Initiating Coverage Jaya Agra Wattie A different plantation - Kim Eng

We initiate coverage on Jaya Agra Wattie with a BUY recommendation and target price of Rp670, which offers 37% upside potential. JA Wattie is a small plantation company that is focused on the rubber business. Though rubber is planted in 32% of its planted areas, it would account for 72% of its gross profit this year, based on our estimate.
􀂃 Higher margin per hectare basis. Using 3M11 commodity prices of rubber and palm oil products, we estimate a hectare of rubber in JA Wattie will generate Rp73.5m in revenue. In comparison, the revenue of a typical domestic oil palm plantation is only Rp39.5m. Based on the sector’s average figures, we estimate that a hectare of JA Wattie’s rubber plantation could produce a gross margin of 80%, compared to
60% from a hectare of a oil palm plantation.
􀂃 Strong volume growth. We expect the sales volume of rubber to increase at a CAGR of 20% in FY11‐13, which would be driven by higher production from newly‐mature plants and purchase from third party. As for CPO, we estimate that its sales volume would grow at a CAGR of 38% over the next three years from 19.7k tonnes in 2010 to
52.9k tonnes in 2013.
􀂃 Aggressive expansion in rubber and oil palm. Going forward, the company plans to add 7k ha oil palm within the next three years, thus boosting to almost 26k ha by 2013 (including plasma) from 18.9k ha in 2010. As a commitment to its rubber business, management plans to increase its rubber planting area by adding 14.5k ha until 2014, thus expanding its total planted area by more than 150% to total
23.8k ha.

BUY at target price of Rp670
We employed the DCF valuation method to value JA Wattie. The WACC of 13% was derived from the cost of equity of 15% and the cost of debt of 12%, at an effective tax rate of 25%. Based on our five‐year forecast model with a long‐term growth rate of 5%, we estimate JA Wattie to have a total value of Rp2.33t, or Rp672 per share. Thus, we value the stock at 12.5x FY12 P/E. Plantation stocks under our coverage are trading between 10.1‐15.3x FY11 P/E and 9.1‐12.7x FY12 P/E. Currently, JA Wattie is trading at a discount of 15‐18% to the sector’s average of 12.3‐10.8x FY11‐12 P/E. As JA Wattie is experiencing strong volume growth in its rubber and oil palm businesses, mostly due to the young age profile of the plants, we believe such a large discount is unjustified. There are no consensus estimates available at this moment. Our target price of Rp670 offers 37% upside potential. BUY.