Académique Documents
Professionnel Documents
Culture Documents
Food Producers
Palm Oil Sector Extracting Value We launch coverage on the London listed Palm Oil sector with a positive view as we believe the industry will continue to grow and current production will struggle to meet global demand. In our view, companies (such as the ones under our coverage) that have; agricultural land rights in equatorial regions (where oil palms thrive), industry expertise, experienced management teams, and access to capital, have defensible competitive advantages and are likely to experience earnings growth and margin expansion going forward. New Britain Palm Oil (NBPO LN, BUY, 1,197p price target, 23% upside) NBPO produces sustainable and traceable Palm Oil in Papua New Guinea (PNG), which it sells to European markets. We believe the companys competitive advantages, (the traceability and sustainability of its oil, above industry average yields, land and other assets, management team and industry relationships) will enable it to increase sales, expand margins and maintain a market leading position going forward. Asian Plantations (PALM LN, BUY, 345p price target, 29% upside)
Source: MP Evans
Asian Plantations is involved in the acquisition and development of Palm Oil plantation land in Sarawak, Malaysia. We believe the company will be able to execute on its strategy (acquiring undeveloped land and selling it when it reaches full maturity) given its competitive advantages (land rights, mill technology and management) and its track record since listing on AIM in November 2009. Equatorial Palm Oil (PAL LN, BUY, 38p price target, 28% upside) Equatorial Palm Oil is involved in the acquisition and development of Palm Oil plantation land in Liberia, West Africa. In our view, the shares trade at a significant discount to Asian plantations and the developed peers due to execution and political risk, both of which we believe the market is over estimating. We believe execution risk has greatly diminished since the companys AIM listing last year as the company has met many of its operational and financing objectives ahead of schedule. Furthermore, in our view, economic and political risks, stemming from producing in Liberia, have also been reduced evidenced by an influx of foreign investment. MP Evans (BUY, 545p price target, 17% upside) MP Evans owns and operates Palm Oil plantations through associates and subsidiaries in Indonesia and Malaysia. The group also has beef cattle interests in Australia through its 34% share in the North Australian Pastoral Company and a 100% stake in Woodlands Aggregation. We expect growth in the Palm Oil business to be driven by new planting programs, the commissioning of a new mill and improvements in yields. Growth in the cattle business is likely to come from increased capacity given the inherent economies of scale in the cattle business. Additional value is likely to be realised from asset disposal, (estimated to be worth US$90mn).
Source: MP Evans
Palm Oil
www.religarecm.com
Religare Capital Markets plc | Authorised and regulated by Financial Services Authority
| 11 March 2011
Table of contents
Sector Report
Why we like Palm Oil Palm Oil Basics Supply/Production of Palm Oil Demand/Consumption of Palm Oil Geographies 3 8 12 17 22
Asian Plantations
Investment Case Company Valuation Company Forecasts and metrics Company overview Industry overview Board and Management 39 40 44 46 48 49
MP Evans
Investment Case Company Valuation Company Forecasts and metrics Company overview Industry overview Board and Management 62 63 66 67 68 69
| 11 March 2011
Low cost of production versus other edible oils Cost of production is estimated to be US$250-US$350/tonne (c. 50% lower than soybean oil) due to higher yields. Although upfront capital costs (estimated to be c. US$6,500 per hectare in Southeast Asia but dependent on the cost of land) are considerable, replanting costs (c. US$2,500/ha) are low when amortised over the life of the plant (20-30 years).
Demand is defensive but not cyclical Edible oil consumption is supported by population growth and an increase in disposable income (please refer to Demand section for more details)
Considerable barriers to entry (please refer to supply section for more details) Plantable land is scarce and expansion has been restricted due to environmental concerns Some industry participants maintain that no other crop has such strict criteria for sustainability (which is to the benefit of producers who have RSPO membership & certification)
| 11 March 2011
London listed New Britain Palm Oil REA Holdings Anglo-Eastern Plantations MP Evans Group Narborough Plantations Average
Plantation location Papua New Guinea Indonesia Indonesia Indonesia (Australian cattle) Malaysia
Source:
Bloomberg RCM
| 11 March 2011
Source:
Bloomberg
While we recognise that the CPO price, like many commodities, is difficult to predict, we believe Palm Oil prices will continue to be above their historic averages given that we expect demand to continue to exceed supply, primarily due to resilient food demand in key markets such as India and China and issues leading to restrictions in supply. Our CPO forecasts are US$1,100, US$1,050 and US$1,000 per MT for 2011, 2012 and 2013 respectively. We also note that Asian listed plantation stocks (which generally trade at a premium to their London-listed peers) have outperformed the CPO price primarily due to operational leverage. The correlation of the London listed Palm Oil producers to the CPO price is indicated in the charts below (we note that many of these companies have a very limited trading history). Exhibit 3: NBPO
NBPO Share price (US$) 16.00 14.00
12.00
12.00
10.00
10.00 8.00 6.00 4.00 2.00 0.00 300 400 500 600 700 800 900 CPO Price (US$) 1,000 1,100 1,200 1,300 1,400
CPO Price (US$)
8.00 6.00 4.00 2.00 0.00 300 400 500 600 700 800 900 1,000 1,100 1,200 1,400 y = 0.009x + 0.7561 R = 0.8291
Source:
Bloomberg
Source:
Bloomberg
Feb-11
| 11 March 2011
Exhibit 5: MP Evans
12.00 MP Evans Share price (US$)
10.00
8.00
10.00
6.00 y = 0.0048x + 2.4201 R = 0.5735
4.00
2.00
0.00
300
400
500
600
700
800
900
1,000
1,100
1,200
1,300
1,400
Source:
Bloomberg
Source:
Bloomberg
Source:
Bloomberg
Source:
Bloomberg
| 11 March 2011
mn tonnes
17.0%
16.0% -20 -30 15.0% -40 -50 Open Stocks Production Consumption Closing Stocks 14.0% Stock Usage ratio % (closing stocks/consumption)
Source:
USDA
| 11 March 2011
How is it produced?
Oil palms grow best in equatorial climates and when they receive ample sunshine and rain. Yields are highest in Malaysia and Indonesia, which together account for 85% of global production. Producers vary in their level of vertical integration. For example, New Britain Palm Oil is completely vertically integrated from the seed business to refining, while Asian plantations, MP Evans and Equatorial Palm purchase seeds from a third party vendor and do not refine all (and in some case any) of the oil but instead sell CPO to refineries. Please refer to the exhibits on the following page, which detail a typical production process.
| 11 March 2011
Seeds - Oil Palms are grown from seeds usually purchased from third party suppliers (with the exception of NBPO). Seeds are planted in nurseries where they grows into seedlings in 9-12 months.
Seedlings - Seedlings are taken to prepared areas and planted. It takes approximately 30 months before palms start producing fruit.
Mature Palms - Mature palms produce fruit throughout the year (assuming there is an optimal amount of rain and sun). Fruits grow in bunches, known as fresh fruit bunches or "FFBs."
FFBs - When FFBs ripen, they are cut by harvesters and the palm is removed.
Fruit - Each FFB has up to 100 "fruitlets" attached to a fibrous base. As bunches ripen, fruitlets loosen and detach. Bunches are harvested after 10 loose fruitlets have detached.
Fruitlets - Each individual fruitlet is made up of a central "endocarp" or nut and an outer "pericarp." The "periscope" consists of a skin and a fleshy pulp surrounding the nut which is known as the "mesocarp." It is the mesocarp that contains crude palm oil. The nut separately consists of an outer shell and a kernel (which contains palm kernel oil).
Harvested Bunches - Harvested bunches and fruitlets are taken to collection points, then transferred to bins. The bins are taken to the mills on lorries.
Source:
REA Holdings
| 11 March 2011
Delivery to the mills - Harvested bunches are taken by lorries to the mills, where the lorries unload onto a receiving ramp.
Transfer to cages - Bunches are transferred to cages, each contains 10 to 15 tonnes of fruit.
Sterilisation - Cages are sterilised by pressurised steam for approximately two hours.
Separation of fruitlets - Sterilised bunches are moved on to drums, where individual fruitlets are separated from the fibrous bunch base. Empty bunches are transferred by conveyor to a separate storage area where they are recycled back to the plantation as mulch.
Extraction of palm oil - Once separated, fruitlets are then passed through a screw press which extracts the crude palm oil from the pulp or "mesocarp".
Purification of CPO - Extracted CPO is then purified and subjected to a drying process. It is then stored in tanks adjacent to each mill.
Palm Kernels - The fibre and nuts are separated. The nuts are cracked and the kernels and shells are separated. The kernels are neither sold or transferred to a palm kernel crushing plant to extract palm kernel oil.
Source:
REA Holdings
10
| 11 March 2011
FUEL
Palm Kernels
Fruit Residues
Compost
Kernel Crushing
Fibre Board
Premium Soaps
Stock Feed
Stearin
Olein RDB Olein Margarines RDB Stearin Palm Fatty Acid Distillate
Emulsifiers Explosives
Soaps Detergent
Glycerol
Source:
NBPO
11
| 11 March 2011
Soybean Oil
Edible Oils
Crude Oil
Exhibit 14: More Palm Oil is produced than any other major vegetable oil (Production in 000 tonnes)
52000 42000 32000 22000 12000 2000 World Production of Major Vegtable Oils
Palm Oil
Coconut Oil
Cottonseed Oil
Rapeseed Oil
Source:
USDA
Groundnut Oil
Soybean Oil
Sunflower Oil
Oilive Oil
12
| 11 March 2011
As the chart below illustrates, approximately 85% of Palm Oil is currently produced in Indonesia and Malaysia, therefore export taxes, government policies and weather in these two countries materially impacts global Palm Oil production. Exhibit 15: CPO Production
'000 MT 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
$1,260 $1,320
Malaysia
Indonesia
Other
Source:
USDA
2009
13
| 11 March 2011
Environmental Protection Agency (EPA) and therefore, these tax breaks are too small to materially impact global production at the moment.
Land
There is a lack of available land in both Malaysia and Indonesia (c. 85% of production) as restrictions on deforestation are imposed and cultivation permits become increasingly more difficult to obtain. This is particularly true in Indonesia (which has an estimated 7mn hectares of oil palm estates), where foreigners are not allowed to own land outright and must apply for thirty year leases from the Indonesian government. For the companies that already have land rights in these countries (among the ones that we cover are MP Evans and Asian Plantations), land access is a competitive advantage but for the industry, lack of land restricts supply and can result in price increases. Given this, companies such as Equatorial Palm Oil, have chosen to focus in regions like West Africa. Although Africa represents a relatively small portion of global production, c. 34% of land allocated for Palms is in Africa. Exhibit 17: Land allocation for Palm Oil
South/ Central America 7% Other 1% Malaysia 27%
Africa 34%
Indonesia 31%
Source: Food and Agriculture Organisation
Sustainability
Arguably as production for Palm Oil has increased so has the pressure on the environment. Issues include deforestation, pollution, endangering indigenous people and species (like the Orang-utans) and safety concerns for workers. To address these issues, the Roundtable on Sustainable Palm Oil (RSPO) was formed in 2004 with the stated objective of promoting the growth and use of sustainable oil palm products through credible global standards and engagement of stakeholders. The RSPO has developed a certification process which ensures that products are produced without undue harm to the environment or society, and, which most publically listed plantation companies have achieved or are in the process of applying for. Furthermore, international sanctions to protect forest area, agrarian people and wildlife and more specifically tightening restrictions on deforestation, have been put in place. Additionally, organisations such as Greenpeace and WWF have put pressure on the food producers and grocery stores (such as Unilever and Sainsbury) to use fully traceable and sustainable Palm Oil. As a result, the market for sustainable Palm Oil has grown, although approximately only 3% of the worlds Palm Oil is sustainable. Supermarkets such as Sainsbury and Marks and Spencer are using sustainable Palm Oil, and many have pledged to use fully traceable Palm Oil by 2015. Producers, such as New Britain Palm Oil have allocated
14
| 11 March 2011
capital towards producing 100% traceable and sustainable Palm Oil, which sells at a premium. RSPO certification and tightening restrictions on deforestation potentially increase the cost of production, restrict supply and could benefit existing producers and/or bigger players who have the capital required to meet the new regulatory and legal requirements.
