Jawa - Rubber Does It Buy 600

7/31/2019 Jawa - Rubber Does It Buy 600

1/15

PT. Jaya Agra Wattie Tbk.

JAWA.IJ Buy - TP: 600

Company Update

Strong Growth ProfileRight Timing for Rubber HighPT J.A. Wattie has a total of 67,697.33 Ha under Cultivation Right (HGU) andLocation Permit. The number above includes plasma plantation where asmuch as 29,339.38 Ha or 43% of total area had been planted.

As of 2010, their palm oil plantation had an age profile consisting of 11,321Ha or 72% of total planted under the immature classification, 3,409 Ha or22% under the young period classification and 1,010 Ha or 6% under peakperiod classification. (Refer to chart on page 9). Their FFB yield had recordeda CAGR (compounded annual growth rate) of 39% for the years starting from2006 to 2010.

As for J.A. Wattie rubber plantation, their age profile as of 2010 had 5,004 haor 53% of total planted classified into immature category, 624 ha or 7% intoyoung category, 3,143 ha or 34% into peak period category and 583 ha or 6%into off-peak category (read: plantation with maturity age of 20 and aboveyears).

Their plantations age profile for both rubber and palm oil are entering theirpeak productive period and are relatively still young compared to the other

plantations. Peak production period coupled with strong average selling pricefor both commodities translated into boosted revenue. In plantation, timingis everything, and J.A. Wattie in our view had the right timing.


2/15

PT. Jaya Agra Wattie Tbk. October 31, 2011

Downstream Products of Rubber - Rubber and Its Uses

u b b e r T r e e s

rubber latex

latex medical devices & laboratorystethoscope tubing

gloves

crumb rubber

tire

other vehicle equipment

bycycles pedal

windshield trim

apparel

shoes, sandals

diving suit

industrial equipment

oil seal

tubes

belt conveyor / transmissionbaby gear

oil

resin

oil paint


3/15


Potential Area of Rubber Processing Industry

Source: BPKM

JAWA Plantation Locations


4/15


Getting You from A to B Rubber does it.

The Bull in Rubber

Emerging Market Growing Consumption Car SalesBridgestone Corp., the worlds largest tire maker, stated that it would spend a record of 300 billion yen next yearto boost production to meet rising demand from emerging markets. Demand from China, India, and Malaysia,representing 45% of the global total, is likely to grow 0.7% in 2011 compared with a 4.7% gain in 2010.

Production in Indonesia is predicted at 2.96 million tons versus 2.74 million tons, while in Malaysia output is e s-timated at 1.02 million tons compared with 939,000 tons, according to Association of Natural Rubber ProducingCountries. While there is little impact of rains and floods in Thailand (the biggest grower) as rubber plantationsare located on the other part of the country, floods in Thailand have reportedly disrupted some movements toports. This condition if prolonged may have an upward drive toward natural rubber remembering that Thailandis one of the main suppliers of natural rubber in the world.

-

150,000.00

300,000.00

450,000.00

600,000.00

750,000.00

900,000.00

-

3,000,000

6,000,000

9,000,000

12,000,000

15,000,000

18,000,000

21,000,000

2005 2006 2007 2008 2009 2010 2011*

IndonesiaOther

Countries Auto Sales

US Japan China India Indonesia

Chinas CAGR for their autosales from year 2005 2010 is28%, followed by India 13%and then by Indonesia 7%.Rubber downstream product istires. Auto sale is pretty muchcorrelated with tire sales thusrubber industry has rooms togrow.


5/15

PT. Jaya Agra Wattie Tbk. October 31, 2011 Tire Industry Outlook

There are two types of rubber tires: 1solid tires used on industrial machinery and on military vehicles and2pneumatic tires tire used for almost all free-moving vehicles including automobiles, trucks and buses, motor-cycles, airplanes and off-road tires. In general, the larger the tire the greater the share of natural rubber (Market

Information In The Commodities Area, 2011) Looking back to Dow Jones as a historical reference, rubber com-panies were doing fine since Goodyear s invented vulcanization which made the uses of rubber more practical inthe production of clothing. But the turnaround story in rubber was when FORD mass-produced automobile,producing a boom for the two of the four listed rubber companies at the time: Goodrich BF and US Rubber.

