- Sugar is sold at Rp9,000-9,400/kg, ahead of our expectations
- But sugar output falling behind forecast due to dry weather
- FY12F-14F earnings tweaked by -2% to +2%
- Maintain HOLD with unchanged TP of S$1.40
Higher sugar ASP offset by lower output. We recently visited IndoAgri’s sugarcane estates/refinery in Komering, (South Sumatra) and palm oil refinery in Tanjung Priok (Jakarta). We learnt that IndoAgri is currently selling its refined sugar for Rp9,000-9,400/kg – ahead of our forecast of Rp7,780/kg. However, we now estimate the group would produce 53k MT this year (short of our previous forecast of 80k MT) due to dry weather.
Maintaining CPO output guidance. IndoAgri is maintaining its CPO production guidance of 45:55 split between 1H and 2H. We expect the group to produce 899k MT this year (+7% y-o-y). Meanwhile, guidance for oil palm new planting for FY12F still stands at 15k ha.
FY12F-14F profit tweaked by -2% to +2% Despite c.20% higher sugar ASP, we adjusted our sugar output down by 34% to account for the drier weather and lowered our assumption for new plantings. These changes resulted in -2% to +2% revisions in our FY12F- 14F earnings, but had no impact on DCF-based TP of S$1.40.
Retain HOLD call. Despite the attractive growth outlook, IndoAgri’s sugar business is expected to
contribute just c.8% of group net profit by FY16. We retain our HOLD call, as we believe the counter has priced in sugar’s contribution. We also see limited catalysts for a re-rating until CPO prices recover towards mid 4Q12.
We recently visited IndoAgri’s sugar operations in Komering (South Sumatra), as well as the group’s palm oil refinery in Tanjung Priok (Jakarta).
Site visit key takeaways
We received the following updates during the site tour:
1. The group is still on target to achieve 15k of new plantings this year with about 10k ha planted so far. Maintained guidance for a 45:55 1H:2H split for its CPO output – in line with our expectations.
2. Given the prevailing dry weather in South Sumatra and slower-than-expected land compensation process, we understand the group does not expect to undertake significant cane plantings for the remainder of the year. This was a risk highlighted in our 2Q12 results note. Total planted area at end of June12 stood at c.12k ha.
3. The group has been selling its sugar between Rp9,000- 9,400/kg, higher than our estimate of Rp7,780/kg.
FY12-14F profit revised by -2% - +2%
We made the following changes to our assumptions:
1. Despite c.20% higher sugar ASP, we adjusted our sugar output down by 34% to account for drier weather;
2. FY12 new plantings revised down to 2,000 ha from 3,000 ha previously with the balance shifted towards FY14F; and
3. Sugar operations’ yield and extraction rate have also been adjusted, based on data given during the site visit.
These changes resulted in -2% - +2% revisions in our FY12F- 14F earnings, but had no impact to DCF-based TP of S$1.40.
HOLD rating unchanged
Despite an attractive growth outlook, IndoAgri’s sugar business is expected to contribute just c.8% of group net profit by FY16. We retain our HOLD call, as we believe the counter has priced in sugar’s contribution. We also see limited catalysts for a re-rating until CPO prices recover towards mid 4Q12
Integrated sugar business
The sugar operations at Komering are fully integrated consisting of sugarcane estates, a mill and a refinery. The land size of the site stands at 30k ha, comprising 21k ha under HGU and 9k ha under Izin Lokasi land titles. With 12k ha planted up to 30 June12, IndoAgri expects to have 18k ha under sugar cultivation in 2 years’ time. However, judging by the delays this year, it may take another year to complete.
On average, IndoAgri is targeting 80k MT of cane yield per ha. We understand that the group may employ newer varieties, which may potentially lift yields up to 90-100k MT/ha. For our forecasts, we are assuming 80 MT/ha.
Growing Indonesian sugar market
According to IndoAgri, Indonesia is currently a net importer of sugar (source: Dewan Gula Indonesia or Indonesian Sugar Association). In 2011, the country imported 2.8m MT or 56% of its 5m MT requirement. Since 2004, sugar consumption has grown at a CAGR of 6.1% outpacing the 0.7% growth in domestic production. The key drivers of demand are:
1. increase in population and
2. development of processed F&B industries.
The government intends to achieve self sufficiency in the long run, with a target of 88 MT/ha cane yield/ha to produce 3.6m MT of refined sugar by 2014.