Input Costs
Any significant increase in input costs, or the inability of any companys ability to finance these costs due to credit constraints, could restrict supply and increase Palm Oil Prices. Since harvesting Fresh Fruit Bunches FFB is labour intensive (please refer to our growing, harvesting and processing section), labour can represent anywhere from 1530% of total costs. Most of the wages are paid in local currency and therefore any relative US$ weakness (sales are in US$) results in increased labour costs. Depending on the level of vertical integration other costs include: Fertiliser, seeds, trees, (usually US$ denominated), machinery & equipment, taxes, insurance, regulatory certification, milling and refining costs and freight costs.
Technology
Advancements in farming technology have led to better yields, irrigation improvements and increased productivity. This generally increases supply and leads to lower prices or margin expansion depending on the shape of the demand curve.
Expansion Africa
In addition to Equatorial Palm (which has the rights to 170,000 hectares of land in Liberia), Golden Agri, Sime Darby, Wilmar and Olam are investing in Africa. Currently, Africa produces only c. 5% of global production (most of which comes from Nigeria and the Ivory Coast) and most analysts believe it will take five to ten years for any meaningful production to come from Africa. Therefore, in the short and medium term we do not believe that African expansion will have a material impact on CPO supply and prices.
15
| 11 March 2011
Source:
USDA
Latin America
In South and Central America, which also represents only c. 5% of global production, near term expansion is less likely given the commercial viability of competing crops such as corn and soy and the high incidence of diseases affecting Palm trees. Exhibit 19: Latin American Production
'000 MT 2000 1800 1600 1400 1200 1000 800 600 400 200 0 Dominican Republic Mexico
Source:
USDA
16
| 11 March 2011
Other 38%
Malaysia 9%
Source: USDA
Indonesia 11%
EU 13%
Other 2%
Food 75%
Source: USDA
17
| 11 March 2011
The main purchasers of Palm Oil are global food producers such as Cargill and Archer Daniels Midland (ADM). Palm Oil is in many well-known products, some of which are listed in the table below. Exhibit 22: Products that use Palm Oil
Brand Hovis Cadbury Dairy Milk Kingsmill Persil Flora Spreads Galaxy Kit Kat Mr Kipling Cakes Wrigley's Extra Birds Eye Poultry Maltesers Mars Kellogg's Special K McVitie's Digestive Comfort Goodfella's Pizza Source: Equatorial Palm Manufacturer Premier Foods Cadbury ABF Unilver Unilver Mars Nestle Premier Foods Wrigley Birds Eye Mars Mars Kellogg's United Biscuits Unilver Northern Foods
Population growth and an increase in disposable income have driven demand and consumption of Palm Oil has grown at a 13% and 8% CAGR since 1995 in India and China respectively. Exhibit 23: India Palm Oil Consumption
'000 MT 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 8% 15-Year CAGR
Source:
USDA
18
| 11 March 2011
Source:
USDA
38%
17%
14%
12%
Bangladesh
Pakistan
Malaysia
Palm Oil does not require hydrogenation, a process that has been linked to higher cholesterol levels, heart disease and cancer. In countries like the US, there is significant pressure on food and beverage manufactures to remove trans fatty acids
19
| 11 March 2011
(TFAs) from their products. For example, in New York and California TFAs are banned in restaurants. Trends towards healthier diets, in addition to the fact that Palm Oil tends to be much less expensive have contributed towards Palm Oils market share growth, which has gone from 8% of the edible oil market in 1973 to 33% in 2010. Exhibit 26: Palm Oil Market Share Edible Oils
35% 30% 25% 20% 15% 10% 5% 0%
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Source:
USDA
Source:
USDA
Source:
USDA
2009
20
| 11 March 2011
There are concerns surrounding the environmental impact from using Palm Oil as a fuel source, and of course the cost of production and conversion would have to be considered. The current average cost of producing a Palm Oil is estimated to be $250 - $350 per tonne. Below is $US/barrel cost of converting Palm Oil into oil assuming different Palm Oil production and conversion costs. (Note we assume that 1 tonne = 7.15 barrels). Exhibit 29: Production cost (US$/barrel) of converting Palm Oil into bio-fuel
58.8 80 100 120 140 160 200 39 42 45 48 50 CPO Cost of Production US$/tonne 250 300 350 46 53 60 49 56 63 52 59 66 55 62 69 57 64 71 400 67 70 73 76 78
Source:
RCM Estimates
21
| 11 March 2011
Geographies
85% of the worlds Palm Oil is produced in Malaysia and Indonesia largely due to the suitability of the land and climate in these two countries. Among the London listed companies, REA Holdings, Anglo Eastern Plantations and MP Evans all have operations in Indonesia, while Asian Plantations and Narborough Plantations operate in Malaysia, New Britain Palm Oil operates in Papa New Guinea (with a refinery in the UK) and Equatorial Palm (still in development) has land rights in Liberia, West Africa.
Indonesia
Exhibit 30: Indonesia
Source:
http://www.merriam-webster.com
Approximately 16mn tonnes or c. 76% of Indonesias Palm Oil production is exported. Exhibit 31: Indonesian Consumption mn tonnes
5.5 5.0 4.5 4.0 3.5 3.0 2.5 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2.0 1995
Source: USDA, RCM
2000
2005
2010E
Source:
USDA
22
| 11 March 2011
Indonesia Advantages For those producers that have already obtained land rights in Indonesia, there are many advantages to operating here. Land and climate are extremely suitable for growing oil palms and therefore average yields are much higher. Low operating costs and most labour is Indonesian. Plantation land is held under 25-35 year leases, which are currently renewable after expiration, (MP Evans renewed most of its leases in 1998/1999). Less remote to key markets (China and India) as compared to PNG, Africa and South America. Well established/developed Palm Oil industry. Low political/economic risk, the Indonesian economy was relatively resilient through the downturn and there is strong government support for the sector.
Indonesia Disadvantages For companies looking to expand in Indonesia it is very difficult to obtain land rights (you cannot own land outright) and there is significant land acquisition risk. The Indonesian government owns the land. Land must be zoned for commercial agricultural development and permission must be obtained to begin planting often before determining whether or not the land is plantable. Once permission is granted it can take two years to convert land rights into land titles. Export taxes - In November 2008 the Indonesian government implemented a progressive export tax, whereby the tax imposed is based on the market CPO price (not the price paid to the producing company) ranging from 0 to 25%. This tax is illustrated below.
Somewhat onerous obligations to local villagers/small growers o Support from local growers/villagers is required. o Some proportion of all land must be allocated to community projects, the amount is negotiable. o Plasma scheme requires the plantation owner to provide compensation for any displaced people.
23
| 11 March 2011
Malaysia
Exhibit 34: Malaysia
Source:
www.chinatownconnection.com
2000
2005
2010E
Source:
USDA
Similar to Indonesia, Malaysia is also well suited for growing oil palms and for those producers that have already obtained land rights in Indonesia, there are many advantages to operating here. Malaysia Advantages Land and climate are extremely suitable for growing oil palms and therefore average yields are much higher. Malaysia is a politically stable country with a strong credit rating (S&P A+/Stable). There is a very structured legal system and land registration is based on the British title system, which protects the rights of investors and land owners. A well developed banking system which provides low-cost financing to quality companies, especially in the established Palm Oil industry. No obligation to minority interests/small holders (as there are in Indonesia). Less remote to key markets (China and India) as compared to PNG, Africa and South America.
24
| 11 March 2011
Malaysia Disadvantages There can be issues with labour shortages (although this is usually not a problem if the workers are treated well). Anglo Eastern experienced some labour shortages in 2009. Most workers are from Indonesia with many on two year contracts. Expansion is very difficult (a benefit to those who already have land rights), as 60% of Malaysia's land is protected as forest or forest reserve, and this is restricted from being converted into agriculture land. Additionally, some agricultural land is better suited for commercial purposes other than agriculture.
Source:
http://geography.howstuffworks.com
2000
2005
2010E
Source:
USDA, RCM
New Britain Palm Oil dominates production in Papau New Guinea (PNG) having acquired Cargills business last year. There are several advantages to operating in PNG, most notably import tax exemptions.
25
| 11 March 2011
Liberia
Exhibit 40: Liberia
Source:
www.fuelyouthliberia.org
Given that agriculture land in Southeast Asia is scarce, and demand continues to outpace supply, many companies such as Equatorial Palm are looking towards South America and Africa for expansion. Liberia, located in West Africa (where the oil palms originated) recently emerged from civil war and following the exile of leader Charles
26
| 11 March 2011
Taylor in 2003, and subsequent election of Ellen Johnson-Sirleaf is on the road to recovery. Liberia Advantages Recent political stability. Since 2006 when Harvard educated Ellen Johnson-Sirleaf was elected head of state, the country has made significant progress towards stabilisation. In 2008 Liberias IMF status was restored and c. US$1bn of financial aid was granted. In June the IMF and World bank indicated they would help Liberia reduce its national debt. Both Sime Darby and Golden Agri Resources are in the process of developing Palm Oil plantations in Liberia
High unemployment - c. 85% unemployment rate, no issues with labour shortages An abundance of land Although obtaining permission to cultivate the land is not easy, there is ample land much of which has already been logged and therefore there should be no issues with deforestation restrictions. Equatorial Palm has 169,000 hectares of rights, Sime Darby and Golden Agri Resources have plans in place to develop c. 250,000 hectares each.
Liberia Disadvantages Less developed banking/financial system Some political/economic risk given that the country has just recently emerged from a period of civil way Lower than average yields, largely due to the presence of a dry season Poor (but improving) infrastructure Seeds need to be specially adapted to ensure that palms are resistant to West African specific diseases
27
Company Report
Industrials
Rachel Galvez
We launch coverage on New Britain Palm Oil (NBPO) with a Buy recommendation and a 1,197 p price target, which represents 23% upside coupled with a 2% dividend yield. NBPO produces sustainable and traceable palm oil in Papua New Guinea (PNG), which it sells to European markets. Investment case: We believe the companys competitive advantages, (the traceability and sustainability of its palm oil, above industry average yields, land and other assets, management team and industry relationships) will enable it to increase sales, expand margins (and/or demand premium pricing for its products) and maintain a market leading position going forward. Valuation: We derive our 1,197p price target using a DCF methodology assuming a WACC of 9.1% and a terminal growth rate of 3%. We believe this is well supported by the fact that NBPO trades at a discount to many of its Asian peers, despite generating better margins and higher returns. Catalysts: CPO price increases, entry in the FTSE Index, acquisition and/or contract announcements and reported gains in productivity. Risks: Risks to our investment case include lack of liquidity as a result of large ownership concentration (Kulim Malaysia and West Britain Provincial Government own 51% and 8% of the shares respectively), commodity price volatility (although this is minimised as the company sells c. 50% of production forward) and any negative impact on yields stemming from adverse weather conditions. We view political and economic risk due to operating in Papua New Guinea and management execution risk as very low for NBPO.
rachel.galvez@religarecm.com
Valuation & Recommendation Share Price 12 month target Previous target Rating Previous % Upside / (Downside) + Dividend yield Total return 23% 2% 25% 973 p 1,197 p p Buy
Company data Market Market cap ( mn / US$ mn) EV ( mn / US$ mn) Shares in issue (mn) Free float (%) 2-month average daily volume (mn) 52 Week high / low (p) Main Market 1,409 / 2,263 1,578 / 2,534 145 25% 0.11 985 / 480
Share Price
(p) 1,100 850
New Britain Palm Oil Limited Rel to FTSE ALL Share
Financial highlights Year End: 31 Dec Revenue (US$ mn) EBITDA (US$ mn) Net Profit (adj) (US$ mn) EPS (adj) (US$) EV/Sales (x) EV/EBITDA (x) P/E (x) P/E (recurring) (x) Dividend yield (%) Free Cash yield (%) ROCE (post-tax) (%) FY09A 324 101 138 0.95 7.13 22.9 16.4 16.4 1.8 n.m. 2.5 FY10A 471 145 217 1.71 5.51 17.9 9.2 9.2 0.0 n.m. (2.7) FY11E 689 288 150 1.03 3.68 8.8 15.1 15.1 1.8 5.6 12.5 FY12E 742 323 174 1.20 3.24 7.4 13.0 13.0 1.8 6.9 13.1 FY13E 764 334 188 1.30 2.99 6.8 12.1 12.1 2.1 6.0 12.9
11 March 2011
600 350 100 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11
Company Report
11 March 2011
Investment Case
We launch coverage on New Britain Palm Oil with a Buy recommendation, and a DCF based price target of 1,197p as we believe the companys following competitive advantages will enable it to increase sales, expand margins and maintain a market leading position as the Palm Oil Industry continues to grow. Competitive Advantages Traceability and sustainability. NBPO was one of the first companies to be independently certified by the RSPO, one of the only producers to achieve certification for its smaller holders and the only producer that can provide fully sustainable and traceable palm oil (through its Liverpool and PNG refineries). In our view, traceability can only be achieved through full vertical integration and investment in downstream production. NBPO is fully integrated and continues to invest at various stages of production. Last year it commissioned the first refinery to be dedicated to sustainable palm oil and this year it is expanding into bakery and pastry. Higher yields. Due to its seed business, which funds its R&D costs, NBPO has achieved above average industry yields. We are forecasting yields to improve further as efficiency gains are made at the KPOL estates acquired last spring (through the CTP acquisition). Land and other assets. NBPO has a total land bank of 127,000 ha, c. 78,000 of which is comprised of managed oil palm plantations, in PNG. PNG benefits from EU import tax exemptions and lower input costs such as fertiliser (please refer to industry report for more details). Additionally, it has 12 oil mills, 2 refineries, an 80,000 tonne storage facility, two methane capture facilities (in construction) and what the industry considers to be a world class seed business. Obtaining land rights in PNG is a long and arduous process achieved only by having people on the ground who understand the legal and local complexities of the process, something that no other listed producer has. Thus, NBPO is likely to remain the dominant player in PNG (its only competitor is Sipef, which operates on a much smaller scale). Experienced management team. Both the executive and operational management teams have a long successful track record in the Palm Oil Industry. CEO Nick Thompson and Executive Director Alan Chaytor have been with the company since 1984. We also note that the professional management team is independent of key shareholders Kulim Malaysia and West New Britain Provincial Government. Industry relationships. We highlight the contracts with United Biscuits and Italian chocolate manufacturer, Ferrero Rocher, as evidence that, unlike most of its competitors, NBPO has direct relationships with end market customers. As sustainability and traceability become increasingly more important, NBPO should be able to increase its direct customer base, which would enable it to expand its margins.