Typical Tire Composition by WeightNatural Rubber Synthetic Rubber Carbon black Steel Fil ler

Passenger Tire 14% 27% 28% 14-15% 16-17%Truck Tire 27% 14% 28% 14-15% 16-17%Source: Rubber Manufacturers Association (RMA)

Source: Bloomberg

45

60

75

90

0

200

400

600

800

Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09

BnMn China & US Tire Output

China Industrial Tire Output

Adjusted Automotive Parts Accessories & Tire Stores

Chinas GDP growth for year2010 is 3 times US GDP and as

you can see from the China & USTire Output chart beside us thatChinas tire industry is growingat a very steep pace comparedto US.


6/15


30

60

90

120

150

0

300

600

900

1200

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Crude OilRSS 3, TSR 20 Rubber Price MovementVs Crude Brent Oil

RSS3 TSR20 Crude Brent Oil

Rubber Price Movement

High Correlation between Rubber Price and Crude Oil

There are two types of rubber: Natu-ral Rubber (NR) tapped from treesand Synthetic Rubber (SR) made of derivatives from petroleum thus theclose correlation to oil price move-ment. Rubber is consumed mainly intires, for passenger cars, commercialvehicles, and a great variety of other

tire like bicycle tires, airplane tires,and off-road tires. Due to its superiortear strength and excellent resistanceto heat, natural rubber is more suita-ble for high performance tires used inracing cars, trucks, buses, and air-crafts.

STATISTICAL SUMMARY OF WORLD RUBBER SITUATION (000 tonnes) Natural Rubber Production

2008 2009 2010 2011Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Q1

Asia 9,399 1,839 2,057 2,405 2,740 9,042 2,175 2,071 2,728 2,663 9,637 2,398Africa 447 98 95 112 118 423 102 110 119 129 459 104Latin

America247 64 72 55 62 253 67 75 57 64 263 73

Total 10,128 1,985 2,230 2,570 2,905 9,690 2,361 2,271 2,904 2,865 10,401 2,571Natural Rubber ConsumptionN America 1 179 232 147 183 228 790 280 261 265 266 1 071 298

Figure 1 Rubber Price Movement Vs Crude Brent Oil.Source: Bloomberg


7/15


Future of Rubber

Increasing Demand on the back of Global Economy GrowthAccording to a statement made by Stephen Evans, secretary general of the International Rubber Study Group during theWorld Rubber Summit, the IRSG predicted that global rubber consumption will increase 47.1% to 31.5 million tons by2020 from 21.4 million tons in 2009; of that, natural rubber will account for 14.6 million tons and synthetic rubber 16.9million tons. Tires will consume 19.4 million tons of rubber in 2020 and general rubber goods 12.1 million tons. Do re-member that synthetic rubber is made of petroleum derivatives. What will happen in the long run if oil shoots up to$160 - $180 a barrel? Less growth for synthetic rubber as the economic value of selling general rubber goods is out-weighed by the cost component of producing SR. Naturally, NR will pick up the slack.

Company Profile Business Activities


8/15


JAWAs Track Record

Table 1.1 - J.A. Wattie Rubber and CPO Sales Figures2006 2007 2008 2009 2010 CAGR 1H 11

CPOSales

4,036 30,355 19,762 121% 11,700

CPOASP

4,477 6,005 6,952 7,860

RubberSales

6,410 7,605 8,001 8,485 8,392 7% 5,100

Rubber

ASP

19,545 17,655 27,526 18,022 29,442 44,000

Source: Company

As you can see from table above, there was a spike in both CPO and rubber prices in 2010. Although sales in CPO de-creased significantly in the year of 2010 due to decline on third party purchase, price appreciation in both commoditieshelped provide a floo r for JAWAs revenue . Sales volume for rubber also decreased a mere 1.1% Year on Year ( YoY ),however average selling price for rubber jumped 63.4% to Rp.29,442/kg.

