Author: boostmy
Toppish Market?
Is the market frothy? Did you miss out on the tech rally? Are there still value buys? This is the general feeling among market participants today.
However, we believe that there are always good opportunities in the market waiting to be uncovered. This rings true in almost every market condition, be it bear or bull. The challenge is finding these elusive seedlings and holding on to them until they bear fruit (an apt analogy for our stock pick below).
Our Second Stock Pick
Today, we will be making our second stock pick, which we have added to our real-life stock portfolio. Recall that our first purchase was TGUAN at a price of RM4.20. To recap, we like stocks that a) are laggards in terms of share price appreciation, b) likely to announce results that are better, c) have decent valuations and d) may declare dividends that are higher than the previous year.
Brief Background
The company we are buying is Innoprise Plantations Berhad (INNO, 6262). INNO is a Sabah based Plantation Company, with Yayasan Sabah as the majority shareholder and the management of TSH Resources Berhad as the manager/operator. TSH is known to be a high yield, cost effective planter, famed for its high yielding Wakuba seeds and trendy chairman, Datuk Kelvin Tan.
Inno is a relatively new player in the Plantation space, having over the past several years used the proceeds from its log extraction contract and bank borrowings to fund the planting of its palm oil estates and construction of its 60/90 MT FFB per hour palm oil mill.
Inno’s Estates are 93% Planted
Today, the company is ripe for harvest – out of its 12.8k hectares suitable for palm oil cultivation, 11.9k hectares have been planted. Meanwhile, 80% or 9.5k hectares of the plantation have matured. In 2017, a further 1.1k hectares (11.6%) will come into maturity, bringing the total matured area to 90%. The remaining 10% will mature in 2018 and 2019, creating clarity in terms of FFB growth for the next 2 financial years. The Company’s planting programme concluded in 2017, and it is time to harvest the fruits of its labor.
Industry Beating Age Profile
Inno’s estates have one of the best age profiles among Bursa listed planters. 80% of the company’s palm oil estates are producing FFB comprising 65% of young maturity trees (4-7 years) and 15% of prime maturity trees (8-10 years). A further 20% of trees are immature and will reach maturity in 2017, 2018 and 2019 as mentioned above. Thus, Inno will no longer need to incur large Capex for planting for the next 15 years! As a result, we will expect the company to pare down its borrowings and increase its dividend payout.
Strong FFB Production Growth Likely
According to data published by Inno to Bursa Malaysia, FFB production grew 14.8% in 2Q17. For 3Q17, only data for the month of July is published which recorded FFB production of 18k metric tonnes. Extrapolating that figure into 3 months would give rise to a production figure of 54k metric tonnes or an 11.1% growth. Meanwhile, we expect 4Q17 to record 56k metric tonnes, being the seasonally strongest quarter for FFB production, having dealt with the El Nino impact back in 2H16.
Average CPO Prices Higher in 1H17
Average CPO prices have performed well in 1H17 due to the lingering effects of El Nino, low Soy Bean production and good export demand. For 2H, we expect average prices to be within RM2650 as production gathers strength and inventories build up. However, CPO futures are currently hovering around the 2750 mark, suggesting that there could be upside to our forecasts. Any further disruptions to production or spikes in demand could be positive for our CPO price forecast.
Revenue Might Fall Slightly due to Absence of Logging Activity
Inno recorded a RM5m drop in revenue in 2Q17, resulting from discontinuation of its logging contract (as its plantations are now ready). However, net profit rose 15% or RM1.2m and net profit margin increased by 6 percentage points.
Forecasting for 3Q and 4Q, we are using the above FFB production figures and CPO price. We are assuming a CPO extraction rate of 24% and PK extraction rate of 3.2%, below the 2015 and 2016 average of 24.5% and 3.4% respectively. As such, PAT is expected to be higher, at RM12m for 3Q and RM12.5m for 4Q on better margins from palm oil business.