rachel.galvez@religarecm.com
29
Company Report
11 March 2011
Company Valuation
Year End: 31 Dec FY08A FY09A FY10A FY11E FY12E FY13E
Per Share data (US$) EPS (adj) DPS Book value Valuation ratios EV/Sales (x) EV/EBITDA (x) EV/Capital Employed (x) P/E (x) P/E (recurring) (x) Dividend yield (%) Free Cash yield (%) P/BV (x)
Source: Company, RCM estimates, Bloomberg
0.15 0.42 2.7 6.41 18.9 5.3 106.3 106.3 2.7 3.1 5.8
0.95 0.28 3.2 7.13 22.9 4.7 16.4 16.4 1.8 (6.0) 4.8
1.71 0.00 4.8 5.51 17.9 3.3 9.2 9.2 0.0 (12.2) 3.3
1.03 0.28 5.5 3.68 8.8 2.3 15.1 15.1 1.8 5.6 2.8
1.20 0.28 6.5 3.24 7.4 1.9 13.0 13.0 1.8 6.9 2.4
1.30 0.33 7.4 2.99 6.8 1.6 12.1 12.1 2.1 6.0 2.1
We derive our 1,197 price target using a DCF methodology and assuming a WACC of 9.1% and a terminal growth rate of 3%. Below is the DCF sensitivity analysis. Exhibit 1: DCF Sensitivity Analysis
Key assumptions
Sales We are forecasting a 46% yoy increase in FY11 revenue (and small increases thereafter) driven by: Improvements in yields due to efficiency gains made at the KPOL estates acquired in April 2010 An average CPO price of US$1,100/tonne (the company has already sold 300,000 tonnes forward at an average price of $1,080) A 52% increase in the amount of refined oil sold
rachel.galvez@religarecm.com
30
Company Report
11 March 2011
Source:
Source:
Capex We estimate that Capex will peak in FY11 at US$120mn, to be spent on improving the KPOL estates (infrastructure, fertiliser applications and management), mill construction and additional downstream production investments. Dividend We believe the company will resume paying a dividend in FY11, which we are forecasting to be $0.28 per share.
London listed New Britain Palm Oil REA Holdings Anglo-Eastern Plantations MP Evans Group Narborough Plantations Average
Plantation location Papua New Guinea Indonesia Indonesia Indonesia (Australian cattle) Malaysia
Source:
rachel.galvez@religarecm.com
31
Company Report
11 March 2011
rachel.galvez@religarecm.com
32
Company Report
11 March 2011
Y/E 31 Dec Revenue Gross profit EBITDA EBIT Net interest/inc./(exp.) Exceptional items Pre-tax Profit (stated) Pre-tax Profit (adj) Tax paid Minorities Net Profit (stated) Net Profit (adj) Shares outstanding (mn) EPS (stated) EPS (adj) DPS
FY09A 323.8 159.1 101.1 73.6 (1.5) 0.0 75.3 75.3 (58.9) (3.1) 13.2 138.0 145 0.95 0.95 0.28
Growth (YoY, %)
Y/E 31 Dec Revenue EBITDA Net profit EPS Dividend Capital employed FY09A (8.1) (15.3) 549.6 548.3 (34.4) 17.4 FY10A 45.3 43.7 57.1 79.1 (100.0) 95.2 FY11E 46.3 98.4 (31.0) (39.5) n.a. 14.7 FY12E 7.8 12.2 16.5 16.5 0.0 11.3 FY13E 3.0 3.4 7.7 7.7 16.5 9.3
Y/E 31 Dec EBIT Depreciation & Amortisation Change in Working Capital Other Operating Cash Flow Capital Expenditure Tax paid Cash Flow to the Firm Dividends Acquisitions & Disposals Proceeds from Share Issues Currency Adjustments Free Cash Flow to Equity Year End Net Cash/(Debt)
Balance Sheet
All figures in (US$ mn)
Y/E 31 Dec Tangible Fixed Assets Intangibles Assets Associates & Investments Working Capital Other Assets of which: tax assets Other Liabilities of which: tax liabilities of which: pension liabilities Cash & Cash Equivalents Total Capital Employed Gross Debt of which: short term of which: long term Shareholders Equity Minorities Total Capital Employed
FY09A 395.3 184.6 4.4 88.0 0.0 0.0 162.5 124.0 0.0 13.5 532.9 56.8 15.0 41.8 468.8 7.3 532.9
FY10A 577.1 604.4 8.5 190.1 0.0 0.0 362.1 275.1 0.0 10.2 1,040.4 281.7 239.0 42.7 691.9 66.8 1,040.4
FY11E 639.4 604.4 11.5 184.9 0.0 0.0 360.0 275.1 0.0 110.0 1,193.6 312.1 264.8 47.3 800.9 80.6 1,193.6
FY12E 665.4 604.4 12.8 168.7 0.0 0.0 366.6 275.1 0.0 239.9 1,328.4 298.4 253.2 45.2 934.6 95.4 1,328.4
FY13E 688.9 604.4 13.3 167.5 0.0 0.0 369.3 275.1 0.0 342.7 1,451.3 265.7 225.4 40.3 1,075.0 110.7 1,451.3
rachel.galvez@religarecm.com
33
Company Report
11 March 2011
Company Overview
New Britain Palm Oil
Company Description New Britain Palm Oil cultivates and processes Crude Palm Oil (CPO) and Palm Kernel Oil (PKO) primarily in Papua New Guinea (PNG), which it sells to both the domestic and foreign markets. It is focused on sustainability, is the world's leading producer of sustainable palm oil, was one of the first producers to receive certification from the Round Table on Sustainable Palm Oil and recently (Spring 2010) opened a refinery in Liverpool to increase traceability. NBPO one of the only listed Palm Oil producers that is completely vertically integrated. The company is also the largest producer of sugar and beef in PNG through Ramu Agri-Industries, Ltd (RAIL). Company Strategy New Britain Palm Oil's strategy is to grow revenue and profits by increasing the area under cultivation and improving the productivity of its land and refineries, while still operating in a sustainable manner. It had originally set out to double the size of its plantations over eight years, which it now plans to do by FY12 due to the CTP acquisition. Productivity gains in the form of higher yields are likely to be achieved through its proprietary seed business and by improving the infrastructure and management of the three estates (26,295ha of palm oil plantations) it now owns through the CTP acquisition. Additionally, as a producer of fully traceable and sustainable Palm Oil, NBPO should be able to command a premium price for its refined products. Planted area split by geography
Solomon Islands 7%
Company's stated objectives Timing Description Near term Continue to increase sales and production from Liverpool refinery Near term Expand PNG refinery capabilities Near term Refinance $240 mn debt facility Medium term Continue to improve the efficiency of the KPOL estates acquired in April 2010 Medium term Ongoing new planting programmes Medium term "30:30" initiative - raise FFB yield to 30tonnes/ha and extraction rates to 30% Medium term Increase area under cultivation to c. 80K hectares by FY12 Long term Continue to be recognised as an ethical, sustainable and traceable producer of Palm Oil
Sales split by product FY11E Key Products/Services Product Crude Palm Oil Refined Products Palm Kern Oil Sugar Seeds Beef
Seeds 1% Beef 1% Sugar 6%
Description Edible oil that is extracted from the pulp of the fruit of the palm. Crude Palm Oil that is further processed in a refinery and commands a premium price. Oil that is derived from the seed or kernel of the palm. Usually refers to sucrose, primarily comes from sugar cane and is characterised by a sweet flavour. Dami seed business represents a small portion of sales but is a key competitive advantage. C. 20,000 cattle on 9,500 ha, small portion of sales but PNG's leading producer of quality beef.
Management and Board Name Antonio Monteiro de Castro Nick Thompson Alan Chaytor Amir Mohareb
Title
Non-Executive Chairman Chief Executive Officer
Major Share holders Description Palm Oil Price Increases Entry into the FTSE Index Acquisitions Any announcements regarding contracts with key end customers Increased production efficiency (i.e. Higher yields)
Name Kulim Malaysia Berhad West New Britain Provincial Government Alan Chaytor Pacific Rim Plantation Services Blackrock Investment Management National Superannuation Fund Limited AXA Framlington Investment Management Wellington Management Co % 51% 8% 5% 5% 4% 4% 3% 3%
Source: Bloomberg
Recent Corporate Action/Events Date Description 30 April 2010 NBPO completes 80% acquisition of CTP PNG Limited (renamed Kula Palm Oil, KPOL), a Palm Oil Plantation company in PNG for $175mn. 01 May 2010 UK Refinery (a Liverpool based processing facility that can produce refined palm oil ) is fully commissioned (cost c. 18mn). 08 October 2009 NBPO enters into a 5 year supply agreement with Ferrero (confectionary) via Pacific Rim Plantations. 10 October 2008 Acquisition for Ramu Agri-Industries Limited (RAIL) is completed for $63mn, implying a price of $1,900 per ha. 17-Dec-07 Shares admitted to trading on the LSE main market, company raised 62.5mn from issuance of 25mn shares at 250p.
Source: Company, RCM Estimates
34
Company Report
11 March 2011
Source: NBPO
35
Company Report
11 March 2011
Industry Overview
Industry & Competitive analysis Industry Description (please refer to sector report for more details) Palm Oil and palm kernel oil are edible oils extracted from the fruit of palm trees. Crude palm oil can be further refined and sold as refined palm oil. Southeast Asia represents 85% of global production and India and China account for >30% of global consumption. Industry Growth Drivers An increase in food demand driven by population growth and rising disposable incomes. 75% of palm oil is used in food products. Substitution of other edible oils, due to health benefits and lower cost (edible oil market share has increased by 50% since 1996). To a lesser degree, an increase in bio-fuel mandates, although Palm Oil accounts for a small percentage of bio-fuels usage. SWOT Analysis
Strengths Vertical integration Agreements with Ferrero and United Biscuits Location - PNG (tax advantages) Land & assets Sustainable producer (RSPO certified) Strong management team Industry leading yields
Weaknesses Ownership concentration / lack of liquidity Correlation with the CPO price, which can be volatile. PNG is relatively remote (vs. Malaysia or Indonesia) but tax benefits offset increase shipping costs
Opportunities Increase in demand for Palm Oil due to: food demand, substitution effect and bio-fuel demand. Increase in demand for sustainable and traceable Palm Oil. Tightening restrictions on expansion creates opportunities for existing producers.
Threats Competition - Sipef on a much smaller scale. Adverse weather conditions can negatively impact yields. Commodity price volatility. Some political and economic risk, although PNG is a relatively stable democracy.
