JAWA:The unique rubber planter - Mandiri

J.A. Wattie (JAWA) plants rubber, oil palm, coffee, and cocoa in Kalimantan and Java islands. 60% of its FY10 sales came from rubber, 37% from palm oil products, and the remaining from coffee and cocoa. Its aggressive rubber planting activities between 2006-2009 should drive production growth in year 2011-2013, when the regional supply is expected to be tight. Natural rubber has been one of the best performing commodity in the S&P GS index, as a preferred play on global car production recovery and tyre replacement cycle. JAWA is one of the six listed rubber plantations companies in Asia Pacific, four of which are listed in the less liquid Vietnam stock exchange.

Compounded EPS growth of 12.1% between FY11-13F, based on flat selling price assumptions. From its own estates, rubber production should grow by 15% and oil palm by 34% between FY11-13F, based on historical planting activities. Risk of price movement on natural rubber is skewed to the upside, based on the tight three-year supply outlook.

EPS responsive to natural rubber price movements. Due to progressive export tax scheme on CPO, Indonesian CPO companies (including JAWA) may not see EPS benefit from a mere 10% rise in CPO price. But a zero export tax scheme for natural rubber export means that a 10% increase in natural rubber price will lift JAWA’s EPS by 12%.

Natural rubber fundamentals are strong. New planting and re-planting activities within the Association of Natural Rubber Producing Countries (ANRPC) dropped by almost 40% in year 2009-10, compared with in 2007-08. Meanwhile, average output yield from Thailand’s rubber estates - the biggest world producer - has been declining, from 1.80 tons/ha in 2006 to 1.62 tons/ha in 2010.

Cheap as chips. If we back out the value of JAWA’s CPO estates based on EV/planted oil palm hectarage of US$13,000 – below average market valuation for pure Indonesian oil palm plays, the implied residual value for its planted rubber estates is below US$2,000 per ha. One hectare of mature rubber estate is currently yielding 118% more cash profit than that of oil palm, with 41% shorter payback period. The stock trades on undemanding FY11F P/E of 9.8x vs Indo plantations average of 12.8x. Buy with DCF-sderived TP of Rp700, or 12.9x FY11F.