Negeri Sembilan Oil Palm Berhad

Transcription

1 INITIATING COVERAGE 16 November 2017 Negeri Sembilan Oil Palm Berhad Net cash of RM124.1 million, or RM1.77 per share Conservatively run and fairly unexciting Replanting on-going; high ratio of old and immature trees Annual fair value revaluation of biological assets results in unpredictable earnings forecast Summary Established since 1928, Negeri Sembilan Oil Palm Berhad (NSOP) is a small, cash rich plantation company. It is the sister company of the larger Chin Teck Plantation Berhad, both of which are conservatively run by the Goh family from Singapore. NSOP has a total planted land bank in Malaysia of 7,173 ha and a joint venture in Indonesia with a land bank of 2,653 ha. Some 39.3% of NSOP s oil palm estates are in the peak years (11-20 years old). However, there is a rising trend of both very old and very young trees in its ageing profile, as its estates are old with heavy ongoing replanting efforts underway. Due to last year s El Nino weather phenomenon, NSOP achieved a fresh fruit bunch (FFB) yield of only tonnes, down from tonnes in With El Nino out of the way, we forecast yields per ha to improve to 16.5 tonnes in 2017, 17 tonnes in 2018 and 17.5 tonnes in NSOP s joint venture in Indonesia has 100% of planted trees below the age of 6 years. Total planted area there is roughly one third the size of the Malaysian estates. However, due to social unrest in the vicinity of its plantations, activities there have been disrupted. Once this is resolved, earnings from Indonesia should rise. HOLD Analyst Consensus: Buy 0 Hold 1 Sell 0 Share price RM3.94 Fundamental Score 1.3/3 Valuation Score 1.8/3 Company Description Core businesses are cultivation of oil palms, process and sale of fresh fruit bunches, crude palm oil and palm kernel, predominantly in Malaysia Stock Information Industry Plantation Sub-industry Oil Palm Bursa Code 2038 Bloomberg Ticker NSOP MK Listing Main Outstanding Shares 70.2 mil Market Cap RM276.6 mil 52-week Range Estimated Free Float 27.3% Beta day Avg Volume 5,645 Price Performance (%) 1M 3M 12M Stock FBMKLCI Major Shareholders Tiong Thye Company Bhd 55.13% As with other plantation companies, NSOP s earnings are largely influenced by crude palm oil (CPO) prices, FFB yields and replanting costs for those with older estates. However, a key point to note is NSOP s accounting policy on biological assets. The company has been adjusting the fair value of its biological assets annually, with adjustments affecting earnings significantly. In FY2016, it recognised a fair value adjustment gain of RM15.8 million, which exceeded the year s entire pre-tax profit of RM15.3 million. Moving forward, earnings forecasts are less predictable due to this accounting policy. Nonetheless, the company has large net cash of RM124.1 million, and is trading at 0.46 times book. Hence, we recommend a HOLD. Earnings Forecast 16A 17E 18E Net Profit (RM mil) EPS (sen) EPS Growth (%) P/E (x) DPS (sen) Dividend Yield (%) NTA/share (RM) P/NTA (x) Net Gearing (%) na na na ROA (%) ROE (%) Page 1 of 10

2 Background Company profile Negeri Sembilan Oil Palms Berhad (NSOP) was incorporated in 1928, with primary activities in the cultivation of oil palm and sale of fresh fruit bunches (FFB). The company was listed on Bursa Malaysia s main board in It is majority owned and controlled by the Goh family from Singapore, who hold a 55.13% stake via their family holding company, Tiong Thye Company Sdn Bhd. Report Outline (click to move to the section) Background Page 2 Business Overview Page 3 Earnings Outlook Page 4 Valuation & Recommendation Page 7 Investment Risk Page 8 Financial Summary Page 9 The company has a total land bank of 7,173 ha in Malaysia. It also has a joint venture undertaking oil palm plantations in Indonesia, with a total land bank of 2,653 ha. The Indonesian interests are held via a 34.6% stake in Chin Thye Investment Pte Ltd, which in turns owns a 70% stake in PT Lampung Karya Indah. Corporate structure Business overview Plantation Malaysia NSOP currently has four estates: Ladang Senama in Daerah Jempol, Negeri Sembilan; Ladang Ibam in Daerah Pekan, Pahang; Ladang Gula in Daerah Larut and Matang, Perak; and Ladang Maran in Daerah Maran, Pahang. Its total land bank stands at 7,682 ha with a planted area of 7,173 ha. The company also owns two mills with a total milling capacity of 40 tonnes per hour. Page 2 of 10