New Entrants
There are significant barriers to entry in this business (land is very difficult to obtain in PNG)
Suppliers
NBPO has its own seed business, uses various suppliers for fertiliser
Industry Competitors
Only Sipef in PNG 7 London listed Palm Oil producers (2 are in development)
Customers
All of the oil is exported to Europe (tax benefits offset freight costs), looking to increase direct customer base, high customer concentration is standard for the industry
Substitutes
Other edible oils, although Palm Oil's production costs are much lower
36
Company Report
11 March 2011
37
Company Report
Industrials
Asian Plantations
BLOOMBERG: PALM LN EQUITY
Rachel Galvez
We launch coverage on Asian Plantations (PALM LN) with a Buy recommendation and a 345p price target, which represents 29% upside. Asian Plantations is involved in the acquisition and development of palm oil plantation land in Sarawak, Malaysia. It currently has three estates, which total 15,645 hectares of land, and which are in the process of being planted. Investment case: We believe the company will be able to execute on its strategy (acquiring undeveloped land and selling it when it reaches full maturity) given its competitive advantages (land rights, mill technology and management) and its track record since listing on AIM in November 2009. Catalysts. CPO price increases, FY10 results and additional land acquisitions. We would expect the shares to significantly re-rate once planting is completed and all of the existing estates are producing. Valuation: We derive our 345p price target using a DCF methodology. In our view this is well supported by the fact that mature land is currently valued at US$25,000/hectare, which would equate to a share price of 422p applying a 9.9% (WACC) discount rate and assuming it takes three years for the land to reach maturity. Risks: Risks to our investment case include lack of liquidity as a result of large ownership concentration (Keresa Plantations and Steadfast Financial own 40% and 23% of the shares respectively), commodity price volatility and any negative impact on yields stemming from adverse weather conditions. Execution is also a risk and once this is eliminated we would expect significant share price appreciation.
rachel.galvez@religarecm.com
Valuation & Recommendation Share Price 12 month target Previous target Rating Previous % Upside / (Downside) + Dividend yield Total return 29% 0% 29% 267 p 345 p p Buy
Company data Market Market cap ( mn / US$ mn) EV ( mn / US$ mn) Shares in issue (mn) Free float (%) 2-month average daily volume (mn) 52 Week high / low (p) AIM 79 / 127 103 / 165 30 52 0.03 311 / 100
Share Price
(p) 350.0 275.0
Asian Plantations Limited Rel to FTSE AIM ALL Share
Financial highlights Year End: 30 Jun Revenue (US$ mn) EBITDA (US$ mn) Net Profit (adj) (US$ mn) EPS (adj) (US$) EV/Sales (x) EV/EBITDA (x) P/E (x) P/E (recurring) (x) Dividend yield (%) Free Cash yield (%) ROCE (post-tax) (%) FY08A n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. FY09A 0 (1) (1) (0.07) n.a. n.m. n.m. n.m. 0.0 n.m. (3.8) FY10E 0 (1) (2) (0.06) 622.00 n.m. n.m. n.m. 0.0 n.m. (4.8) FY11E 1 (1) (2) (0.07) 338.68 n.m. n.m. n.m. 0.0 n.m. (4.9) FY12E 5 2 0 (0.01) 43.46 139.3 n.m. n.m. 0.0 n.m. (0.6)
200.0 125.0
11 March 2011
Asian Plantations
Company Report
11 March 2011
Investment case
We launch coverage on Asian Plantations with a Buy recommendation and a DCF based price target of 345p. Strategy. Asian Plantations acquires undeveloped but properly zoned Malaysian agriculture land with the intention of selling it as mature producing palm oil plantations. Although the execution is somewhat complex, we believe the economics are simple. Titled land is acquired for approximately US$2,000 per hectare and development costs are US$4,500 per hectare, spread over three years. Approximately 2/3 of the total cost of US$6,500 are financed on what we believe are good terms by local banks. The land is then sold as mature plantation land, which in Malaysia is currently valued at US$25,000/hectare. We believe the company will be able to execute on its strategy given its competitive advantages and based on what it has achieved so far. Competitive advantages Land rights. Largely due to the relationships and expertise it has in the area, the company has been able to acquire 15,645 ha of plantable land in Sarawak, Malaysia, where yields tend to be high but land is becoming increasingly scarce. Mill technology. Joint CEO and Executive Director Graeme Brown has developed a unique vertical sterilizer mill which requires less energy and labour than traditional mills. The mill has proven to be successful at Keresa Plantations (the largest share holder) and Asian plantations is in the process of constructing its own mill incorporating this technology and a methane recapture process (which is carbon credit eligible). Management experience and expertise. In our view, execution risk is mitigated by the fact that Graeme Brown, Co-Founder & Joint CEO and Captain Panir, Chief Operating Officers have over 10 and 25 years of industry experience respectively. Specifically, Graeme Brown has successfully managed 6,000 hectares of palm oil for Keresa Plantations (where he remains the managing director). Additionally, Datuk Linggi (Graeme Browns father in law) has over 36 years experience in the Malaysian business and legal sectors with an extensive network in both the Malaysian government and private sectors. Sustainability. Given the industrys recent focus on sustainability and social responsibility, we believe a commitment to being RSPO compliant is necessary for medium and longer term growth. Management has experience working with the RSPO and intends to begin the process of obtaining RSPO certification soon. Proven track record. We are comforted by the fact that the company has been able to acquire land, raise capital and generate revenue from FFB sales since listing in November 2009. Exhibit 1: Significant events
Date Jan-11 Jan-11 Dec-10 Nov-10 Sep-10 Aug-10 Aug-10 Jun-10 Dec-09 Nov-09 Event Share Placing Medium term note Acquisition Issue of debt Interim results Subscription Acquisition Final Results Acquisition Admission to AIM Details Company raised c. $16mn by placing 7.3mn new shares at the price of 220p Issued a medium term note for $80mn w ith various maturities ranging up to ten years Fortune Plantation acquisition is completed for c. $12.2mn $1mn bond purchased by AAC, proceeds to be used for w orking capital 6 months to 30 June 2010, first revenue reported from FFB Company enters into subscription agreements w ith institutional investors to raise c. $6.6mn Acquisition of Fortune estate c. 5,000 ha in Saraw ak, Malaysia, c. $2,400/ha over 5,000 ha of planting completed and FFBs successfully harvested Acquisition of "Jubilant" and "Incosetia," plantations c. 5,850 ha in Saraw ak, Malaysia, c. 2,100/ha 5.26mn raised through placing of 7nm shares, approximate market cap of 22.8mn
rachel.galvez@religarecm.com
39
Asian Plantations
Company Report
11 March 2011
Company Valuation
We derive our 352p price target using a DCF methodology and assuming a WACC of 9.9% and a terminal growth rate of 3%. This is well supported by the fact that: Mature land is currently valued at US$25,000/hectare; and this would equate to a share price of 422p applying the same discount rate (WACC of 9.9%) and assuming it takes three years for the land to reach maturity.
Source:
RCM estimates
Our analysis is based only on the companys existing land rights as we have not incorporated any acquisitions into our forecasts. We are assuming PBT is positive from FY13 based on the following plantings schedule, FFB production yields and CPO extraction rates: Exhibit 3: Revenue driver assumptions
2010F CULTIVATED AREA AND PRODUCTION ASSUMPTION Own Planted Area (Hectares) YoY % ch Maturity - % of Planted Area Mature Area (HA) FFB ('000 MT) - Own Production FFB Yield - Own Production (MT/HA) CPO production ('000 MT) CPO extraction rate - % Source: RCM estimates 2011F 2012F 2013F
rachel.galvez@religarecm.com
40
Asian Plantations
Company Report
11 March 2011
Cash flow
We believe Asian Plantations will be cash flow positive from FY14E due primarily to the fact that we are forecasting positive PBT from FY13 and considerable declines in Capex once 90% of the land is mature and the mill has been commissioned, (specifically we estimate that capex declining from 43% of sales in FY13 to 16% of sales in FY14). The charts below illustrate our forecasts.
Exhibit 4: FCF US$ mn We are forecasting the firm to be FCF positive from FY14....
10.00 5.00 (5.00) (10.00) (15.00) (20.00) (25.00) (30.00) (35.00) FY09A
Source:
Exhibit 5: FCF US$ mn .... due to an increase in PBT and lower capex
20.0 10.0 -10.0 -20.0 -30.0 -40.0 FY10E FY11E FY12E FY113E FY09A FY14E Capital Expenditure Tax paid Depreciation & Amortisation Change in Working Capital Other PBT
FY10E
FY11E
rachel.galvez@religarecm.com
41
Asian Plantations
Company Report
11 March 2011
Source:
RCM, Bloomberg
129 55
168 46
Malaysia Liberia
8,245 325
Source:
RCM, Bloomberg
rachel.galvez@religarecm.com
42
Asian Plantations
Company Report
11 March 2011
For a more detailed comparative analysis, we compare Asian plantations to IJM plantations. We apply our FY14 assumptions, as we expect 90% of the current land assets to be mature by FY14. On the current share price, Asian Plantations would be trading at a 45% discount to IJM on an EV/Mature ha basis, which we believe is unjustified given the forecasted net income margin is 532 basis points higher. Exhibit 8: Comparative Analysis
Comparitive Analysis IJM Plantations (RM) Price Per Share- 22 February, 2011 Land Mature Palm Oil (Ha) Immature Palm Oil (Ha) Total Palm Land (Ha) Unplanted Land (Ha) Total Hectares (Ha) # Mills owned Production FFB (tonne) CPO (tonne) Palm kernel (PK) (tonne) CPO extraction rate (%) Kernel extraction rate (%) FFB processed (tonne) Yield FFB (tonne/Ha) CPO yield (tonne/Ha) Palm Kernel yield (tonne/Ha) Total yield (tonne/Ha) Financials Revenue (RM) Net Income (RM) Shares Outstanding '000 Equity Value (RM) Equity Value (USD millions) Debt + Deferred Tax (RM) Cash (RM) Net Debt: (RM) Minority Interest (RM) TEV (RM) TEV (USD millions) Ent. Value Per Mature Ha (US$): Ent. Value Per Total Palm Ha (US$): Asian Plantations discount to IJM Net Income Margin
Source: RCM, Company
270
FY14E
135,207
FY14E FY14E
9.60 2.0
469,819 131,498 809,822 2,372,780 765 148,044 183,982 (35,938) 1,594 2,338,436 754 31,977 24,709 28.0%
Revenue US $'000 FY14E Net Income US $'000 FY14E Equity Value ('000) $ Debt US$'000 FY14E Cash US$ '000 FY14E Net Debt US$'000 FY14E
$ $ $
rachel.galvez@religarecm.com
43
Asian Plantations
Company Report
11 March 2011
Y/E 30 Jun Revenue Gross profit EBITDA EBIT Net interest/inc./(exp.) Exceptional items Pre-tax Profit (stated) Pre-tax Profit (adj) Tax paid Minorities Net Profit (stated) Net Profit (adj) Shares outstanding (mn) EPS (stated) (US$) EPS (adj) (US$) DPS (US$)
FY08A n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Growth (YoY, %)
Y/E 30 Jun Revenue EBITDA Net profit EPS Dividend Capital employed FY08A n.a. n.a. n.a. n.a. n.a. n.a. FY09A n.a. n.a. n.a. n.a. n.a. n.a. FY10E n.a. (26.9) 26.7 (15.2) n.a. 1.4 FY11E 133.0 (14.7) 39.1 11.6 n.a. 37.5 FY12E 731.6 (282.7) (87.1) (87.1) n.a. (0.6)
Y/E 30 Jun EBIT Depreciation & Amortisation Change in Working Capital Other Operating Cash Flow Capital Expenditure Tax paid Cash Flow to the Firm Dividends Acquisitions & Disposals Proceeds from Share Issues Currency Adjustments Free Cash Flow to Equity Year End Net Cash/(Debt)
Balance Sheet
All figures in (US$ mn)
Y/E 30 Jun Tangible Fixed Assets Intangibles Assets Associates & Investments Working Capital Other Assets of which: tax assets Other Liabilities of which: tax liabilities of which: pension liabilities Cash & Cash Equivalents Total Capital Employed Gross Debt of which: short term of which: long term Shareholders Equity Minorities Total Capital Employed
FY08A n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
FY09A 5.1 0.5 0.0 (1.2) 27.0 0.0 0.0 0.0 0.0 4.2 35.7 22.5 2.5 19.9 13.3 0.0 35.7
FY10E 13.2 0.5 0.0 (1.2) 37.6 0.0 0.0 0.0 0.0 (14.1) 36.2 24.7 2.5 22.2 11.5 0.0 36.2
FY11E 23.2 0.5 0.0 (0.8) 54.1 0.0 0.0 0.0 0.0 (27.4) 49.8 24.7 2.5 22.2 25.1 0.0 49.8
FY12E 23.2 0.5 0.0 0.0 67.1 0.0 0.0 0.0 0.0 (41.5) 49.5 24.7 2.5 22.2 24.8 0.0 49.5
Revenue drivers
Mature Area (HA)
16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2010 2011F 2012F 2013F 2014F
rachel.galvez@religarecm.com
44
Asian Plantations
Company Report
11 March 2011
3.