Dividend Payout Ratio Could Rise above 30% in 2017
Inno started registering free cash flow from 3Q16. Over the past 4 quarters, i.e. 3Q16, 4Q16, 1Q17 and 2Q17, free cash flow averaged at RM10m per quarter. Inno is generating more free cash flow per quarter than the entire dividend amount paid in FY16 which amounted to RM9.5m (2 sen per share) translated to 30% of FY16 earnings. With major Capex spending complete, we think there is a decent chance Inno might raise its dividend payments. Meanwhile, net debt has been decreasing steadily over the quarters.
Final Remarks
Besides the reasons stated above, Inno has a fixed offtaker for its CPO, which is the TSH-Wilmar joint-venture ensuring that its products are sold. In addition, the company is in the midst of becoming RSPO certified.
At its current price, we think the company is grossly undervalued based on metrics such as PE and EV/hectare. Despite its healthy growth prospects, trailing PE is only in the mid-teens.
Genting Plantation bought a plantation in Indonesia a couple of days back at US$13k per hectare. At its current market cap of RM536m divided by 12.8k hectares, Inno’s is only valued at US$10k per hectare.
Another example is Boustead Plantations (announced 2 days ago) which has signed an LOI to buy 11.5k hectares in Sabah for RM750m which translates to roughly US$15.5k per hectare.
We think Inno is very comparable to this latest purchase by Boustead with plantation of 11.9k hectares. At minimum, Inno should be worth RM750m not the RM584m ascribed by the market today.
We are purchasing 20,000 units of Inno at RM1.20.
KT
en-uk
https://boost.my/2017/08/22/81/
Is the market frothy? Did you miss out on the tech rally? Are there still value buys? This is the general feeling among market participants today.
However, we believe that there are always good opportunities in the market waiting to be uncovered. This rings true in almost every market condition, be it bear or bull. The challenge is finding these elusive seedlings and holding on to them until they bear fruit (an apt analogy for our stock pick below).
Our Second Stock Pick
Today, we will be making our second stock pick, which we have added to our real-life stock portfolio. Recall that our first purchase was TGUAN at a price of RM4.20. To recap, we like stocks that a) are laggards in terms of share price appreciation, b) likely to announce results that are better, c) have decent valuations and d) may declare dividends that are higher than the previous year.
Brief Background
The company we are buying is Innoprise Plantations Berhad (INNO, 6262). INNO is a Sabah based Plantation Company, with Yayasan Sabah as the majority shareholder and the management of TSH Resources Berhad as the manager/operator. TSH is known to be a high yield, cost effective planter, famed for its high yielding Wakuba seeds and trendy chairman, Datuk Kelvin Tan.
Inno is a relatively new player in the Plantation space, having over the past several years used the proceeds from its log extraction contract and bank borrowings to fund the planting of its palm oil estates and construction of its 60/90 MT FFB per hour palm oil mill.
Inno’s Estates are 93% Planted
Today, the company is ripe for harvest – out of its 12.8k hectares suitable for palm oil cultivation, 11.9k hectares have been planted. Meanwhile, 80% or 9.5k hectares of the plantation have matured. In 2017, a further 1.1k hectares (11.6%) will come into maturity, bringing the total matured area to 90%. The remaining 10% will mature in 2018 and 2019, creating clarity in terms of FFB growth for the next 2 financial years. The Company’s planting programme concluded in 2017, and it is time to harvest the fruits of its labor.
Industry Beating Age Profile
Inno’s estates have one of the best age profiles among Bursa listed planters. 80% of the company’s palm oil estates are producing FFB comprising 65% of young maturity trees (4-7 years) and 15% of prime maturity trees (8-10 years). A further 20% of trees are immature and will reach maturity in 2017, 2018 and 2019 as mentioned above. Thus, Inno will no longer need to incur large Capex for planting for the next 15 years! As a result, we will expect the company to pare down its borrowings and increase its dividend payout.
