CLSA Indo : GZCO Locking in a fertile year

We continue to like GZCO given its compelling LT organic growth profile, with an unplanted to planted landbank ratio of 3:1 and 27% CAGR in nucleus FFB production through 2015. In the more immediate term, we forecast 40% nucleus FFB growth, 14% increase in ASP and more than US$1m savings from fertilizer hedging will drive earnings in FY11. Our target price of Rp520/share offers 28% upside. We reiterate our BUY call.


Strong 4Q10 performance bodes well for 1Q11
FY10 revenue grew 11% to Rp455bn despite a 13% decline in CPO production (51.6k tons). Sales were boosted by strong 4Q10 nucleus FFB harvests (+45% YoY), a 15% increase in FY ASP (Rp7,239/kg net) and a 5k ton sell down in CPO inventory. 4.4k ha rise (+30%) in mature plantings in FY10 will continue to drive production growth and incremental volume through 1Q11 to propel strong earnings momentum on the back of near peak CPO prices.


Capitalizing on organic growth
Plantations total 32,317ha, of which 40% remains immature. From 99k ha of unplanted landbank at YE09, the company planted 6.3k ha in FY10, adding 5,238ha to total estates. In FY11, new plantings of 6.5k ha are targeted in Kalimantan while construction of a port and CPO mill will continue at Golden Blossom in South Sumatra. Total capex of up to Rp314bn will be financed through internally generated cashflow. An untapped Bank Mandiri credit facility, secured in 4Q10 will be reserved for potential acquisition targets.


Reducing COGS through fertilizer hedge
Fertilizer for mature estates is secured through 1Q12 at US$450/ton (pre tax). 15k tons of compound fertilizer are contracted for delivery in FY11, from Malaysian producer Hikey, sufficient for at least 18k ha of estate upkeep (3-6kg/tree/yr and 140 trees/ha). Current US$520/ton market price of fertilizer implies cash production cost savings of US$1.05m (plus tax shield) in FY11, with further upside from strengthening fertilizer prices or a weaker dollar.

Still a growth and value play
In FY11, 40% nucleus FFB growth and higher ASP are key catalysts for earnings expansion. We maintain a US$1,000/ton CPO price outlook (+14% YoY). At Rp405/share, GZCO is trading on 11x 2011 earnings, a 35% discount to small cap peer BW Plantations (BWPT IJ). Using blended Indonesian sector (ex large cap) forward PE (12.8x) and EV/ha (US$14,592) metrics, we derive a target price of Rp520/share, implying 28% upside. BUY.