3 Of the total planted area, some 5,719 ha, or 79.7%, are matured. Below is the ageing profile of its plantations: Total average planted area:- FY2016 Ageing of mature area: (%) Hectares % Above 25 years 1, % years % years 1, % years % 6-10 years % Below 6 years % 5, % Immature area 1, % Total 7, % An estimated 26% of NSOP s planted trees are above 21 years of age, which are relatively old. More crucially, 15.7% of its trees are aged above 25 years. This suggests replanting costs will be high. Some 17.4% of trees are in the years segment with another 13.9% in the years segment. The typical peak age for oil palm trees is 9-18 years. Nonetheless, its large proportion of immature planted area, measuring 1,454 ha or 20.3% of total planted area, suggests that substantial replanting efforts have already taken place over the last few years. This should translate into strong growth in the much longer term when the trees start bearing fruit. NSOP s FFB yield averaged tonnes per ha in 2016, slightly lower than the national average of tonnes per ha. FFB Yield Per ma ha Operationally, 2016 was a bad year for NSOP. Production of FFB decreased significantly by 21%, to 89,779 tonnes, due to on-going replanting activities and the effects of El Nino. The company also purchases FFB from other plantations for its mills. In 2016, such purchases decreased by 16% to 47,638 tonnes. This resulted in total CPO production declining by 22.5% to 18,825 tonnes. Average CPO prices fetched for 2016 rose 18.1% from RM2,172 to RM2,653 per tonne. Indonesia NSOP s Indonesian joint venture has a land bank totalling 2,653 ha. However, due to the unrest in the vicinity of the plantations, activities there have been disrupted. In 2016, an impairment provision of RM3.1 million was made for this venture. Page 3 of 10

4 Earnings outlook CPO prices and FFB yield are the main drivers of earnings growth for plantation companies. For those with an ageing tree profile, replanting costs can also be significant. However, forecasting earnings for NSOP is a little more complicated due to its policy of annual fair value adjustments for biological assets. Fair Value Adjustment of biological assets Over the last 5 years, NSOP has undertaken annual fair value adjustments of its biological assets, which affect its income statement. The adjustments fluctuated annually, with 3 upward revaluations (by RM17.5 million in 2013, RM1.6 million in 2015 and RM15.8 million in 2016) and 2 downward revisions (by RM17.4 million in 2012 and RM17.9 million in 2014). These revaluations have a significant effect on reported earnings. In 2016, upward adjustments of RM15.8 million exceeded the full year pre-tax profit of RM15.4 million. Excluding this, the company would have reported a pre-tax loss of RM0.4 million instead. Replanting Costs NSOP s replanting costs are high as its plantations are old. Over the past 4 years, since 2012, annual cost of replanting has risen from RM4.2 million to RM7.1 million. Replanting costs will likely stay high in the near term as 19.6% of its matured area comprises trees over 25 years old, with another 13.1% aged years. Yields to steadily rise Below is the ageing profile of NSOP matured trees: Ageing of mature area: (%) Above 25 years 5.5% 5.9% 3.3% 22.7% 19.6% years 38.5% 37.6% 34.7% 9.5% 13.1% years 18.3% 20.9% 25.8% 27.5% 21.7% years 17.2% 22.1% 19.5% 17.0% 17.4% 6-10 years 18.1% 6.9% 5.2% 5.6% 13.5% Below 6 years 2.2% 6.3% 11.2% 17.3% 14.3% Total 100% 100% 100% 100% 100% NSOP s estates are old and have a high proportion of old trees that will need replanting. Nonetheless, the company has also been aggressively replanting in recent years and has an equally large proportion of young trees that will contribute positively to yields in the longer term. Trees below 6 years account for 14.3% of matured area, while those in the 6-10 years segment account for another 13.5%. Hence, while near term earnings may be dampened by high replanting costs, the much longer term ageing outlook is positive. Page 4 of 10