4. Overall free cash generation: Fully developed Palm Oil Producers are very cash generative. Balance Sheet Issues 1. Debt: We are forecasting an increase in net debt levels due to planting and mill construction. These levels should decline post FY13, at which time most of the land will have been planted and the mill will have been commissioned. The company finances two thirds of the land acquisition and development costs (US$6,500/hectare) with local banks on what we believe are attractive terms. Debt levels are high (relative to developed plantation companies) due to the fact that upfront capital requirements are considerable in this industry. We would expect net debt/equity and net debt/ebitda ratios to normalise as the company increases its production. We also note that Malaysia has a highly liquid and well developed banking sector. Furthermore, the agriculture sector is a priority lending sector and most banks have specialist financing departments for palm oil.
2. Other liabilities / assets: Exhibit 9: Asian Plantation land assets (in Sarawak, Malaysia)
Plantation name Incosetia BJ Corporation Fortune Plantation Total Interest (%) 100% 100% 100% Total (Hectares) 5,850 4,795 5,000 15,645 Net Plantable (ha) 4,973 4,076 4,250
rachel.galvez@religarecm.com
45
Asian Plantations
Company Report
11 March 2011
Company Overview
Asian Plantations
Company Description Asian Plantations is involved in the acquisition and development of palm oil plantation land in Sarawak, Malaysia. It currently has three estates which total 15,645 hectares of land, and which are in the process of being planted. Company Strategy
The company is also seeking to become a world leader in Fresh Fruit Bunch "FFB" processing. It is currently building a mill that incorporates proprietary vertical steriliser technology and methane recapture, which is expected to be in operation in 2012. The technology used has been developed by Joint CEO, Graeme Brown.
The Companys strategy is to acquire under-priced, properly zoned agricultural land in Malaysia, develop it into high-quality palm oil estates and sell it as mature plantation land. It's aiming to increase the size of its land bank to approximately 23,000 hectares by the end of 2011.
Near term Near term Near term Medium term Medium term Medium term Longer term
Increase land bank to c. 23,000 hectares (from 15,645) Prepare for planting at Incosetia Complete planting of BJ Corporation estate Commission FFB crushing mill which uses vertical sterilising technology & methane recapture Complete planting of Fortune and Incosetia estates Complete planting of existing estates by the end of 2014 so that all palms are producing by 2018 Produce up to 375,000 tonnes of FFB per annum as all three estates reach full maturity
Cash Equity
Mortgage Facility
Equity Uplift
source: Company
Description Edible oil that is extracted from the pulp of the fruit of the palm. Fortune 32%
BJ Corporati on 31%
Management and Board Name Datuk Amar Leonard Linggi Jugah Graeme Brown Dennis Melka Captain Panir
Non-Executive Chairman Joint CEO & Executive Director Joint CEO & Executive Director
Incosetia 37%
COO
Description Palm Oil Price appreciation FY10 Results - confirmation of the planting schedule and an update on the Mill Additional land acquisitions The key share price driver is an increase in value of the underlying asset base
Major Share holders Name Keresa Plantations Steadfast Financial Asian Palm Oil Ltd Graeme Brown, Joint CEO & ED Dennis Melka, Joint CEO & ED Datuk Linggi, Non-Executive Chairman Legal and General Asian Agriculture Fund Asian Forestry Holdings Artemis Alpha Trust
% 40% 23% 9% 6% 6% 6% 3% 3% 3% 3%
Recent Corporate Action Date 27 January 2011 30 December 2010 19 November 2010 16 August 2010 31 December 2009 30 November 2009
Source: Company, RCM Estimates
Description Company raised c. $16mn by placing 7.3mn new shares at the price of 220p Fortune Plantation acquisition is completed for c. $12.2mn $1mn bond purchased by AAC, proceeds to be used for working capital Company enters into subscription agreements with institutional investors to raise c. $6.6mn Jubilant Paradise and Incosetia acquisitions are completed for 12.4mn 5.26mn raised through placing of 7nm shares, approximate market cap of 22.8mn
rachel.galvez@religarecm.com
46
Asian Plantations
Company Report
11 March 2011
rachel.galvez@religarecm.com
47
Asian Plantations
Company Report
11 March 2011
Industry Overview
Industry Overview
Industry & Competitive analysis Industry Description (please refer to sector report for more details) Palm Oil and palm kernel oil are edible oils extracted from the fruit of palm trees. Crude palm oil can be further refined and sold as refined palm oil. Southeast Asia represents 85% of global production and India and China account for >30% of global consumption. Industry Growth Drivers An increase in food demand driven by population growth and rising disposable incomes. 75% of palm oil is used in food products. Substitution of other edible oils, due to health benefits and lower cost (edible oil market share has increased by 50% since 1996). To a lesser degree, an increase in bio-fuel mandates, although Palm Oil accounts for a small percentage of bio-fuels usage. SWOT Analysis
Strengths Land rights (15,645ha in Sarawak, Malaysia) Local relationships/managers on the ground Experienced management team Mill technology (developed by Joint CEO Graeme Brown) The group has applied for RSPO Membership Malaysian advantages (see industry report)
Weaknesses Lack of liquidity/ownership concentration We expect the company to be operating at a loss until FY14
Opportunities Increase in demand for Palm Oil due to: food demand from India & China, substitution effect and bio-fuel demand Tightening restrictions on expansion creates opportunities for existing producers Very few listed developing palm oil plantation companies, immature land trades at a significant discount to mature land
Threats Adverse weather conditions can negatively impact yields Commodity price volatility Some execution risk, delays in planting or mill construction (although management has a proven track record) Potential restrictions on planting`
New Entrants There are significant barriers to entry in this business (land rights are scarce in Malaysia)
Industry Competitors Six other London listed, 13+ Malaysian producers listed in Asia, many private plantation owners
Customers Asian Plantations does not refine its own oil - it sells its oil to the Malaysian refineries
Substitutes Other edible oils, although Palm Oil's ' production costs are much lower
rachel.galvez@religarecm.com
48
Asian Plantations
Company Report
11 March 2011
CAPTAIN PANIR
Chief Operating Officer Captain has over 25 years of experience in planting and managing palm oil estates. He is responsible for all aspects of the in-field operations and community relations. Prior to entering the plantation industry, Captain was a decorated military officer including having been awarded Malaysias highest honour for field bravery in combat.
rachel.galvez@religarecm.com
49
Company Report
Industrials
Equatorial Palm
BLOOMBERG: PAL LN EQUITY
Equatorial Palm
Rachel Galvez
+44 20 7444 0679
We launch coverage on Equatorial Palm Oil (PAL LN) with a Buy recommendation and a 38p price target which represents 28% upside. Equatorial Palm Oil is involved in the acquisition and development of palm oil plantation land in Liberia, West Africa. Investment case: In our view, the shares trade at a significant discount to
rachel.galvez@religarecm.com
Valuation & Recommendation Share Price 12 month target Previous target Rating Previous % Upside / (Downside) + Dividend yield Total return 28% 0% 28% 29 p 37 p p Buy
Asian plantations (which is also in development) and the developed peers due to execution and political risk, both of which we believe the market is over estimating. We believe execution risk has greatly diminished since the companys AIM listing last year as the company has met many of its operational and financing objectives ahead of schedule. Furthermore, in our view, economic and political risks, stemming from producing in Liberia, have also diminished evidenced by an influx of foreign investment. Valuation: We derive our 38p price target using a DCF methodology and assuming a WACC of 10.2% and a terminal growth rate of 3%. discount on an EV/hectare metric compared to its peers. Catalyst: CPO price increases, FY10 results, (which are likely to update the market on the planting schedule and the mill), and further investments by established competitors in Liberia. Risks: Execution and political risk are the greatest risks to the investment case. Other risks include commodity price volatility, lower yields and a lack of liquidity as a result of large ownership concentration, (BioPalm Energy and JP Morgan Asset Management own 27.5% and 15% of the shares respectively), a small market cap and buy and hold investor mentality. We believe
Company data Market Market cap ( mn / US$ mn) EV ( mn / US$ mn) Shares in issue (mn) Free float (%) 2-month average daily volume (mn) 52 Week high / low (p) AIM 36 / 57 30 / 48 124 1 0.70 35 / 10
this is well supported by the fact that Equatorial Palm is trading at a significant
Share Price
(p) 40.00 30.00
Equatorial Palm Oil PLC Rel to FTSE AIM ALL Share
Financial highlights Year End: 31 Dec Revenue ( mn) EBITDA ( mn) Net Profit (adj) ( mn) EPS (adj) () EV/Sales (x) EV/EBITDA (x) P/E (x) P/E (recurring) (x) Dividend yield (%) Free Cash yield (%) ROCE (post-tax) (%) FY08A n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. FY09A 0 (1) (1) (0.04) n.a. n.m. n.m. n.m. 0.0 0.5 (21.4) FY10E 0 (1) (1) (0.01) 141.43 n.m. n.m. n.m. 0.0 n.m. (7.8) FY11E 1 (1) (1) (0.01) 34.65 n.m. n.m. n.m. 0.0 68.4 (2.0) FY12E 5 1 0 0.00 9.43 63.3 n.m. n.m. 0.0 n.m. (0.2)
20.00 10.00
11 March 2011
Equatorial Palm
Company Report
11 March 2011
Investment Case
We launch coverage on Equatorial Palm Oil (EPO) with a Buy recommendation and a DCF based price target of 38p. Strategy. EPO is rehabilitating existing plantations and developing new land in Liberia, West Africa. In our view, the shares trade at a significant discount to Asian plantations (which is also in development) and the developed peers due to execution and political risk, both of which we believe the market is over estimating. We believe execution risk has greatly diminished since the companys AIM listing a year ago due to the operational and financing objectives that have already been met: Exhibit 1: Significant events
Completion of JV Mill Installation Delivery of Mill Issue of new equity Operational Update AIM Listing
Company, Investigate
JV with BioPalm has been implemented providing US$22.5mn + agreement to arrange US$30mn loan facility Mill installation for the Palm Bay Plantation is proceeding on schedule Mill delivered to Palm Bay Plantations, construction to take place over the next few months 5mn subscription agreement with BioPalm Energy signed, 33mn new shares at 15p Reactivation of 3,000 ha of existing oil palm plantation has commenced, 220,000 seeds ordered Company raised 6.5mn through initial placing 37mn shares at 17.5p, (market cap of 14.3mn)
We also note the following competitive advantages, which further reduce execution risk. Land rights. The company has 169,000 hectares of land. Most of the land has already been logged, and therefore there no risk of restrictions on expansion being imposed due to deforestation concerns. Management experience and expertise. Peter Bayliss, Managing Director and Geoff Brown, Plantations Director, have over 20 and 40 years of industry experience respectively. Sustainability. Given the industrys recent focus on sustainability and social responsibility, we believe a commitment to being RSPO compliant is necessary for medium and longer term growth. Management has experience working with the RSPO and is in the process of obtaining RSPO certification. In our view, economic and political risks, stemming from producing in Liberia, have also diminished. (Please refer to the sector report for more details) Liberia has been relatively stable since Ellen Johnson-Sirleaf (who was Harvard educated and who worked for both the UN and the World Bank) was elected head of state in 2006. Under Mrs. Johnson-Sirleafs government, Liberias IMF status has been restored, debt has been reduced and the countrys infrastructure has improved. Encouragingly, IMF is forecasting Liberian GDP to grow 9.0% in 2011. Foreign investment in Liberia has increased and we are comforted by the fact that both Sime Darby and Golden Agri Resources have invested in Liberia with plans to develop oil palm plantations.
