RHB Indonesia - Regional Plantation: Volatility Is The Name Of The Game- 11 January 2017 - (Regional Plantation, Nippon Indosari) Unknown Rabu, 11 Januari 2017




Good morning,

Regional Plantation: Volatility Is The Name Of The Game

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We expect yet another volatile year for CPO prices – similar to last year – due to the recovery in CPO output which we anticipate to start coming through after 1Q17. This should result in a moderation of prices. Demand remains unexciting, given China’s predilection for soybean which remains in abundance, while India has yet to get over its currency issues. We maintain our NEUTRAL sector call. We favour selected big-cap counters like KLK, Sime Darby, Golden Agri and London Sumatra – being high-beta stocks which would fare well in a volatile environment.

¨        Malaysia’s CPO production dropped 6.4% MoM in December, while its YTD production decline narrowed to 13.2% YoY. We expect CPO production to continue declining going into 1Q17, before turning around post 1Q17.
¨        Exports fell in 7.5% MoM in the same month, as China continued to utilise its rapeseed oil and soybean stocks. Exports to China saw a MoM decline of 27% in December, although this was partially offset by an increase to India of 25.4%.
¨        Malaysia’s YTD-Dec exports dropped 8.1% YoY, with wider declines to China (-21%), India (-23%), the US (-16%) and the EU (-15%). We expect demand from India to improve once the effect of the currency demonetisation wears off, while China’s demand is expected to remain weak, due to high domestic stockpiles.
¨        Inventory rose 0.2% MoM to 1.67m tonnes in December from lower exports, bringing the stock/usage ratio to 8.9% (Nov: 8.8%), vs the 12-year average of 10%. Over the next few months, as production continues to slow and exports remain lacklustre, inventory should remain range-bound, ie 1.6-1.9m tonnes.  
¨        Recent developments:
          i.      Argentina’s soybean planting is delayed again due to wet weather and flooding. Planting is at 55% of the intended area currently, vs the 68% average. On the other hand, Brazil’s soybean crop is likely to be bountiful, increasing by 7% YoY in 2016/2017;
         ii.      Argentina plans to cut export taxes on soybean by 0.5% per month from Jan 2018 onwards, from the current 30%. This may result in more soybean coming out to the export markets, resulting in downward pressure on prices;
        iii.      China’s palm oil imports remain weak, but improved from 3Q16. CPO imports fell 27.5% YoY in YTD-Nov;
        iv.      India’s palm oil imports fell further to 13% YoY in YTD-Nov, due to the continued impact of the currency demonetisation, We expect India to start coming back into the market within the next few months.
¨        Still NEUTRAL. We expect volatility to be the name of the game in 2017, with the current strong CPO prices moderating after 1Q17, as CPO production recovers more significantly and soybean crop from South America starts being harvested. We keep our MYR2,500/tonne CPO price assumption for 2016-2017. Our regional Top Picks remain Kuala Lumpur Kepong (KLK), Golden Agri and London Sumatra. We also like Sime Darby as a restructuring play. (Hoe Lee Leng, Hariyanto Wijaya, CFA, CPA)


Company Update:

Nippon Indosari Corpindo (ROTI IJ, BUY, TP: IDR1,870), A Good Start To 2017
Early 2017 has seen two significant developments for Nippon, which came in the form of lower input costs and the acquisition of a Philippines-based bread company. The company signed a new 6-months (for Jan-Jun 2017) purchase contract on flour – its main raw material – at a lower price. In addition, its JV SFC, acquired a local bread company which we see as a strategic move for Nippon’s penetration in Philippines market. Maintain BUY with a DCF-based TP of IDR1,870 (13% upside), implying 25x FY17F P/E.
¨ Lower input costs. Nippon Indosari Corpindo’s (Nippon) management revealed that its contracted flour price (for purchase contract Jan-Jun 2017) is to decline by 4% from the price in the previous 6-months(Jul-Dec 2016) contract. Since flour accounts for around 25% of Nippon’s COGS, we see this lower input cost having a significant impact on Nippon production costs.
We believe that Nippon is in better position than its peers, which purchase flour at spot price. Nippon’s new purchase contract was determined in Dec 2016 when international wheat price was still on a declining trend, hence the company able to secure a good price. In the first week of January, average international wheat price increased by 6%, compared to that of thefull-month of December. Hence, its peers – bread makers – which buy flour at spot price may face higher input cost.
¨ Room to increase selling price. Nippon has not increased its selling prices for 30 months. During this same period, other domestic consumer food products like biscuits, snacks and instant noodles have seen selling prices increase by 5-6% pa. The price gap between bread and other consumer food products has widened, and we believe Nippon has huge room to increase its prices. Lower input costs and higher selling prices should help the company improve its EBIT margins.
¨ Development on Philippines market expansion. Its JV company, Sarimonde Food Corporation (SFC) (55%-owned by Nippon), has acquired All Fit & Popular Foods Inc.’s brands. Notably, SFC does not acquire the Philippines company’s assets and liabilities. Total acquisition costs is PHP174m (IDR47bn). Nippon did not disclose the base of its acquisition value (because it is restricted on the sale and purchase agreement). However, the acquisition cost is relatively small, considering its potential business in the Philippines market. The acquired company’s brand Walter Bread, which is well-known for its high quality and healthy products including sugar free and high fibre breads and has more than 33 years’ experience.
SFC began selling Walter Bread breads in the Philippines in Dec 2016, hence Nippon is likely to start booking revenue from its overseas business starting from its Dec 2016 accounting period.
¨ Maintain BUY. Our DCF-based TP IDR1,870 implies 25x FY17F P/E, ie near to its 5-year average forward P/E. Key risks to our call include rising competition, higher sales returns and weakened consumer spending. (Andrey Wijaya)
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Media Highlights:
  
Corporates

Cement sector: Lower cement selling price in Papua
As reported in local media, during his speed on the PDIP party anniversary ceremony, President Jokowi contemplates to reduce cement selling price in Papua to IDR70,000/bag (from currently IDR800k-2.5m per bag). Notably, cement selling price in Papua is extremely high compared to other area in Indonesia, this is mainly due to bulky logistic costs.

On our discussion with management of state-owned cement company Semen Indonesia (SMGR IJ, Neutral, TP: IDR9,800, 6% upside), there is no government intervention in setting-up cement selling price. As such, Semen Indonesia will not selling cement if its selling price below its costs.

At IDR70,000/kg per bag, Conch Cement Indonesia (Conch) will become the likely cement supplier in Papua, especially as Conch is constructing cement plant in this area. Based on our calculation, Semen Indonesia ex-factory price is around IDR45,000 per bag (for 50 kg bag). Hence, cement companies can still enjoy slight profit if they have manufacturing plant facility in the island to reduce distribution cost.
Sales in Papua accounted for mere 2% of Semen Indonesia sales and 1% of Indocement (INTP IJ, Neutral, TP: IDR15,700, 3% upside) total sales. Given its small contribution, its impact should not be significant to Semen Indonesia and Indocement operation. We maintain Neutral on Indonesia cement sector. (Andrey Wijaya)

Financial Service Authority (OJK) to change deposit rules
Financial Service Authority (OJK) plans to change the deposit rules in order to avoid deposit rate war between banks. OJK will narrow the gap between deposit rate cap for book 4 and book 3 to 10-15bps from 25bps. Currently, deposit rate cap for book 4 at a maximum 75bps above BI 7-days reverse repo rate of 4.75%. Meanwhile, deposit rate cap for book 3 is 100bps above the benchmark rate. (Kontan)

Comment: We view such plan would work more effectively if LPS rate is also move inline. This plan should benefit more towards BUKU IV banks (core capital above IDR30trn) as the big depositors would switch their preference to bigger banks. (Eka Savitri)

RALS’ Dec-16 SSSG accelerated
¨ RALS’ December SSSG accelerated to 6.6% (from 1.8% in Nov) driven by strong sales in outside Java; it seems higher commodities price helped.
¨ The result is encouraging, showed an sales acceleration across the board in Indonesia.
¨ FY16 gross sales reached Rp8.2tn, slightly behind expectations (less than 5%).
¨ RALS trades at 18x 2017 cons’ PE (Stifanus Sulistyo)

Figure: RALS’ SSG summary
Source: Company

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Best regards,

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

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