Equity Explorer: JA Wattie (JAWA IJ): Rp450 Best proxy to upstream rubber - DBS

• JA Wattie (JAWA) is a diversified planter with the 2rd largest planted rubber area after Lonsum
• Undemanding on EV/mature (pro-rated for rubber estates) at US$10,895 (vs. US$14,198 peers average)
• Jump in maturity, resilient rubber prices will expand earnings by 31% CAGR over FY10-13F
• We value JAWA at Rp625/share (offering 39% upside potential); 41% of market cap is cash by end FY11F

The Business
A young, diversified and growing planter. JAWA is a diversified Indonesian planter involved in cultivating oil palm, rubber, coffee and tea. The attraction is its 9,355 ha of rubber estates, which is a third of its planted area. Its 15,740 ha of oil palm planted area is young with a 3-year average age profile, and is targeted to expand to over 22k ha by 2013F.

Undemanding on EV/mature area. Pro-rated for rubber estates’ share of mature area, JAWA’s FY12F rubber EV/mature area is currently US$10,895, or c.23% below peers’ average. The market has mispriced JAWA, because by end FY11F, c.41% of its capitalisation would be cash following its recent IPO.

Entering productive years. JAWA only started oil palm cultivation in 1999. We expect its own FFB output to grow at 45% CAGR over FY10-FY13F. A new 30 MT/hr CPO mill will likewise boost CPO output by 34% CAGR over the same period. We also expect rubber production to grow at 11% CAGR during the same period driven by new maturities.

The Stock
Based on DCF (WACC 12.8%, Rf 8.5%, Rm 13.5%, B 1.2x, TG 3.0%), JAWA is valued at Rp625/share. This implies 39% upside potential and 16.5x FY12F PE. Catalysts for the stock include a jump in CPO output from maturing estates, resilient rubber prices, aggressive new planting, and capacity expansion.

Risks. Lower-than-expected natural rubber and palm oil prices, stronger Rupiah, and failure to meet its internal expansion targets are key risks to our call.