tire Output Adjusted Automotive Parts Accessories & Tire Stores
Source: Bloomberg

Tire Producer Price Index YoY Change

15.0% 12.0% 9.0%

US

6.0% 3.0%
0.0% -3.0% 2008 2009 2010 2011

Tire Price or Tire PPI increased 12.3% YoY and declined 0.5% MoM due to increasing raw materials price.

1Q
Source: BLS.gov

2Q

3Q

4Q

GJTL Tire Sales (mn) Motorcycle Total 5

2004 10.9 21.6

2005 12.2 23.7

2006 12.5 23.3

2007 14.1 26.5

2008 16.1 27.5

2009 18.5 28.5

2010 18.2 30.8

CAGR 9% 6%

Source: Gajah Tunggal Tbk.,eTrading

PT. Jaya Agra Wattie Tbk.

October 31, 2011

Rubber Price Movement

High Correlation between Rubber Price and Crude Oil

There are two types of rubber: NatuRSS 3, TSR 20

1200 900
600 300 0 Jan-05

Rubber Price Movement Vs Crude Brent Oil

Crude Oil 150 120

90 60 30

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

RSS3

TSR20

Crude Brent Oil

Figure 1 Rubber Price Movement Vs Crude Brent Oil. Source: Bloomberg

ral Rubber (NR) tapped from trees and Synthetic Rubber (SR) made of derivatives from petroleum thus the close correlation to oil price movement. Rubber is consumed mainly in tires, for passenger cars, commercial vehicles, and a great variety of other tire like bicycle tires, airplane tires, and off-road tires. Due to its superior tear strength and excellent resistance to heat, natural rubber is more suitable for high performance tires used in racing cars, trucks, buses, and aircrafts.

STATISTICAL SUMMARY OF WORLD RUBBER SITUATION (000 tonnes) Natural Rubber Production 2008 2009 2010 2011 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Q1 Asia 9,399 1,839 2,057 2,405 2,740 9,042 2,175 2,071 2,728 2,663 9,637 2,398 Africa 447 98 95 112 118 423 102 110 119 129 459 104 Latin 247 64 72 55 62 253 67 75 57 64 263 73 America Total 10,128 1,985 2,230 2,570 2,905 9,690 2,361 2,271 2,904 2,865 10,401 2,571 Natural Rubber Consumption N. America 1,179 232 147 183 228 790 280 261 265 266 1,071 298 Lat. America 587 122 106 120 139 488 153 162 152 147 613 148 EU 27 1,256 203 145 223 258 829 289 282 274 287 1,132 313 Other Euro 230 38 38 48 53 177 50 57 62 58 227 65 Africa 126 25 21 25 22 94 26 26 27 23 101 28 Asia / 6,854 1,424 1,820 1,896 1,845 6,984 1,700 1,889 2,027 2,017 7,632 1,701 Oceana Total 10,175 2,044 2,267 2,484 2,534 9,329 2,496 2,677 2,806 2,799 10,778 2,552 World Surplus / -47 -59 -37 86 371 361 -135 -406 98 66 -377 19 Deficit World Stocks 1,519 1,460 1,423 1,509 1,880 1,880 1,745 1,339 1,437 1,503 1,503 1,522 Deficit of Natural Rubber; Natural Rubber Prices worse than 2008. 2008 2009 2010 2011 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Q1 Q2 SICOM, 3,685 2,238 2,482 2,880 3,601 2,800 4,457 5,166 4,580 5,633 4,959 7,339 6,574 RSS32 SICOM, 2,530 1,328 1,524 1,834 2,516 1,800 3,098 3,023 3,145 4,253 3,380 5,251 4,672 TSR203 Source: International Rubber Study Group 6

PT. Jaya Agra Wattie Tbk.

October 31, 2011

Future of Rubber
Increasing Demand on the back of Global Economy Growth
According to a statement made by Stephen Evans, secretary general of the International Rubber Study Group during the World Rubber Summit, the IRSG predicted that global rubber consumption will increase 47.1% to 31.5 million tons by 2020 from 21.4 million tons in 2009; of that, natural rubber will account for 14.6 million tons and synthetic rubber 16.9 million tons. Tires will consume 19.4 million tons of rubber in 2020 and general rubber goods 12.1 million tons. Do remember that synthetic rubber is made of petroleum derivatives. What will happen in the long run if oil shoots up to $160 - $180 a barrel? Less growth for synthetic rubber as the economic value of selling general rubber goods is ou tweighed by the cost component of producing SR. Naturally, NR will pick up the slack.