rachel.galvez@religarecm.com
51
Equatorial Palm
Company Report
11 March 2011
Company Valuation
Year End: 31 Dec Per Share data () EPS (adj) DPS Book value Valuation ratios EV/Sales (x) EV/EBITDA (x) EV/Capital Employed P/E (x) P/E (recurring) (x) Dividend yield (%) Free Cash yield (%) P/BV (x) FY07A n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. FY08A n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. FY09A (0.04) 0.00 0.1 n.a. n.m. n.a. n.m. n.m. 0.0 0.5 2.5 FY10E (0.01) 0.00 0.1 141.43 n.m. 2.8 n.m. n.m. 0.0 (21.5) 2.3 FY11E (0.01) 0.00 0.1 34.65 n.m. 1.2 n.m. n.m. 0.0 68.4 2.4 FY12E 0.00 0.00 0.1 9.43 63.3 1.1 n.m. n.m. 0.0 (32.4) 2.4
We derive our 38p price target using a DCF methodology and assuming a WACC of 10.2% and a terminal growth rate of 3%. Below is the DCF sensitivity analysis. Exhibit 1: DCF Sensitivity Analysis
DCF Sensitivity Analysis WACC 8.0% 9.0% 10.0% 69p 78p 91p 51p 56p 63p 38p 41p 44p
Source:
RCM Estimates
We believe our share price target is well supported by the fact that Equatorial Palm is trading at a significant discount on an EV/ha metric, compared to its London listed peers, and to Asian Plantations (which is also in development) as illustrated below. Exhibit 2: London listed comparables
London listed New Britain Palm Oil REA Holdings Anglo-Eastern Plantations MP Evans Group Narborough Plantations Average London listed in development Asian Plantations Equatorial Palm Oil Mkt Cap US$mn 2,283 389 495 401 16 EV US$mn 2,254 770 512 414 12 Plantation location Papua New Guinea Indonesia Indonesia Indonesia (Australian cattle) Malaysia Mature hectares 78,000 22,000 35,000 14,071 555 EV/ha (US$) 28,897 35,012 14,629 29,422 21,657 25,923
129 55
168 46
Malaysia Liberia
8,245 325
Source:
rachel.galvez@religarecm.com
52
Equatorial Palm
Company Report
11 March 2011
Cash Flow
We believe Equatorial Palm will be cash flow positive (FCF to the firm) from FY14E due to the fact that we are forecasting positive PBT from FY13 and declines in capex as the land becomes mature and the mill is commissioned. The charts below illustrate our forecasts.
Exhibit 3: FCF mn We are forecasting FCF to the firm to be negative through FY13......
FY10E
FY11E
FY12E
FY13E
PBT FY09A FY10E FY11E FY12E FY13E Depreciation & Amortisation Change in Working Capital Other Capital Expenditure Tax paid
rachel.galvez@religarecm.com
53
Equatorial Palm
Company Report
11 March 2011
Working capital movements: We expect significant cash outflows from working capital as the company becomes revenue generating, which is typical of companies that are in the early stage of development. Capital expenditure: We estimate the cost of planting and rehabilitating the land to be 10mn for FY12-FY14 plus an additional $15mn in FY14 for mill construction. We are forecasting capital expenditure to decline dramatically in FY15. Dividend payments: As the company is in its early stage of development, we are not forecasting it to pay a dividend in the medium term. Overall free cash generation: Fully developed Palm Oil Producers are very cash generative. We are forecasting Equatorial Palm to be cash flow positive (FCF to the firm) in FY15.
2. 3. 4.
Balance Sheet Issues 1. Debt: We are forecasting an increase in net debt levels due to rehabilitation, planting and mill construction. The company is well financed and recently announced a JV with BioPalm Energy, which will provide $22.5mn of equity investment and a guarantee to a $30mn loan facility. Expected debt levels are high (relative to developed plantation companies) due to the fact that upfront capital requirements are considerable in this industry. We would expect net debt/equity and net debt/ebitda ratios to normalise as the company increases its production. Other liabilities/assets: The companys land assets, all in Liberia are as follows: Planted 5,600 4,000 Unplanted 8,564 3,411 Expansion 20,234 47,139 80,000 9,600 11,975 147,373 Total 34,398 54,550 80,000 168,948
2.
Equatorial Palm has constructed a palm oil processing mill (built by Modipalm Engineering in Malaysia), which is currently being commissioned.
rachel.galvez@religarecm.com
54
Equatorial Palm
Company Report
11 March 2011
Y/E 31 Dec Revenue Gross profit EBITDA EBIT Net interest/inc./(exp.) Exceptional items Pre-tax Profit (stated) Pre-tax Profit (adj) Tax paid Minorities Net Profit (stated) Net Profit (adj) Shares outstanding (mn) EPS (stated) EPS (adj) DPS
FY08A n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Growth (YoY, %)
Y/E 31 Dec Revenue EBITDA Net profit EPS Dividend Capital employed FY08A n.a. n.a. n.a. n.a. n.a. n.a. FY09A n.a. n.a. n.a. n.a. n.a. n.a. FY10E n.a. 35.7 0.5 (74.1) n.a. 175.4 FY11E 384.5 (43.5) (27.4) (27.4) n.a. 185.7 FY12E 386.8 (230.2) (89.0) (89.0) n.a. (0.2)
Y/E 31 Dec EBIT Depreciation & Amortisation Change in Working Capital Other Operating Cash Flow Capital Expenditure Tax paid Cash Flow to the Firm Dividends Acquisitions & Disposals Proceeds from Share Issues Currency Adjustments Free Cash Flow to Equity Year End Net Cash/(Debt)
Balance Sheet
All figures in ( mn)
Y/E 31 Dec Tangible Fixed Assets Intangibles Assets Associates & Investments Working Capital Other Assets of which: tax assets Other Liabilities of which: tax liabilities of which: pension liabilities Cash & Cash Equivalents Total Capital Employed Gross Debt of which: short term of which: long term Shareholders Equity Minorities Total Capital Employed
FY08A n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
FY09A 0.1 7.2 0.0 (1.7) 0.0 0.0 0.0 0.0 0.0 0.1 5.7 2.0 2.0 0.0 3.7 0.0 5.7
FY10E 0.3 8.2 0.0 0.3 1.3 0.0 0.0 0.0 0.0 5.6 15.7 0.0 0.0 0.0 15.7 0.0 15.7
FY11E 3.0 8.2 0.0 0.6 3.0 0.0 0.0 0.0 0.0 30.0 44.8 30.0 0.0 30.0 14.8 0.0 44.8
FY12E 2.8 8.2 0.0 2.2 13.0 0.0 0.0 0.0 0.0 18.4 44.7 30.0 0.0 30.0 14.7 0.0 44.7
Revenue drivers
Mature Area (HA) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0
Total FFB ('000 MT) 900 800 700 600 500 400 300 200 100 0
rachel.galvez@religarecm.com
55
Equatorial Palm
Company Report
11 March 2011
Company Overview
Equatorial Palm Oil
Company Description Equatorial Palm Oil is involved in the acquisition and development of palm oil plantation land in Liberia, Africa. It currently has three estates which total 169,000 hectares of land rights, and which are in the process of being planted. Planted area split by estate (all in Liberia) Company Strategy The Companys strategy is to rehabilitate existing palms and develop nurseries for new planting. We expect CPO to soon be produced from fruit obtained from the reactivation of 3,000 hectares of the Palm Bay Plantation and note that last August, a palm oil processing mill was delivered from Malaysia. The mill is currently being installed and expected to be commissioned this year. With land becoming increasingly scarce in South East Asia, Equatorial Palm Oil is focused on Liberia, a country that has just recently achieved political stability. The Oil Palm is native to West Africa, and although yields are relatively lower than those compared to Southeast Asia, growing conditions are excellent and investment has increased substantially in recent years (both Arcelor Mittal and Sime Darby have invested in Liberia). River Cess 47% Palm Bay 21%
Near term Near term Near term Near term Medium term Long term Long term Long term
Quickly establish CPO production and generate early stage cash flow Commission processing mill in FY2011 Continue to develop & expand nurseries for new planting Rehabilitate existing oil palm for continual harvesting Further develop downstream infrastructure 10 year target of over 50,000 ha producing 250,000 tonnes of CPO per annum Eventually plant over 100,000 ha Continue to be committed to operate in a sustainable manner
Description Edible oil that is extracted from the pulp of the fruit of the palm
Major Share holders Name Biopalm Energy JP Morgan Asset Management Joseph Jaoudi (NED) Michael Frayne
Management and Board Name Michael Frayne Peter Bayliss Geoffrey Brown Allen Yancy Tim Daniel
Executive Chairman Managing Director Executive Plantations Director Director of Corporate Affairs Chief Financial Officer
Description Palm Oil Price appreciation FY10 Results - confirmation of the planting schedule and an update on the Mill The key share price driver is an increase in value of the underlying asset base
Recent Corporate Action Date 03 February 2011 27 May 2010 26 February 2010 Source: Company, RCM Estimates
Description JV with BioPalm has been implemented providing US$22.5mn + $30mn loan facility 5mn subscription agreement with BioPalm Energy signed, 33mn new shares at 15p Company raised 6.5mn through initial placing 37mn shares at 17.5p, (market cap of 14.3mn)
rachel.galvez@religarecm.com
56
Equatorial Palm
Company Report
11 March 2011
Description/location of estates
Palm Bay Plantation: (34,398 ha of land) is 30km southeast of Buchanan (shown on the map below) and approximately an hour to drive on what was formerly a logging gravel road. Currently the Port of Buchanan is not capable of accepting large commercial ships but this is likely to change due to investment by companies such as Arcelor Mittal. Butaw Plantation: (54,550 ha of land) is 20km and approximately a 1 hour drive from Greenville (shown on the map below). There are companies who provide sea freight services from Monrovia to Greenville but the port can currently only accept small vessels. River Cess County area: (80,000 ha of land) is indicated on the map below.
rachel.galvez@religarecm.com
57
Equatorial Palm
Company Report
11 March 2011
Industry Overview
Industry & Competitive analysis Industry Description (please refer to sector report for more details) Palm Oil and palm kernel oil are edible oils extracted from the fruit of palm trees. Crude palm oil can be further refined and sold as refined palm oil. Southeast Asia represents 85% of global production and India and China account for >30% of consumption. Industry Growth Drivers An increase in food demand driven by population growth and rising disposable incomes. 75% of palm oil is used in food products. Substitution of other edible oils, due to health benefits and lower cost (edible oil market share has increased by 50% since 1996). To a lesser degree, an increase in bio-fuel mandates, although currently only a small share of Palm Oil goes towards bio-fuels usage.
SWOT Analysis
Strengths Land rights (169,000 ha in Liberia) Experienced management team (Geoff Brown and Peter Bayliss) The group has applied for RSPO Membership Most of the land has already been logged (no deforestation issues) First mover advantage in Liberia
Weaknesses Lack of liquidity due to ownership concentration, and buy and hold investors We expect the company to be operating at a loss until FY13
Opportunities Increase in demand for Palm Oil due to: food demand from India & China, substitution effect and bio-fuel demand Tightening restrictions on expansion creates opportunities for existing producers Very few listed developing palm oil plantation companies, immature land trades at a significant discount to mature land
Threats Adverse weather conditions can negatively impact yields, which are typically lower than in Southeast Asia Commodity price volatility Some execution risk, delays in rehabilitation, planting or mill construction Potential political instability in Liberia
New Entrants There are significant barriers to entry in this business (land rights are difficult to obtain in Liberia and significant upfront capital is required)
Suppliers Various for fertiliser, special seeds required for West Africa, local labour relatively cheap (Liberia has c. 85% unemployment)
Industry Competitors Six other London listed, Sime Darby and Golden Agri Resources have plans to develop 220,000 and 240,000 ha in Liberia respectively
Customers Equatorial Palm does not refine its own oil - it sells its oil to refineries
Substitutes Other edible oils, although Palm Oil's production costs are much lower
rachel.galvez@religarecm.com
58
Equatorial Palm
Company Report
11 March 2011
rachel.galvez@religarecm.com
59
Equatorial Palm
Company Report
11 March 2011
rachel.galvez@religarecm.com
60
Company Report
Industrials
M P Evans
BLOOMBERG: MPE LN EQUITY
MP Evans
Rachel Galvez
+44 20 7444 0679
We launch coverage on MP Evans with a Buy recommendation and a 545p price target which represents 17% upside. MP Evans owns and operates Palm Oil plantations through associates in Indonesia and Malaysia. The group also has beef cattle interests in Australia through its 34% share in the North Australian Pastoral Company and 100% stake in Woodlands aggregation. Investment case: In our view, growth will come from both the Indonesian palm oil and the Australian cattle businesses. More specifically, we expect growth in the palm oil business to be driven by new planting programs, the commissioning of a new mill and improvements in yields (due to the planting cycle). Growth in the cattle business is likely to come from increased capacity given the inherent economies of scale in the cattle business. Additional value is likely to be realised from disposal of the Woodland business (c. US$40mn) and the remaining Malaysian property assets (c. US$50mn). Valuation: We derive our price target using a DCF methodology assuming a WACC of 9.7% and a terminal growth rate of 3%. peers. Catalysts: CPO price increases, positive FY10 results, and any We also note that MP Evans trades on a discount on an EV/mature hectare basis relative to its Asian
rachel.galvez@religarecm.com
Valuation & Recommendation Share Price 12 month target Previous target Rating Previous % Upside / (Downside) + Dividend yield Total return 17% 0% 17% 466 p 545 p p Buy
Company data Market Market cap ( mn / US$ mn) EV ( mn / US$ mn) Shares in issue (mn) Free float (%) 2-month average daily volume (mn) 52 Week high / low (p) AIM 252 / 404 261 / 419 54 89 0.03 501 / 318
announcements regarding additional land acquisitions and asset disposals. Risks: Risks to our investment case include commodity price volatility and any negative impact on yields or cattle production stemming from adverse weather conditions (such as flooding in Australia).