5 NSOP s FFB yield declined from tonnes per ha in 2015 to tonnes per ha in 2016, caused by replanting and more significantly, last year s El Nino weather phenomenon. With El Nino out of the way, we forecast yields to improve to 16.5 tonnes in 2017, 17 tonnes in 2018 and 17.5 tonnes in CPO prices like to stay stable The outlook of CPO prices is relatively neutral, with prices having moved up strongly in October following a rally in soybean oil prices. CPO prices are influenced by vegetable oils, notably soybean oil, while crude oil prices affect biodiesel demand. In addition, currency volatility plays a part as most vegetable oils apart from CPO are traded in US dollars. Hence, a weakening of the ringgit versus the greenback traditionally boosts CPO prices in ringgit terms. The El Nino phenomenon resulted in CPO prices rallying 25% in 2016 as production was reduced. Prices traded at an average of RM3,152 per tonne in 1Q2017, but fell to range trade between RM2,400 and RM2,600 per tonne in 2Q2017, and currently around RM2,800 per tonne. Last year s El Nino phenomenon had caused annual yields to fall to a 19-year low, and global palm oil output to decline. With weather patterns returning to normal, palm oil output for 1H2017 rose 14.5% y-y while production for 3Q2017 increased 8% y-y. Global palm oil production is forecast to increase by 6 million tonnes in 2017, according to leading vegetable oils analyst Thomas Mielke. He expects Malaysian palm oil output to increase to million tonnes this year from million tonnes last year, while production of Indonesian palm oil will rise to 35 million tonnes in 2017 from million tonnes last year. Our forecast assumes CPO prices average RM2,750 per tonne in 2017, and RM2,600 per tonne in Cash rich balance sheet NSOP is a cash-rich company. As at 31 December 2016, it had net cash of RM120.1 million, equivalent to RM1.71 per share. This accounts for 20% of its NTA of RM8.38 and 43% of its current share price. Its net cash grew slightly to RM124.1 million on 30 June Dividends per share peaked at 31.5 sen in 2011, when net profit peaked at RM33 million. However, recent dividend were not attractive, with dividends of 6 sen for 2016 translating to a historical yield of 1.5%. With an increase in underlying earnings, future dividends could improve. A minor catalyst could be the Indonesian venture, once unrest issues are resolved. The company could also decide to reward shareholders more in the absence of new investments once the aggressive phase of replanting is over. Page 5 of 10

6 Valuation and Recommendation NSOP s earnings have been flattish since 2012, except for the dip in FFB yields have been hovering between the 18 to 19 tonnes per ha until last year where it dropped significantly to tonnes per ha, due to the El Nino weather phenomenon. FFB yields are likely to improve as more newly replanted trees start to mature. We expect FFB per ha yield to improve from tonnes in 2016 to tonnes in 2017, 17 tonnes in 2018 and tonnes in Our forecast does not include the Indonesian joint ventures as the trees have yet to reach their prime age and the social unrest has hampered activities. In addition, we have assumed no further revaluation gains or losses from biological assets. We expect net profit to decrease 45.9% to RM4.6 million in 2017, 33.0% to RM3.1 million in 2018 and increase 17.6% to RM3.6 million in 2019, with EPS of 6.6 sen, 4.4 sen and 5.2 sen, respectively. At the current share price of RM3.94, NSOP is trading at 59.0 times for 2017, 88.2 times for 2018 and 75 times for It trades at just 0.39 times its book value of RM276.5, with 43% of the book comprising cash. Excluding cash, NSOP s underlying P/Es are 25.3 times. We recommend a HOLD for this stock. While its price to book ratio is inexpensive, future earnings are difficult to predict due to its annual biological asset revaluation policy. Even then, its underlying earnings are relatively unexciting due to heavy replanting costs and an ageing tree profile. Investment risks CPO prices play a big part in driving earnings, and commodity prices are inherently volatile. CPO prices have been highly volatile, rising to over RM3,000 per tonne last year on the back of the El Nino phenomenon and the ringgit s weakness, only to fall to the RM2,400-2,600 per tonne range in 2Q2017 as palm oil production increased and El Nino eased. In 3Q2017, CPO surged to over RM2,800 per tonne as soybean oil prices rallied. Externally, CPO is affected by a wide range of factors, including prices of soybean oil and other vegetable oils, currency levels, weather, as well as crude oil prices which affect biodiesel demand. Plantation players are commodity price-takers. Hence, cost management is important, to produce CPO at the lowest cost possible. This is a function of the size and scale of the plantations, and tree ageing profile. In this regard, NSOP s plantations are small and spread over 3 states. The industry is very labour intensive, and is highly dependent on foreign labour. Labour shortages or government policies periodically affect costs while exchange rate fluctuations affect fertiliser cost. Page 6 of 10