Company Profile Business Activities

Source: Company

Competitive Advantage
7 More than ninety years of experience in the research and development of rubber plantation Has about 30,000 ha of reserve land Young age profile plantation entering peak period Diversified plantation profile; multiplier effect Products produced by J.A. Wattie has met both national and international standard

PT. Jaya Agra Wattie Tbk.

October 31, 2011

JAWAs Track Record

Table 1.1 - J.A. Wattie Rubber and CPO Sales Figures

2006

2007

2008
4,036 4,477 8,001 27,526

2009
30,355 6,005 8,485 18,022

2010
19,762 6,952 8,392 29,442

CAGR
121%

1H 11
11,700 7,860

CPO Sales CPO ASP Rubber 6,410 7,605 Sales Rubber 19,545 17,655 ASP Source: Company

7%

5,100 44,000

As you can see from table above, there was a spike in both CPO and rubber prices in 2010. Although sales in CPO decreased significantly in the year of 2010 due to decline on third party purchase, price appreciation in both commodities helped provide a floor for JAWAs revenue. Sales volume for rubber also decreased a mere 1.1% Year on Year (YoY), however average selling price for rubber jumped 63.4% to Rp.29,442/kg. The great news is sales volume for both CPO and rubber in 1H 11 respectively represented 59.2% and 60.8% of FY 2010 sales. Remember the favorite multiplier effect that I had mentioned, price x volume. We are going to see the wonders of multiplier effect in the year of 2011 as average selling price for both CPO and rubber increased significantly ; 13.1% and 49.4% respectively.

tons 32,000 28,000 24,000 20,000 16,000 12,000 8,000 4,000 -

Crude Palm Oil (CPO)

tons 8000
6000 4000 2000

Palm Kernel (PK)

2008

2009

2010

1H 2011

2009

2010

1H 2011

Production

Sales

Production

Sales

Rubber
10,000

8,000
6,000 4,000

2,000
2007 2008 2009 2010 1H 2011

Production

Sales

Source: Company 8

PT. Jaya Agra Wattie Tbk.

October 31, 2011

Plantation Age Profile

Palm Age Profile 2010

6%; 1,010 Ha 22%; 3,409 Ha

Palm Age Profile 2015F

20%; 3,722 Ha 14%; 2,628 Ha

72%, 11,321 Ha

67%; 12,608 Ha

Immature

Young

Peak

Immature

Young

Peak

Rubber Age Profile 2010A

6%; 583 Ha
34%; 3,143 Ha

Rubber Age Profile 2015F

10%; 1,037 Ha 18%; 1,932 Ha 28%; 2,908 Ha 44%; 4,622 Ha

53%; 5,004 Ha

7%; 624 Ha Immature Young Peak Mature Immature

Young

Peak

Mature

Source: Company, eTrading Securities

Assuming a 3.8% and 4.1% new planting of total area planted annually for 2011 2015, we have come to the above age profile for both palm and rubber plantation under J.A. Wattie. We would like to remind you that commodity companies are price-taker meaning that they are not like Gudang Garam and or Indofood where they can set a price for the products that they sell (read: pricing power). In other words their revenue are pretty much correlated to the volatility of commodities benchmark price; in our case CPO price in Rotterdam index and for rubber price are RSS(Ribbed Smoke Sheet) 3 and TSR (Technically Specified Rubber) 20 in Singapore Commodity Exchange. Thus, any companies entering their peak period where growth is supported by production volume is good in our view. Volume will help offset any effects from the drop in commodities price.

Plantation Classification
Area in hectares Cultivation Right & Location Permits Planted: - Matured - Immature Total Planted Unplanted Others Rubber 32,435.46 4,511.81 4,943.56 9,455.37 21,730.93 1,249.16 Oil Palm 35,125.51 5,828.00 14,260.37 20,088.37 13,378.41 1,658.73 Coffee 554.59 531.02 5.00 536.02 18.57 Tea 504.30 504.30 504.30 Total 68,619.86 11,375.13 19,208.93 30,584.06 35,109.34 2,926.46

Source: Company; based on core and plasma plantations as of June 30, 2011

PT. Jaya Agra Wattie Tbk.