Strong FFB Production Growth Likely
According to data published by Inno to Bursa Malaysia, FFB production grew 14.8% in 2Q17. For 3Q17, only data for the month of July is published which recorded FFB production of 18k metric tonnes. Extrapolating that figure into 3 months would give rise to a production figure of 54k metric tonnes or an 11.1% growth. Meanwhile, we expect 4Q17 to record 56k metric tonnes, being the seasonally strongest quarter for FFB production, having dealt with the El Nino impact back in 2H16.
Average CPO Prices Higher in 1H17
Average CPO prices have performed well in 1H17 due to the lingering effects of El Nino, low Soy Bean production and good export demand. For 2H, we expect average prices to be within RM2650 as production gathers strength and inventories build up. However, CPO futures are currently hovering around the 2750 mark, suggesting that there could be upside to our forecasts. Any further disruptions to production or spikes in demand could be positive for our CPO price forecast.
Revenue Might Fall Slightly due to Absence of Logging Activity
Inno recorded a RM5m drop in revenue in 2Q17, resulting from discontinuation of its logging contract (as its plantations are now ready). However, net profit rose 15% or RM1.2m and net profit margin increased by 6 percentage points.
Forecasting for 3Q and 4Q, we are using the above FFB production figures and CPO price. We are assuming a CPO extraction rate of 24% and PK extraction rate of 3.2%, below the 2015 and 2016 average of 24.5% and 3.4% respectively. As such, PAT is expected to be higher, at RM12m for 3Q and RM12.5m for 4Q on better margins from palm oil business.
| 1Q17 | 2Q17 | 3Q17F | 4Q17F | |
| Revenue | 29,461 | 30,594 | 38,688 | 40,477 |
| COGS | -13,638 | -14,673 | -17,909 | -18,737 |
| GP | 15,823 | 15,921 | 20,779 | 21,739 |
| Other income | 79 | 33 | 0 | 0 |
| Selling expense | -2,526 | -2,676 | -3,384 | -3,540 |
| Other expenses | -831 | -886 | -1,120 | -1,172 |
| EBIT | 12,545 | 12,392 | 16,274 | 17,027 |
| Net finance cost | -577 | -519 | -500 | -500 |
| PBT | 11,968 | 11,873 | 15,774 | 16,527 |
| Tax | -2,627 | -2,699 | -3,786 | -3,966 |
| PAT | 9,341 | 9,174 | 11,988 | 12,560 |
| Growth (yoy) | 299.9% | 15.3% | -13.1% | 46.2% |
Inno started registering free cash flow from 3Q16. Over the past 4 quarters, i.e. 3Q16, 4Q16, 1Q17 and 2Q17, free cash flow averaged at RM10m per quarter. Inno is generating more free cash flow per quarter than the entire dividend amount paid in FY16 which amounted to RM9.5m (2 sen per share) translated to 30% of FY16 earnings. With major Capex spending complete, we think there is a decent chance Inno might raise its dividend payments. Meanwhile, net debt has been decreasing steadily over the quarters.
Final Remarks
Besides the reasons stated above, Inno has a fixed offtaker for its CPO, which is the TSH-Wilmar joint-venture ensuring that its products are sold. In addition, the company is in the midst of becoming RSPO certified.
At its current price, we think the company is grossly undervalued based on metrics such as PE and EV/hectare. Despite its healthy growth prospects, trailing PE is only in the mid-teens.
Genting Plantation bought a plantation in Indonesia a couple of days back at US$13k per hectare. At its current market cap of RM536m divided by 12.8k hectares, Inno’s is only valued at US$10k per hectare.
Another example is Boustead Plantations (announced 2 days ago) which has signed an LOI to buy 11.5k hectares in Sabah for RM750m which translates to roughly US$15.5k per hectare.
We think Inno is very comparable to this latest purchase by Boustead with plantation of 11.9k hectares. At minimum, Inno should be worth RM750m not the RM584m ascribed by the market today.
We are purchasing 20,000 units of Inno at RM1.20.
KT
en-uk
https://boost.my/2017/08/22/81/
