Company update:
PP London Sumatra Indonesia (LSIP IJ, BUY, TP: IDR2,200)
Beneficiary Of Rubber Price Upcycle
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.
Kindly click the following link for the full report: PP London Sumatra Indonesia : Beneficiary Of Rubber Price Upcycle
Hariyanto Wijaya,
CFA, CFP, CA, CPA
Vice President
Research Analyst – Heavy
Equipment, Plantation
PT. RHB Securities
Indonesia
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