October 31, 2011

Financial Overview 1H 11
Rp Bn

Revenue
CAGR 2007 - 2010 = 35.3%
413.4 369.7 301.5

500.00 400.00 300.00

200.00 100.00 -

333.8

As

167.1

202.3

2007
Source: Company

2008

2009

2010

1H 10

1H 11

we can see in the bar chart beside us, revenue 1H 11 represents 80.8% of total revenue in FY 2010. Again this is because of the jump in both commodities prices and increased production volume compared to 2010.

Rp Bn
120.0 100.0 80.0 60.0 40.0

Net Income & Gross Margin

CAGR 2007 2010 = 98.7%
44.1% 39.7% 33.0% 10.2 2007 27.8 2008 46.1% 52.1%

% 55.0% 50.0% 45.0% 40.0%

JAWA

Net Income recorded a whooping 98.7% compounded annual growth rate (CAGR) over the period 2007 2010.

33.8%
115.8 1H 11

35.0% 80.1 2010 52.3 1H 10

20.0 -

43.5 2009

30.0% 25.0%

Net income
Source: Company

Gross Margin

Rp Bn 120.0
90.0

Net Income & Op. Margin

46.4%

50.0%

36.1% 30.7%
24.7%

38.9%

40.0% 22.3%
10.2 27.8 43.5 80.1 52.3 115.8 20.0%

60.0
30.0 -

30.0%

2007

2008

2009

2010

1H 10

1H 11

Net income
Source: Company

Operating Margin

10

PT. Jaya Agra Wattie Tbk.

October 31, 2011

Cost Structure - FY 2010

Rubber Cost Structure - 2010

Biggest
Wages
40% 47%

Fertilizer Depr. & Amort. Overhead

9% 4%

cost structure in rubber plantation is actually labor. Rubber is very labor intensive, from the get-go (nursery) until the tapping process, its hard to mechanize any of the process. However rubber trees are more durable than palm, meaning that they dont require as much fertilizing.

Source: Company

Palm Cost Structure - 2010

22% 31%

Wages Fertilizer Depr. & Amort. Overhead

For

22% 25%

Palm, the cost structure is pretty much even out. In a more mature plantation, cost structure will lean on fertilizing being the biggest part of the pie. Its easier to mechanize some of the harvesting process.

Source: Company

In the worst case scenario where rubber price goes back to below $1/kg, per management, they can cut back on the fe rtilizer and it wont hurt the trees much. In fact they wont tap the rubber trees if rubber price are very much in the bottom. The difference in palm trees and rubber trees are their preservation practices: 1With rubber you can hold back on fertilizing and less fertilizing wont hurt the trees much. With palm trees, less fertilizing means more diseases and unhealthy trees. 2With rubber, you can delay harvesting, in fact the longer you wait until you harvest the better the quality. In this case, rubber is very much like wine, as they aged inside the trees, they get better. Its the opposite with palm fruits, when harvesting time come, you have to hack them off or they will rot and give diseases to the trees. The need for speedy handling process in which after palm fruits are harvested also serves as a hindrance to steal them. However the opposite applies on rubber, its very easy to steal the latex off the trees. I assume this is why the overhead and labor cost structures are higher on the rubber side of the business. However security measures can be provided in terms of securing the perimeter of the plantation by building moats around the area. 11

PT. Jaya Agra Wattie Tbk.

October 31, 2011

J.A. Wattie Financial Breakdown

Revenue Breakdown 2008 - 2010

100%
80% 60% 49.3% 40% 20% 73.0% 41.4% 2009 Tea Coffee 59.8% 2010 Others

6.0%
33.2%

0%
2008 Rubber CPO

Source: Company

There may be some concerns that J.A Wattie is too diversified a plantation and some believe diversification for some company is deworseification. That might be true if revenue contribution by crop other than palm and rubber is more than 5%. However that is not the case as you can see from the chart above specifying JAWAs revenue breakdown from year 2008 to 2010. In fact there might be a hedge element in the case when crude oil price fell and dragged down the price of rubber, considering our belief that palm oil price is more stable than rubber price. Furthermore as you can see, J.A. Wattie is concentrating more and more to their two main products which is: rubber and palm oil. Other than the hedge element, there is that multiplier effect in the case where economy is doing great, driving up the prices of both commodities and J.A. Wattie will benefit from the two crops price hike.

