BW Plantation (BWPT IJ; CP: IDR1,190; BUY) Target Price: IDR1,590 - BNP Paribas

Key issues
ƒ Management raised their production growth target to 15% from 10% given continued strong monthly production data. In 1H11, BW CPO production increased by 54% y-y, but this is coming from a low base, as CPO production in early 2010 was very low. In 2H, management expects production growth to normalise.
ƒ Production costs were down 6% in 1H11, which continues to highlighted BW’s competitive cost efficiency. For the first time, BW’s EBITDA margin went above the 60% level in 1H11.
ƒ Through their R&D, BW has adopted an early harvesting programme from which they can enjoy the first production 30 months after planting – faster than the traditional 48 months. Production during the first year is also expected to be higher at 12 tonnes FFB/ha vs 7-8 tonnes FFB/ha traditionally.
ƒ With the expected strong production growth (20-30% pa), management expects positive cashflow in 2014. BW will continue to expand its planted area, targeting 10,000 ha expansion pa.

Questions raised
ƒ Any plans to go downstream or enter the rubber business? BW will only focus on expanding its palm oil business. Expansion into downstream businesses or rubber is not on management’s agenda.
ƒ What kind of seeds does BW use given its much higher productivity than peers? BW mostly uses palm oil seeds from Marihat, which are also used by most plantation companies in Indonesia. High productivity is mainly driven by BW’s effective mechanisation process, which is maximising production output while reducing the potential of oil loss during the harvesting process.

Current view
ƒ We like BW on its strong growth potential starting next year. With 70% of its planted area still immature, BW should enjoy a stronger growth trajectory ahead of its peers in the sector which only have an average ~28% of their planted area still immature. With its above average medium-term growth, we believe BW has a better cushion for its earnings in the event of lower CPO price. BW is our TOP PICK in the sector with TP IDR1,590.