The great news is sales volume for both CPO and rubber in 1H 11 respectively represented 59.2% and 60.8% of FY 2010sales. Remember the favorite multiplier effect that I had mentioned, price x volume. We are going to see the wonders of multiplier effect in the year of 2011 as average selling price for both CPO and rubber increased significantly ; 13.1% and49.4% respectively.

12 00016,00020,00024,00028,000

32,000tons Crude Palm Oil (CPO)

4000

6000

8000tons Palm Kernel (PK)


9/15


Plantation Age Profile

Source: Company, eTrading Securities

Assuming a 3.8% and 4.1% new planting of total area planted annually for 2011 2015, we have come to the above ageprofile for both palm and rubber plantation under J.A. Wattie. We would like to remind you that commodity companiesare price-taker meaning that they are not like Gudang Garam and or Indofood where they can set a price for the prod-

72%,11,321 Ha

22%;3,409 Ha

6%; 1,010Ha

Palm Age Profile 2010

Immature Young Peak

14%;

2,628 Ha

67%;12,608 Ha

20%;3,722 Ha

Palm Age Profile 2015F

Immature Young Peak

53%;

5,004 Ha

7%; 624Ha

34%;3,143 Ha

6%; 583Ha

Rubber Age Profile 2010A

Immature Young Peak Mature

18%;1,932 Ha

44%;4,622 Ha

28%;2,908 Ha

10%;1,037 Ha

Rubber Age Profile 2015F

Immature Young Peak Mature


10/15


J AWA Net Income recorded awhooping 98.7% compoundedannual growth rate (CAGR)over the period 2007 2010.

Financial Overview 1H 11

Source: Company

167.1

301.5

369.7413.4

202.3

333.8

-

100.00

200.00

300.00

400.00

500.00

2007 2008 2009 2010 1H 10 1H 11

Rp Bn Revenue

CAGR 2007 - 2010 = 35.3%

10.2 27.8 43.5 80.1 52.3 115.8

33.0%

39.7%

33.8%

44.1%46.1%

52.1%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

55.0%

-

20.0

40.0

60.0

80.0

100.0

120.0

2007 2008 2009 2010 1H 10 1H 11

%Rp Bn Net Income & Gross MarginCAGR 2007 2010 = 98.7%

As we can see in the bar chartbeside us, revenue 1H 11represents 80.8% of total rev-enue in FY 2010. Again this isbecause of the jump in bothcommodities prices and in-creased production volumecompared to 2010.


11/15


Cost Structure - FY 2010

Source: Company

47%

4%9%

40%

Rubber Cost Structure - 2010

Wages

Fertilizer

Depr. &

Amort.Overhead

22%

22%

31%

Palm Cost Structure - 2010

Wages

Fertilizer

Depr. &Amort.

Biggest cost structure in rubberplantation is actually labor. Rub-ber is very labor intensive, fromthe get-go (nursery) until thetapping process, its hard to m e-chanize any of the process.

However rubber trees are moredurable than palm, meaning thatthey dont require as much fert i-lizing.

For Palm, the cost structure ispretty much even out. In a more

mature plantation, cost struc-ture will lean on fertilizing beingthe bigge st part of the pie. Itseasier to mechanize some of the


12/15


J.A. Wattie Financial Breakdown

Source: Company

There may be some concerns that J.A Wattie is too diversified a plantation and some believe diversification for some

company is deworseification. That might be true if revenue contribution by crop other than palm and rubber is morethan 5%. However that is not the case as you can see from the chart above specifying JAWAs revenue breakdown from year 2008 to 2010. In fact there might be a hedge element in the case when crude oil price fell and dragged down theprice of rubber, considering our belief that palm oil price is more stable than rubber price. Furthermore as you can see,J.A. Wattie is concentrating more and more to their two main products which is: rubber and palm oil. Other than thehedge element, there is that multiplier effect in the case where economy is doing great, driving up the prices of bothcommodities and J.A. Wattie will bene fit from the two crops price hike.