COMPANY PROFILE
PT Jaya Agra Wattie is a publicly listed agribusiness corporation engaging in plantation, processing and agricultural logistics and marketing activities. Having 90 years of experience in the agricultural sector, the company continually strengthens its business base through a diversification approach by cultivating various premium plantations of primary raw commodities such as rubber, crude palm oil (CPO), coffee and tea.

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PT. Jaya Agra Wattie Tbk.

October 31, 2011

Earning Sensitivity Analysis

Incremental Change +30% +20% +10% Base -10% -20% -30%
Source: eTrading

Rubber Price (Rp/Kg) 40,664 37,536 34,408 31,280 28,152 25,024 21,896

EPS (Rp) 55.11 50.23 45.34 40.46 35.58 30.70 25.82

EPS Change (%) 36.2% 24.1% 12.1% -12.1% -24.1% -36.2%

Key Assumptions
Y/E December CPO Prices (benchmark) FFB Yield Rubber Prices (benchmark) Rubber Yield 2009 6,694 64,395 19,424 6,444 2010 7,804 67,897 32,144 6,325 2011F 7,981 93,920 38,887 6,599 2012F 8,140 134,854 31,280 7,337 2013F 8,303 187,383 29,802 8,681

Peer Comparisons
Ticker Market Cap JAWA 1,415,507 LSIP 14,839,730 SGRO 5,622,750 BWPT 4,925,242 GZCO 1,500,000 TBLA 2,940,101 Average 9,052,590 Source: Bloomber, eTrading EPS 12F 53 232.62 315.91 102.25 37.56 113.89 PE 12F 7.08 9.24 9.34 11.64 7.85 5.44 8.43 ROE 26.29% 24.70% 23.18% 23.95% 14.35% 23.12% 23.66% ROA 8.57% 19.86% 17.58% 11.39% 7.87% 7.66% 13.94% EV/EBITDA 6.82 5.98 4.73 10.48 9.11 4.95 7.13

Our View
We are bullish on rubber and CPO, the two main crops grow by JAWA. Its simple really: demand will outpace supply in the long run. Deficit will drive up price. Another key point is JAWA had their foot wet already by owning quite a large area of rubber plantation when rubber price hit their peak this year. Bluntly speaking, they didnt miss the boat like some others did. Thus based on their growth profile and rubber concentrated plantation, providing a double multiplier effect during the commodities price hike, we call JAWA a Buy with target price Rp.600; a 48.1% upside from current price. Valuation is based on DCF calculation with 10.56% WACC, 3% terminal growth, and discount factor of 30% due to the ill iquidity of the stock. Company fair value of RP.600 per share will reflect PE12F of 14.8.

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PT. Jaya Agra Wattie Tbk.

JAWA.IJ Buy - TP: 600

Company Update

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PT. Jaya Agra Wattie Tbk.

October 31, 2011

Disclaimer: This report is prepared strictly for private circulation only to clients of PT eTrading Securities. It is purposed only to person having professional experience in matters relating to investments. The information contained in this report has been taken from sources which we deem reliable. No warranty (expres s or implied) is made to the accuracy or completeness of the information. All opinions and estimates included in this report constitute our judgments as of this date, without regards to its fairness, and are s ubject to change without notice. However, none of PT eTrading Securities (eTS) and/or its affiliated companies and/or their respective employees and/or agents makes any representation or warranty (express or implied) or accepts any responsibility or liability as to, or in relation to, the accuracy or completeness of the information and opinions contained in this report or as to any information contained in this report or any other such information or opinions remaining unchanged after the issue ther eof. W e expressly disclaim any responsibility or liability (express or implied) of eTS, its affiliated companies and their respective emp loyees and agents whatsoever and howsoever arising (including, without limitation for any claims, proceedings, action, suits, losses, expenses, damages or costs) which may be brought against or suffered by a ny person as a results of acting in reliance upon the whole or any part of the contents of this report and neither eTS, its affiliated companies or their respective employees or a gents accepts liability for any errors, omissions or misstatements, negligent or other wise, in the report and any liability in respect of the repor t or any inaccuracy therein or omission there from which might otherwise arise is hereby expresses disclaimed. This document is not an offer to sell or a solicitation to buy any securities. This firms and its affiliates and their officers and employees may have a position, make markets, act as principal or engage in transaction in securities or related investments of any company mentioned herein, may perform services for or solicit business from any company mentioned herein, and may have acted upon or used any of the recommendations herein before they have been provided to you. PT eTrading Securities 2 011.

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