Supply constrained due to smallholders
The lack of supply is due to the fact that majority of Indonesian’s domestic supply (56%) is sourced from lowyielding smallholders with another 18% from government controlled entities. We understand existing sugar factories are less efficient, as there have not been any new factories over the past 20 years since IndoAgri’s plant was commissioned.
Sugar industry is dominated by SOEs
According to Dewan Gula Indonesia, Indonesia has approximately 450k ha of area under sugar cultivation – of which 277k ha are under state-owned enterprises (SOE) and smallholders, with the remaining 173k ha under private owners. Java is the main producer of sugar with 61% share of the Indonesian market. In total, there are 62 sugar mills across the country, with total installed capacity of 224k TCD (Metric Tonne Cane per Day). Most of these are owned by government entities.
Import quota system
To support domestic sugar producers, Indonesia has implemented import quotas and a floor price for the domestic sugar market. The floor price is jointly set by the Ministries of Agriculture, Trade and Finance and must be above the smallholders’ cost of production (typically higher than international sugar spot prices, currently at Rp5,000- 6,000/kg) to incentivize farmers to produce more sugar. IndoAgri is currently selling its sugar above the floor price at between Rp9,000-9,400/kg.
IndoAgri’s sugar is sold via Bogasari
The sugar produced by IndoAgri is sold to industrial users via Bogasari flour distribution network (part of parent company, Indofood Sukses Makmur), as both businesses have a similar client base. As IndoAgri sells to industrial users, its sugar ASP is relatively lower compared to those sold to the retailers.
Sugar operations
According to IndoAgri, sugarcane can be harvested by up to 5 ratoon’s before replanting. Sugarcane takes about 12 months before the first harvest, and is harvested once a year between Apr/May and Sep/Oct. The compares to 12-18 months in Brazil. The group has 10 sugar cane varieties, all of which mature over a 5-month harvesting window. This is to ensure the mill has a steady supply of cane to be processed over the harvesting season.
Majority of harvesting done manually Majority of sugar cane harvesting is currently done by manual labour. We understand c.10% of the planted area is harvested mechanically. Manual labour is only slightly more expensive, however the mechanized harvesters give the company the flexibility to speed up the harvesting if there are delays from wet weather or when workers go for their Friday prayers. A mechanical harvester can get 35MT of cane per hour versus only 1.5MT per day manually per person.
IndoAgri currently does not apply chemical ripening, but will explore this as an option to increase the sugar content. The last 8 weeks before harvesting is the critical period when sugar content is maximised in the cane. Fertiliser application
Fertiliser is applied twice a year consisting of
1. 250kg of urea/ha
2. 380kg of phosphate/ha
3. 450kg of potash/ha
IndoAgri’s Java sugar operations
IndoAgri does not grow its own sugar cane for its Java sugar mill/refinery at Pati (recently expanded from 3,000 TCD to 4,000 TCD). Rather it sources raw cane from the smallholders after providing them with credit for fertiliser and seeds. Under the profit share arrangement, the farmers receive 70% of the value of the crop with the remaining 30% to IndoAgri. Currently IndoAgri has close to 7k ha of planted area under this arrangement but also sources cane from another 2,000ha where it does not provide any credit.
There are two main mills owned by government entities close to the Pati operations. The group’s main competitive advantages are:
1. Giving more credit to the farmers than the government
2. Transparent with the profit share
3. Paying the farmers within 2 weeks versus 4-6 weeks by the government
4. Strong balance sheet
Tanjung Priok refinery overview
IndoAgri’s Tanjung Priok refinery is located near the Jakarta port and was completed in Dec10. It has 420k MT of CPO refining capacity, out of the group’s total refining capacity of 1.425m MT. The main products manufactured at the Tanjung Priok facility include cooking oil, margarine and shortening.
The land on which the refinery is built is leased from the port authority for 30 years, while the refinery itself had cost US$55m to build.
Potential expansion opportunities
At Tanjung Priok, IndoAgri has spare space to put in an additional 210k MT of refining capacity, which would take the number of lines to 3. The lead time for such an expansion would take 9-12months and cost about Rp25bn. The facilities also have space to add another 2 stearin lines from the existing 4 lines.
