Gozco Plantations (GZCO-BUY-IDR350-TP:IDR450) ‘G’ for growth - Bahana Securities

Entering high growth period
Having owned 126k ha total area, Gozco Plantations (GZCO) plans to plant 6k–7k ha a year starting from 2010, paving the way for several years of high growth period for the company. We forecast 2011-2015 CAGR in mature area of 22.6% to translate to revenue CAGR of 18.7% over the same period, much higher than industry average (exhibit 10), despite our conservative operating performance forecast (exhibit 17). At the same time, its 45tons/hour increased capacity in their CPO mill will support GZCO’s expansion plans.

Solid 4Q10 results (+27% y-y): Precursor of better things to come
GZCO’s 4Q10 performance is set to improve in the subsequent quarters in our view. 4Q10 FFB production reached 54k tons, flat q-q but +45% y-y, bringing 12M10 production to 161k tons, +5% y-y. However, 4Q10 purchased FFB reached 25k tons (+65%q-q, -27% y-y). Overall, 4Q10 higher demand and ASP allowed 2010 revenue to rise 11% y-y to IDR455b, allowing operating profit to come in at IDR156b (+28% y-y) and net profit to reach IDR161b (-21% y-y), although 4Q10 net income of IDR55b rose 13% y-y (exhibit 23). We note that GZCO’s operating result improved over 2009’s level, helped by 15% higher ASP, even though CPO sales volume declined 5% y-y. Lower CPO production caused lower FFB purchased from plasma and 3rd parties.

Increased profitability and sustainability
Going forward, we expect operating improvements to result in higher ROE for GZCO, particularly given several acquisitions of unplanted land bank amounting to 93k ha to support their expansions. As earnings experience significant growth ahead, GZCO will continue to improve its ROE as more land becomes planted (exhibit 13). Thus, we believe this is a good move by GZCO, particularly given that moratorium policy will be implemented soon, limiting plantation companies in general from growing organically. Additionally, as current trees reach their peak productive age and more trees mature, the proportion of 3rd party FFB will eventually decline and CPO production will become more sustainable (exhibit 14).

Unjustified underperformance on high growth and cheap valuation
Considering that GZCO’s high growth period is just around the corner, we expect improved productivity and profitability to unfold. This has us reiterating our positive view on this counter. We forecast GZCO’s top line and bottom line to reach IDR585b (+28.6% y-y) and IDR192b (+24.9% y-y) on the back of strong growth in production coupled with higher ASP. GZCO’s cheap valuation of 9.2x 2011 PE and 0.4x 2011 PEG are attractive when compared to the sector’s 2011 PE of 12.3x and PEG of 1.1x (exhibit 6). We see upside to our valuation if their production yield and/or FFB purchased from 3rd parties recover to 2009’s level. Since listing, GZCO’s market cap has nearly tripled to more than USD200m while average daily turnover has risen 73% to USD0.7m (exhibit 8). As we expect these improvements to persist, our IDR450 TP assumes a reasonable re-rating to 11.7x 2011 PE. BUY.