RHB Indonesia - Aneka Gas Industri: Reaping The Rewards Of Its 4-Year Expansion - 16 January 2017 - (Aneka Gas Industri, PP London Sumatra) Unknown Senin, 16 Januari 2017




Good morning,

Aneka Gas Industri: Reaping The Rewards Of Its 4-Year Expansion

We initiate coverage on AGI with a BUY recommendation and a DCF-derived IDR1,300 TP (44% upside), which implies 22.5x FY17F P/E and 0.24x PEG. The firm is Indonesia’s largest industrial gas company that sells oxygen, nitrogen and argon – gases that are widely used in fast growing sectors like food packaging, medical and infrastructure. Looking ahead, AGI is set to record a very high growth rate and diversified growth exposure as the company stands to benefit from its aggressive expansion over the past four years.

¨ Much strength in the highest-margin segment. Aneka Gas Industri (AGI) is a dominant player in the supply of packaged cylinder and bulk gas, two segments that have a higher value of sales/cu m. In addition, it also has an 80% market share in supplying healthcare-related gases to the medical sector – which is an area with stable demand and good margins.
¨ Good growth prospects. Indonesia is a fast-growing economy and in turn, its industrial gas sector has a higher growth rate than that of other countries. As a market leader, AGI recorded a 2011-2016 CAGR of 20% in terms of volumes sold. The industry has high barriers to entry, mainly because it requires players to have technical expertise. Moreover, big industrial gas users require suppliers to have a track record of stable and uninterrupted gas supply as well as a wide distribution network. AGI meets both requirements.
¨ Set to enjoy the fruits of its 4-year expansion. Over the past three years, AGI increased its net gearing to 1.4x and added extra production capacity that is good for another 3-4 years. It went public recently and used 40% of its IPO proceeds to pare down debt. It also used another 40% to invest in its distribution network to increase its utilisation rate and reduce distribution costs. Cash flow should improve on the back of lower financing costs and capex.
¨ Decent EBIT growth + low interest cost + deleverage = strong EPS growth. AGI’s business is capital-intensive; post IPO, its net gearing has decreased to 0.7x, and the interest savings is substantial. We expect to see a significant uplift in FY17F-18F EPS (2015-2018 CAGR of 90%) when lower interest costs are combined with double-digit operating profit growth.
¨ High P/E on the back of increased growth rate. Looking at its growth rate and comparable listed entities, we believe AGI should trade at >20x FY17-18F P/Es. The stock is currently trading at an implied FY17F P/E of 15x (ie the same level as the JCI). Management guided for FY16F earnings of IDR75bn (+78% YoY).
¨ Key risks. AGI’s high-growth guidance implies that there may be execution risks. Also, there could be a lack of awareness of the industry amongst domestic investors. The firm’s main business risks are power supply outages or accidents, as well as changes in the effective interest rate. More on page 20 regarding key risks. (Norman Choong, CFA)


Link to Daily report: Indonesia Morning Cuppa - 160117

Company Updates:

PP London Sumatra Indonesia (LSIP IJ, BUY, TP: IDR2,200), Beneficiary Of Rubber Price Upcycle
We believe the street has yet to factor in the recent rubber price rally and expect a round of consensus earnings upgrade ahead. Rubber prices have rallied 29.3% since Nov-16. We expect Lonsum’s rubber business to book operating profit of IDR2.6bn in FY17 despite having booked 9M16 operating losses of IDR99bn (25% of 9M16 consolidated operating profit). We raised our earnings forecasts by 6-9% for FY16-18F and reiterate our BUY call with a new TP of IDR2,200 (previous IDR2,050, 31% upside). Consensus earnings upgrade should be a positive catalyst for the stock.
¨ Rubber prices rallying. Natural rubber prices have recovered and started rallying since Nov-16. We believe this is mainly driven by a recovery in crude oil prices, lower natural rubber inventory, supply disruption mainly caused by floods in South Thailand and expectation of a USD-led global economic recovery and the resultant improved demand outlook.
¨ Crude oil price recovery should drive up rubber prices. The recent recovery in crude oil prices should result in higher feedstock prices for synthetic rubber. This in turn should drive prices of synthetic and natural rubber higher in 2017.
¨ Favourable demand supply dynamics. Data from the Association of Natural Rubber Producing Countries (ANRPC) showed that global supply of natural rubberfell by 0.6% p.a in 2014-16 whiledemand grew at 3.2% p.a over the same period. ANRPC estimated that 2016 global supply of natural rubber was short of global demand by 655,000 tonnes. For 2017, ANRPC forecasts global supply of natural rubber to be short of demand by 350,000 tonnes. Stronger demand growth since 2013 has helped absorb excess supply and brought about a more favourable demand supply balance for natural rubber.
¨ Natural rubber supply disruption positive for prices. Thailand, with 37% market share, is the largest natural rubber supplier in the world. Southern Thailand has suffered from heavy rainfall since early Jan-17. 12 provinces in south Thailand have been severely affected by the worst floods in three decades. According to Rubber Authority of Thailand, the flood is expected to cut at least 7.6% of Thailand’s natural rubber production in 2017.
¨ Better earnings outlook for FY17. Due to weak rubber prices in 9M16, London Sumatra (Lonsum) booked 9M16 operating losses of IDR99bn for its rubber business (25% of 9M16 consolidated operating income, see Figure 3). With higher rubber prices, we expect Lonsum’s consolidated earnings to improve as we forecast its rubber business to book operating profit of IDR2.6bn in FY17.
¨ Reiterate BUY with higher TP of IDR2,200 (from IDR2,050). We fine-tuned our assumptions to factor instronger rubber prices(see Figure 4). This led to a 6-9% increase in our FY16-18 earnings forecasts. Our IDR2,200 TP is based on an unchanged FY17P/E target of 16.4x. Our TP implies EV/ha of USD11,400, which is within the range of the EV/ha oflocal listed planters. (Hariyanto Wijaya, CFA, CPA)
Link to report: PP London Sumatra Indonesia : Beneficiary Of Rubber Price Upcycle
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Best regards,

Helmy Kristanto
Director
Head of Indonesia Research
PT. RHB Securities Indonesia

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