73.0% 41.4% 59.8%

6.0%

49.3%

33.2%

0%

20%

40%

60%

80%

100%

2008 2009 2010

Revenue Breakdown 2008 - 2010

Rubber CPO Tea Coffee Others


13/15


Earning Sensitivity AnalysisIncremental Change Rubber Price (Rp/Kg) EPS (Rp) EPS Change (%)

+30% 40,664 55.11 36.2%+20% 37,536 50.23 24.1%+10% 34,408 45.34 12.1%Base 31,280 40.46-10% 28,152 35.58 -12.1%-20% 25,024 30.70 -24.1%-30% 21,896 25.82 -36.2%Source: eTrading

Key AssumptionsY/E December 2009 2010 2011F 2012F 2013FCPO Prices (benchmark) 6,694 7,804 7,981 8,140 8,303FFB Yield 64,395 67,897 93,920 134,854 187,383Rubber Prices (benchmark) 19,424 32,144 38,887 31,280 29,802Rubber Yield 6,444 6,325 6,599 7,337 8,681

Peer ComparisonsTicker Market Cap EPS 12F PE 12F ROE ROA EV/EBITDAJAWA 1,415,507 53 7.08 26.29% 8.57% 6.82LSIP 14,839,730 232.62 9.24 24.70% 19.86% 5.98SGRO 5,622,750 315.91 9.34 23.18% 17.58% 4.73BWPT 4,925,242 102.25 11.64 23.95% 11.39% 10.48

GZCO 1,500,000 37.56 7.85 14.35% 7.87% 9.11TBLA 2,940,101 113.89 5.44 23.12% 7.66% 4.95Average 9,052,590 8.43 23.66% 13.94% 7.13Source: Bloomber eTrading


14/15

PT. Jaya Agra Wattie Tbk.

JAWA.IJ Buy - TP: 600

Company Update

eTrading Research | See to important disclosures on the last page

14

[Type sidebar content. A sidebar is a standalone supplement to the main document. It is often aligned on the left or right of the page, or located at the top or bottom. Use the Text Box Tools tab tochange the formatting of the sidebar text box.

Type sidebar content. A sidebar is a standalone supplement to the main document. It is often aligned on the left or right of the page, or located at the top or bottom. Use the Text Box Tools tab tochange the formatting of the sidebar text box.]


15/15


15

Disclaimer:This report is prepared strictly for private circulation only to clients of PT eTrading Securities. It is purposed only to person having professional experience in matters relating toinvestments. The information contained in this report has been taken from sources which we deem reliable. No warranty (expres s or implied) is made to the accuracy or com-pleteness of the information. All opinions and estimates included in this report constitute our judgments as of this da te, without regards to its fairness, and are s ubject to changewithout notice. However, none of PT eTrading Securities (eTS) and/or its affiliated companies and/or their respe ctive employees and/or agents makes any representation or

warranty (express or implied) or acc epts any responsibility or liability as to, or i n relation to, the accuracy or completeness of the information and opinions c ontained in this re-port or as to any i nformation contained in this report or any other such i nformation or opinions remaining unchanged after the issue thereof. W e expressly dis claim any respon-sibility or liability (express or implied) of eTS, its affiliated companies and their respective employees and agents whatsoever and howsoever arising (including, without limitationfor any claims, proceedings, action, suits, losses , expenses, damages or costs) which may be brought agai nst or suffered by a ny person as a results of acting in reliance upon thewhole or any part of the contents of thi s report and neither eTS, its a ffiliated companies or their r espective employees or a gents ac cepts liability for any errors, omissi ons ormisstatements, negligent or otherwise, in the report and any liability in respect of the report or any inaccuracy therein or omission there from which might otherwise arise ishereby expresses disclaimed.This document is not an offer to sell or a solicitation to buy any securities. This firms and its affiliates and their officers and employees may have a position, make markets, act asprincipal or engage in transaction in securities or related investments of any company mentioned herein, may perform services for or solicit business from any company men-tioned herein, and may ha ve acted upon or used any of the recommendati ons herein before they have been provided to you. PT eTradi ng Securiti es 2011.

Documents

Jawa - Rubber Does It Buy 600