Share Price
(p) 550.0 450.0
M P Evans Group PLC Rel to FTSE ALL Share
Financial highlights Year End: 31 Dec Revenue (US$ mn) EBITDA (US$ mn) Net Profit (adj) (US$ mn) EPS (adj) (US$) EV/Sales (x) EV/EBITDA (x) P/E (x) P/E (recurring) (x) Dividend yield (%) Free Cash yield (%) ROCE (post-tax) (%) FY08A 30 (2) 25 0.93 12.36 n.m. 8.0 8.0 0.3 8.9 8.9 FY09A 28 (6) 15 0.34 14.08 n.m. 22.0 22.0 (12.2) n.m. 4.9 FY10E 36 (7) 18 0.46 11.57 n.m. 16.3 16.3 (0.2) n.m. 5.4 FY11E 53 1 13 0.32 8.32 831.7 23.3 23.3 1.1 n.m. 3.9 FY12E 69 3 15 0.35 6.33 126.7 21.2 21.2 1.1 0.6 4.3
350.0 250.0
11 March 2011
M P Evans
Company Report
11 March 2011
Investment Case
We launch coverage on MP Evans with a Buy recommendation and a DCF based price target of 545p. We believe growth will come from both the Indonesian palm oil and the Australian cattle businesses. Additional value is likely to be realised from asset disposal.
Ownership
Mature ha
90% 92.5%
1,207 0 9,509
31.53% 38%
We are forecasting yields to improve in the majority owned subsidiaries due to the planting cycle. Additionally, we expect growth to be driven by the development of the new estates and the commissioning of the new mill. We highlight RSPO membership, managements industry knowledge and experience and the companys current land rights as competitive advantages in this industry.
Asset Disposal
Although we have not factored it into our forecasts, asset disposal and redeployment of the capital to more productive uses should provide additional value to share holders. The company has chosen to focus on Indonesian Palm Oil and NAPCO, and has already disposed of five estates in Malaysia and its Thai rubber factory (the Sungei Kruit and Perhentian Tinggi estates in Malaysia being the most recent). We believe the company will dispose of the remaining Malaysian assets (estimated to be worth US$50mn) and the Woodlands business (estimated to be worth $US40mn).
rachel.galvez@religarecm.com
62
M P Evans
Company Report
11 March 2011
Company Valuation
Year End: 31 Dec FY07A FY08A FY09A FY10E FY11E FY12E
Per Share data (US$) EPS (adj) DPS Book value Valuation ratios EV/Sales (x) EV/EBITDA (x) EV/Capital Employed P/E (x) P/E (recurring) (x) Dividend yield (%) Free Cash yield (%) P/BV (x)
0.80 0.10 4.2 18.89 n.m. 1.7 9.4 9.4 1.3 1.2 1.8
0.93 0.02 4.7 12.36 n.m. 1.4 8.0 8.0 0.3 8.9 1.6
0.34 (0.91) 5.1 14.08 n.m. 1.3 22.0 22.0 (12.2) (2.1) 1.5
0.46 (0.01) 5.4 11.57 n.m. 1.3 16.3 16.3 (0.2) (4.5) 1.4
0.32 0.08 5.6 8.32 831.7 1.3 23.3 23.3 1.1 (5.2) 1.3
0.35 0.08 5.9 6.33 126.7 1.3 21.2 21.2 1.1 0.6 1.3
We derive our 545p price target using a DCF methodology and assuming a WACC of 9.7% and a terminal growth rate of 3%. Below is the DCF sensitivity analysis. Exhibit 2: DCF Sensitivity Analysis
WACC 9.5% 564 554 542
Source:
RCM Estimates
Revenue forecasts
Our revenue forecasts are driven by our underlying assumptions on volumes, which is a function of yields. Our yield assumptions for the Palm Oil business are on the following page.
rachel.galvez@religarecm.com
63
M P Evans
Company Report
11 March 2011
London listed New Britain Palm Oil REA Holdings Anglo-Eastern Plantations MP Evans Group Narborough Plantations Average
Plantation location Papua New Guinea Indonesia Indonesia Indonesia (Australian cattle) Malaysia
Source:
Bloomberg
rachel.galvez@religarecm.com
64
M P Evans
Company Report
11 March 2011
Price: The company does not sell forward as the export tax imposed is based on the market price. The Eastern Young Cattle Indicator (EYCI) gives an indication in Australian cents/kg carcass of cattle prices in Australia. Volume: Is a function of yields, (Fresh fruit bunches "FFB" per hectare and CPO extraction rate), and land under cultivation increases (which we are not incorporating into our forecasts). M&A: Further land acquisitions and a larger stake in NAPCo would increase revenue. FX: Some exposure to the Indonesian Rupiah since plantation labour is paid in local currency, other costs (land and fertiliser) are paid in US$ denominated currency, Palm Oil sales reflect the global US$ price, cattle business (sales and costs) are in A$. 2. EBIT Margin Drivers Given the economies of scale in both the Indonesian Palm Oil and Australian Cattle businesses, as land under cultivation increases, so will earnings and margins. Improvement in yields also drives margin expansion. 3. Tax rates. Indonesia currently imposes a progressive export tax based on the Market CPO price.
Tax rate
CPO Price
Cash Flow Drivers 1. Capital expenditure: We are forecasting an increase in capex in FY11 to a peak US$45mn due to planting and mill construction and then believe capex will decline towards normalized levels going forward. Other investing cash flow. Other investing cash flow (historically and going forward) consists of dividends from associates, as the associates pay out as much as 85% of profits. Dividend payments: we are forecasting a flat dividend going forward as guided by the company. FCF. We estimate that the company will be cash flow positive from FY12.
2.
3. 4.
Debt: The majority of the debt on the balance sheet (c. US$23mn) is in the form of bank overdrafts payable within a year (although they can be rolled over) secured against the Woodland cattle assets.
2. Subsidiaries and associates. Through its subsidiaries and associates and accounting for its stake, MP Evans has rights to 14,071 hectares of mature land and 23,138 of planted land. 3. Non-palm oil business. The company also has a 100% stake in Woodlands Aggregation (31,000 hectares), which it is looking to dispose of and a 34.37% stake in NAPCO (5.8mn hectares), both in the Australian cattle business. Additionally, it has a 40% stake in Bertam Properties, a property development operation that it is also looking to exit.
rachel.galvez@religarecm.com
65
M P Evans
Company Report
11 March 2011
Y/E 31 Dec Revenue Gross profit EBITDA EBIT Net interest/inc./(exp.) Exceptional items Pre-tax Profit (stated) Pre-tax Profit (adj) Tax paid Minorities Net Profit (stated) Net Profit (adj) Shares outstanding (mn) EPS (stated) (US$) EPS (adj) (US$) DPS (US$)
FY08A 30.4 15.9 (1.6) (3.6) (1.0) 0.0 7.5 7.5 (6.5) (3.8) (2.8) 25.2 53 0.93 0.93 0.02
Growth (YoY, %)
Y/E 31 Dec Revenue EBITDA Net profit EPS Dividend Capital employed FY08A FY09A 42.9 (6.6) 46.2 288.4 (33.4) (39.7) 17.1 (63.6) (80.8) (4,868.0) 7.9 10.5 FY10E 27.4 22.0 16.8 35.1 (98.8) 5.4 FY11E 46.1 (107.1) (24.9) (29.9) (799.1) 3.2 FY12E 30.5 552.3 12.9 10.0 0.4 3.6
Y/E 31 Dec EBIT Depreciation & Amortisation Change in Working Capital Other Operating Cash Flow Capital Expenditure Tax paid Cash Flow to the Firm Dividends Acquisitions & Disposals Proceeds from Share Issues Currency Adjustments Free Cash Flow to Equity Year End Net Cash/(Debt)
Balance Sheet
All figures in (US$ mn)
Y/E 31 Dec Tangible Fixed Assets Intangibles Assets Associates & Investments Working Capital Other Assets of which: tax assets Other Liabilities of which: tax liabilities of which: pension liabilities Cash & Cash Equivalents Total Capital Employed Gross Debt of which: short term of which: long term Shareholders Equity Minorities Total Capital Employed
FY08A 126.2 2.7 1.2 10.2 100.6 2.3 18.1 15.1 0.0 56.5 282.4 21.0 19.0 2.0 249.2 12.2 282.4
FY09A 153.4 2.6 1.2 15.8 114.0 1.4 18.7 16.8 0.0 38.1 312.0 24.3 22.3 2.0 275.5 12.2 312.0
FY10E 173.5 3.4 2.0 23.1 117.5 2.2 20.7 17.3 0.0 20.5 328.9 21.0 19.0 2.0 292.0 15.9 328.9
FY11E 215.0 3.4 2.0 27.5 104.1 2.2 21.5 17.3 0.0 (1.7) 339.3 16.0 14.0 2.0 303.8 19.5 339.3
FY12E 226.7 3.4 2.0 37.9 90.6 2.2 22.8 17.3 0.0 (0.1) 351.4 11.0 9.0 2.0 317.2 23.2 351.4
rachel.galvez@religarecm.com
66
M P Evans
Company Report
11 March 2011
Company Overview
MP Evans
Company Description MP Evans owns and operates Palm Oil plantations both directly and indirectly through associates in Indonesia and Malaysia. The group also has beef cattle interests in Australia through it's 34% share in the North Australian Pastoral Company (NAPCO) and a wholly owned company, Woodlands Aggregation.
Company Strategy The group will continue to focus on the Indonesian Palm Oil and Australia cattle industries. It plans to expand its Indonesian sustainable palm oil production to c. 400,000 tonnes (from 60,000 tonnes) by expanding its land assets to c. 70,000 ha of palm oil plantations. It also hope to increase its beef-cattle interests in Australia, so that it represents approximately 30% of the group's assets.
Near term Near term Medium term Medium term Medium term Longer term Longer term Longer term
Completely divest from Malaysian & Thai rubber plantations and real estate Within the beef cattle industry, sell Woodlands and focus on NAPCO Investment Aggressively develop and plant immature land Dispose of the remaining Malaysian asset, estimated to be worth $50mn Aim for business to be 70% Palm Oil, 30% Australian cattle - in asset terms Increase total Indonesian areas under oil palm to c .70,000ha of environmentally-sustainable oil palm Expand palm oil production from c. 60,000 tonnes to 400,000 tonnes
Indonesia 53%
Malaysia 17%
Land Assets by Value (Target) Key Products/Services Product Crude Palm Oil Cattle Description Edible oil that is extracted from the pulp of the fruit of the palm. MP Evans has a 34% stake in NAPCo, Australians 2nd largest beef cattle company that owns 1% of the land in Australia.
