PT BW Plantation Tbk – Riding the Wave - AAA

Summary
We re-initiate the coverage of BWPT with BUY recommendation at Rp1,390 target price. The important factors that based our BUY recommendation are ample room to grow, positive outlook of CPO price and good plantation management. We use a blended valuation method (DCF, PE and EV/EBITDA) in arriving at our target price which provides about 17% upside potential.

Ample Room to Grow
The total planted area as of FY2010 is 52,060 ha, and about 70% of them are still immature. That will provide BWPT with ample room to grow in terms of its FFB production. BWPT is also increasing its mill capacity to reach 135 tons/hour in 2012 to support FFB processing from its own plantation.

Still Positive Outlook For CPO Prices
2010 is the year of almost all commodities. Prices of CPO, soybean, coal, and oil experienced upward trend after tumbling in 2009. The CPO price began to rise in 3Q2010 from US$910/ton and still rising until now to a new high at US$1,330/ton in 1Q2011. The strong demand from the growing economies e.g. China, India and political instability in the oil exporting countries are the main reasons for continuing high CPO price outlook.

Financial Performance 2010 – Delivering the Promise
BWPT sales increased to Rp712.6 bn due to about 22% higher price, while volume remained relatively unchanged. The ASP of CPO has been higher at Rp7,236/kg in 2010 (2009: 6.117/kg). The EBITDA margin improved to 57.3% from 48.2% previously. These gross and EBITDA margins were higher than its peers at around 42% and 29% respectively. Beside higher CPO price, another reason for BWPT high profitability margins is the high productivity of its trees that average 10.8 years, which considered prime age, with FFB yield of around 27 tons/ha. With higher yield per ha, cost per ton could be lowered. The higher than industry average productivity is because BWPT has not done much planting during the 2001 – 2005 period. As a result, now, the mature area consisted mostly of prime age trees from 1997 – 2000 planting.
Going forward, with planting that has taken place in 2006 onwards, younger trees will be reclassified into matured area and the average age as well as the FFB yield per ha will decline to the industry average. It should be noted that interest expense in 2010 was up to Rp54.4 bn (2009: Rp41.7 bn). With around Rp1,228.7 bn in interest bearing debt to finance its growth, BWPT is one of the most leveraged company in the industry. However, at the current debt to equity level of 1.4x as of FY2010, gearing is still considered low. All in all BWPT was still able to book a 46% increase in net income to reach Rp243.6 bn (2009: Rp167.5 bn).

Valuation – Still Attractive
Since its IPO (at Rp550), BWPT share price has more than doubled in value. While the period of exponential increase in share price has more or less elapsed, we still find BWPT attractively valued at Rp 1,390. Our TP implied a PE of 16.6x. We use a blended valuation method (DCF, PE and EV/EBITDA) in arriving at our target price which provides about 17% upside potential.