New Indonesian refining capacity only at end of 2013
IndoAgri believes that total effective Indonesian refining capacity currently stands at between 16-17m MT. Including non operational capacity, total capacity would be between 20-22m MT. The majority of non operational capacity cannot be used, as they are too small to be economical.
Industry-wide, we understand that the majority of new refining capacities planned post changes in the Indonesian export tax policy would not come into operation until the end of 2013. It took IndoAgri nine months just to add an extra line to its existing refinery, even with civil works in place and pre-ordered equipment. There is currently a two-year wait for new refining equipment, given the high demand.
CPO inventory levels in Indonesia not so high
According to IndoAgri estimates, there is about 3m MT of CPO stocks within the supply chain in Indonesia. The group believes that Dorab Mistry’s estimate of 4m MT is too high and that inventory levels are normal at the moment. IndoAgri’s calculations are based on the total number of palm oil mills, the number of refineries in Indonesia and usual level of inventory held at each facility. Three million tonnes of inventory is equivalent to about 5 weeks of peak production and is in line with inventory to production ratios seen in Malaysia.
Indonesian CPO market pricing mechanism
Domestic Indonesian CPO prices are referenced off Dumai and Medan, as a majority of exported CPO is shipped from these locations. For example, CPO from Sulawesi cannot be exported directly and needs to be shipped to Sumatra. Hence CPO from Sulawesi trades at a Rp200-250/kg price discount to benchmark prices in Dumai, while Kalimantan CPO trades at c.Rp150/kg discount to the Belawan price.
Over time however, the discount for Sulawesi and Kalimantan CPO should narrow as more refineries in the Eastern Indonesia are built to absorb the volumes. In relation to Malaysian CPO prices, Indonesian CPO prices typically trade at a US$20/kg discount to account for the freight costs.
Indonesian cooking oil market
The Indonesian cooking oil market currently stands at 7.5m MT, including the industrial segment. According to IndoAgri, the Indonesian cooking oil market is growing at 3-4% p.a.. The branded market comprises 25% of the total cooking oil market and is growing at 6-8% p.a.
The key driver of growth of the branded cooking oil market is the expansion of minimarts such as Alfamart and Indomaret. Indomaret is adding 2-3 new stores per day. The minimarts are also currently taking share from the supermarkets and hypermarkets.
Branded cooking oil is expected to increasingly take share away from bulk oil sold in the traditional markets, as the government has banned the use of scoop oil due to health and safety reasons. However, enforcement of such a ban is a different issue.
There are approximately 100 cooking oil brands in Indonesia with the top 3 brands commanding 80% of the market. IndoAgri has the largest share of the branded cooking oil market followed by Wilmar and Golden Agri.
Margarine market
Approximately 70-80% of the domestic margarine market serves industrial users with IndoAgri having 70% market share in this segment. In the branded margarine market, IndoAgri has a 25% market share. The largest player is Blue Band owned by Unilver which charges a 20-30% price premium to IndoAgri’s Simas Palmia brand due to consumer perception that is safe and good for children. Yet, according to IndoAgri, based on blind tasting, most consumers prefer the taste of Simas Palmia. Combined, IndoAgri has 45% market share of both the cooking oil and margarine markets.
IndoAgri’s cooking oil operations
Around 50% of cooking oil produced by IndoAgri is for the branded market with the remainder for the industrial market. Within branded cooking oil, the most popular version is the 2-litre pack, which represents 70% of the group’s branded cooking oil volumes. In the sub-brand categories, 70% of branded cooking oil volumes are related to the “Bimoli Classic” with the remaining 30% related to premium brand “Bimoli Spesial”. There is currently a Rp1,000/litre price difference between Bimoli Spesial and Bimoli Classic. IndoAgri’s refineries have been running at 90-95% utilisation rates. Prior to completion of the refinery at Tanjung Priok, IndoAgri was relying on toll manufacturing during the peak harvesting season.
About 80% of the CPO used in the refinery is sourced from its own plantations. The remaining 20% of CPO requirements are purchased from third parties such as Astra Agro.
IndoAgri’s margarine operations
The group is in the process of moving its margarine production from its existing refinery at Pluit, Jakarta to Tanjung Priok. Once the move is completed, the Pluit facility will focus on producing bulk cooking oil.
Shelf life of products
We understand the cooking oil produced has a shelf life of 2 years with margarine lasting a year. In addition cooking oil made from CPO starts to cloud below 23-25 degrees Celsius.
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