Australia 30%
Management and Board Name Peter E Hadsley-Chaplin Philip A Fletcher Owen David Wilkinson Tristan RJ Price
Indonesia 70%
Description Palm Oil Price Increases Positive FY10 Results Any updates regarding additional palm oil estate acquisitions Completing the disposal of the Woodlands estate (estimated to be worth c. US$40mn) Disposal of Malaysian assets (estimated to be worth c. US$50mn)
%
12% 11% 10% 7% 6% 5% 5% 5%
Recent Corporate Action/Events Date Description MPE acquired Sandlark for A$2.5mn which was paid for by issuing 389,577 shares to the company's owners, resulting in a 34.4% stake in NAPCO. 05 November 2008 Disposal: sale of the Sungei Kruit Estate (829ha) for c. $22mn is completed 04 August 2008 Disposal: sale of the Perhentian Tinggi Estate (745ha) for c. $20.7mn is completed 28 March 2008
rachel.galvez@religarecm.com
67
M P Evans
Company Report
11 March 2011
Industry Overview
Industry & Competitive analysis Industry Description (please refer to sector report for more details) Palm Oil and palm kernel oil are edible oils extracted from the fruit of palm trees. Crude palm oil can be further refined and sold as refined palm oil. Southeast Asia represents 85% of global production and India and China account for >30% of consumption. Industry Growth Drivers An increase in food demand driven by population growth and rising disposable incomes. 75% of palm oil is used in food products. Substitution of other edible oils, due to health benefits and lower cost (edible oil market share has increased by 50% since 1996). To a lesser degree, an increase in bio-fuel mandates, although currently only a small share of Palm Oil goes towards bio-fuels usage. SWOT Analysis
Strengths Land & assets Sustainable producer (RSPO members, expect certification this year) Strong managment team Diversification reduces risks associated with all earnings being derived from one product/commodity Industry leading yieldsMP Evans
Weaknesses Few synerigies between Indonesian Palm Oil and Australian cattle businesses
Opportunities Increase in demand for Palm Oil due to: food demand from India & China, substitution effect and bio-fuel demand. Increase in demand for sustainable and traceable Palm Oil. Tightening restirctions on expansion creates opportunities for exisiting producers.
Company Description
Threats Competition - many other producers in Indonesia Indonesian export taxes Adverse weather conditions can negatively impact yields Commodity price volitility
New Entrants
There are significant barriers to entry in this business (land is becoming increasingly scarce and is very difficult to obatin in Indonesia)
Suppliers
Industry Competitors
Many producers in Indonesia 7 London listed Palm Oil producers (2 are in development)
Customers
Oil is sold to refineries
Substitutes
Other edible oils, although Palm Oil 's production costs are much lower
rachel.galvez@religarecm.com
68
M P Evans
Company Report
11 March 2011
Board of Management
Peter E Hadsley-Chaplin, MA MBA, Executive chairman
Appointed a director in 1989, chairman in 2010. Former executive chairman of Bertam Holdings PLC and Lendu Holdings PLC. A director of The North Australian Pastoral Company Pty Limited. Former chairman of The Association of the International Rubber Trade. Prior to joining the Group in 1988 he was a commodity broker with C Czarnikow Limited.
rachel.galvez@religarecm.com
69
M P Evans
Company Report
11 March 2011
Disclaimer
Important Global Disclosures Religare Capital Markets (RCM) is the global brand name for the Religare Capital Markets group which includes Religare Capital Markets Limited and its affiliates worldwide. Each of the analysts identified in this report certifies, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly dependent on the specific recommendations or views expressed in this report. Analysts stock ratings are defined as follows: (Recommendation structure changed with effect from March 1, 2009) Recommendation Interpretation
Expected absolute returns (%) over 12 months More than 15% Between 15% and 5% Less than 5%
Expected absolute returns are based on share price at market close unless otherwise stated. Stock recommendations are based on absolute upside (downside) and have a 12-month horizon. Our target price represents the fair value of the stock based upon the analysts discretion. We note that future price fluctuations could lead to a temporary mismatch between upside/downside for a stock and our recommendation. Global Coverage Profile By recommendation
(%) (%)
By market cap
80 60 40 20 0
80 60 40 20 0
During the previous quarter Religare Capital Markets Plc in the UK has published 25 research notes, 22 of which contained research recommendations, and 3 related to corporate broking clients of the firm. The 22 recommendations were broken down into 15 buy, 1 sell, and 6 hold. RCMs policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. RCM's policy is to publish both investment research and marketing communications. Investment research is impartial, independent, clear, fair and not misleading. Marketing communications cannot be seen as objective and are not prepared in accordance with legal requirements designed to promote the independence of Investment Research. In some instances, RCM may have, or be seeking, a business relationship with the company which is the subject of the research. For more information on RCM's Conflict of Interest Policy and its use of Independent and Non-Independent research please refer to http://www.religarecm.com/ Analysts Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and RCMs total revenues, which include revenues from, among other business units, Equities and Investment Banking. Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of RCM, are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of RCM, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. Important Regional Disclosures United Kingdom: This material has been prepared by Religare Capital Markets in accordance with the legal requirements for producing investment research. Notwithstanding anything to the contrary contained herein, the following applies where the publication/communication is distributed in and/or into the United Kingdom. This publication/communication is only for distribution and/or is only directed at persons ("permitted recipients") who are (i) persons falling within Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (the "FPO") having professional experience in matters relating to investments or high net worth companies, unincorporated associations etc. falling within Article 49 of the FPO, and (ii) where an unregulated collective investment scheme (an "unregulated CIS") is the subject of the publication/communication, also persons of a kind to whom the unregulated CIS may lawfully be promoted by a person authorized under the Financial Services and Markets Act 2000 ("FSMA") by virtue of Section 238(5) of the FSMA. The investments or services to which this publication/communication relates to are available only to permitted recipients and persons of any other description should not rely on it. This publication/ communication have been produced to meet the requirement of the Conduct of Business Sourcebook (COBS) 12 under the FSA Rules, please refer to our Conflict of Interest Policy as mentioned above in connection with Investment Research.
70
M P Evans
Company Report
11 March 2011
Singapore: This publication/communication is distributed for and on behalf of RCM in Singapore through Religare Capital Markets (Singapore) Pte Limited solely to persons who qualify as institutional investors, accredited investors or expert investors, as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore (the SFA). Pursuant to regulations 33, 34, 35 and 36 of the Financial Advisers Regulations (the FAR), sections 25, 27 and 36 of the Financial Advisers Act, Chapter 110 of Singapore shall not apply to Religare Capital Markets (Singapore) Pte Limited when providing any financial advisory service to an accredited investor, expert investor or overseas investor (as defined in regulation 36 of the FAR). Please contact Religare Capital Markets (Singapore) Pte Limited in respect of any matters arising from, or in connection with this publication/communication. South Africa: This material is distributed for and on behalf of Religare Capital Markets Plc in South Africa through Religare Capital Markets (Pty) Ltd. Religare Capital Markets (Pty) Ltd is a licensed financial services provider (FSP No. 31530). Canada: Neither this publication/communication nor any copy hereof may be distributed in Canada or to any individual outside Canada who is a resident of Canada except in compliance with applicable Canadian securities laws. India: This publication does not constitute an offer or invitation or solicitation to subscribe for or buy or sell securities. This report is intended for information purpose only to the intended recipient and should not be reproduced or redistributed to any other person. Hong Kong: In Hong Kong, this publication/communication must not be sent to anyone other than (1) to Professional Investors as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that ordinance; or (2) in other circumstances which would not result in this publication/communication being a Prospectus as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that ordinance. United States: Neither this publication/communication nor any copy hereof may be taken or distributed into the United States. Dubai: This publication/communication is intended for professional clients only and is not for onward distribution within the United Arab Emirates. Other jurisdictions: In any other jurisdictions, except if otherwise restricted by law or regulation, this publication/communication is only for distribution to professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. Specific Research Disclosures The authoring analyst, a member of the authoring analysts household, or any individual directly involved in the preparation of this investment research, may have a position in the shares or derivatives, or has some other financial interest in the relevant companies mentioned in this report. The companies mentioned in this report have not seen or made factual amendments to this research note. Disclaimers This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Religare Capital Markets Limited or its affiliates (RCM) to any registration or licensing requirement within such jurisdiction(s). All material presented in this report, unless specifically indicated otherwise, is under copyright to RCM. None of the material, its content, or any copy of such material or content, may be altered in any way, transmitted to, copied or reproduced (in whole or in part) or redistributed in any form to any other party, without the prior express written permission of RCM. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of RCM or its affiliates, unless specifically mentioned otherwise. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. RCM may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. RCM will not treat recipients as its customers by virtue of their receiving the report. The investments or services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or appropriate to your individual circumstances or otherwise constitutes a personal recommendation to you. RCM does not offer advice on the tax consequences of investment and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Accordingly, you are recommended to seek your own legal, tax or other advice as you may find appropriate and should rely solely on your own judgment, review and analysis in evaluating the information contained in this report. Subject to any applicable laws and regulations at any given time, RCM, its affiliates or companies or individuals connected with RCM may have positions in, may make investment decisions that are inconsistent with the recommendations or views expressed in this research, may from time to time purchase or sell or have a material interest in any of the securities mentioned or related securities or may currently or in future have or have had a business or financial relationship with, or may provide or have provided investment banking, capital markets and/or other services to, the entities referred to herein, their advisors and/or any other connected parties. As a result, investors should be aware that RCM and/or such individuals may have one or more conflicts of interests that could affect the objectivity of this report. RCM believes that the information and opinions in the Important Regional Disclosure Section of this report are accurate and complete and are provided in good faith. Information and opinions presented in the other sections of the report were obtained or derived from sources that RCM believes to be reliable, but RCM makes no representations or warranty, express or implied, as to their accuracy or completeness or correctness. Additional information may be available upon request. RCM accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that liability arises under specific statutes or regulations applicable to RCM. This report is not to be relied upon in substitution for the exercise of independent judgment. RCM may have issued, and may in the future issue, a trading call regarding this security. Trading calls are short term trading opportunities based on market events and catalysts, while stock ratings reflect investment recommendations based on expected absolute return over a 12-month period as defined in the disclosure section. Because trading calls and stock ratings reflect different assumptions and analytical methods, trading calls may differ directionally from the stock rating. In addition, RCM may have issued, or may in the future issue other reports that may be inconsistent with, and may reach different conclusions from, the information presented in this report. The other reports may reflect different assumptions, views and analytical methods of the analysts who prepared them and RCM is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report. RCM is involved in many businesses that relate to companies mentioned in this report. These businesses include specialized trading, risk arbitrage, market making, and other proprietary trading.
71
M P Evans
Company Report
11 March 2011
RCM, its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently RCM expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors or omissions in this report. The data contained in this report is subject to change without any prior notice. RCM reserves its right to modify this report as maybe required from time to time. RCM is committed to providing independent recommendations to its clients and would be happy to provide any information in response to any query received from anyone who was an intended recipient. This report is strictly confidential and is being furnished to you solely for your information. The views expressed in the report reflect the analysts personal views about the securities and issuers that are subject of this report, and that no part of the analysts compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in this report. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment of its original date of publication by RCM and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADRs, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large increases or decreases in their value, causing profits or losses when that investment is realized. Those losses may equal your original investment or may exceed the amount of initial investment itself. In such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realizable and it may be difficult to sell or realize those investments. Similarly, it may prove difficult to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to websites. Except to the extent to which the report refers to website material of RCM, RCM has not reviewed the linked site and takes no responsibility whatsoever, for the contents therein. Such addresses or hyperlinks (including addresses or hyperlinks to RCMs own website material) is provided solely for your convenience and information and the content of the linked site does not in any way form part of this report. Accessing such website or following such link through this report or RCMs website shall be at your own risk. This report is issued by RCM. This report is distributed in India by Religare Capital Markets Limited, which is a registered Intermediary regulated by the Securities and Exchange Board of India. This report is being distributed in the United Kingdom and European Economic Area countries by Religare Capital Markets Plc and Religare Capital Markets (EMEA) Ltd, which are both authorised and regulated in the United Kingdom by the Financial Services Authority (FSA). In South Africa, distributed through Religare Capital Markets (Pty) Ltd which is is a licensed financial services provider In Dubai, it is being distributed by Religare Capital Markets Plc (Dubai Branch) which is licensed and regulated by the Dubai Financial Services Authority (License number F001188). In Singapore, it is being distributed by Religare Capital Markets (Singapore) Pte Limited which is a holder of a capital markets services licence and an exempt financial adviser in Singapore. In Hong Kong, it is being distributed by Religare Capital Markets (Hong Kong) Limited, which is licensed and regulated by the Securities and Futures Commission, Hong Kong In jurisdictions where RCM is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation in the respective jurisdiction, which may vary from one jurisdiction to another and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a RCM entity in their local jurisdiction unless governing law permits otherwise. Please note that this report is prepared and issued by RCM for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of RCM should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. Any reference to a third party research material or any other report contained in this report represents the respective research organization's estimates and views and does not represent the views of RCM and RCM, its officers, employees do not accept any liability or responsibility whatsoever with respect to its accuracy or correctness and RCM has included such reports or made reference to such reports in good faith. If this report is being distributed by a financial institution other than RCM, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by RCM to the clients of the distributing financial institution, and neither RCM, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content.
72