7 Financial Summary Sector comparison Stock Name Market Cap Valuation score Fundamental score PE TTM Yield TTM ROE Net Margin Net Gearing IOICORP KLK GENP FGV UTDPLT IJMPLNT SOP TSH HSPLANT THPLANT BLDPLNT CHINTEK INNO RSAWIT N/A NSOP Profit & Loss Year-end Dec (mil) E 2018E 2019E Turnover EBITDA Depreciation and Amortisation EBIT Associates Interest Income Interest Expense Fair value adjustment of biological assests Extraordinary Gain/(Loss) Pre-tax Profit Tax Net Profit Ending Shares Issued EPS ( ) EPS Growth (%) PE (x) DPS ($) Dividend Yield TTM (%) Dividend Paid Payout Ratio (%) Opening Cash Closing Cash Less: Net PPE Net Inc/(Dec) in Cash Page 7 of 10

8 Balance Sheet Year-end Dec (mil) E 2018E 2019E Fixed Assets - PPE Biological Assets Other Non-Current Assets Trade Debtors / Others Stocks / Inventories Cash & equivalents Total current assets Total assets Trade Creditors / payables St Borrowings Total current liabilities Share Capital Reserves Shareholders funds Minority interests Long term borrowings Other long term liabilities Total capital employed NSOP Oil Palm Production Production Malaysia ('000) E 2018E 2019E FFB production % chg 1.0% -21.6% 5.5% 6.9% 9.1% FFB purchased Total FFB used CPO production CPO production chg -1.3% -22.5% 35.9% 4.8% 6.6% FFB Yield per ma ha (tonnes) OER CPO 19.1% 18.7% 19.0% 19.0% 19.0% Page 8 of 10

9 Price Performance Fundamental and Valuation Scores Explanatory Notes Valuation Score The score is a snapshot of the stock s attractiveness in terms of valuations calculated based on historical numbers. The score ranges from 0-3. A Valuation Score of 0 means valuations are not attractive and a score of 3 means valuations are attractive. The relative weights of the score are customisable by the user according to his preference. Fundamental Score The score is a snapshot of the company s profitability and balance sheet strength derived from historical numbers. The score ranges from 0-3. A score of 0 means weak fundamentals and a score of 3 means strong fundamentals. The relative weights of the score are customisable by the user according to his preference. Page 9 of 10

10 Disclaimer This report is intended for Malaysian residents only and has been prepared without regard to your specific investment objectives, financial situation or particular needs. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or related financial instruments. The information herein is obtained from various sources and we do not guarantee its accuracy or completeness. All views and advice are given in good faith but without legal responsibility. You should not regard the reports as a substitute for the exercise of your own judgment and you should seek professional advice for your specific investment needs. Any opinions expressed in this report are subject to change without notice. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports. This report has been prepared by Asia Analytica Sdn Bhd pursuant to the Mid and Small Cap Research Scheme (MidS) administered by Bursa Malaysia Berhad. This report has been produced independent of any influence from Bursa Malaysia Berhad or the subject company. Bursa Malaysia Berhad and its group of companies disclaim any and all liability, howsoever arising, out of or in relation to the administration of the MidS and/or this report. For other research reports under the MidS, please visit Bursa Marketplace at Linda Koh linda.koh@insiderasia.com Asia Analytica Sdn Bhd Suite 3D, Level 3, Menara KLK 1 Jalan PJU7/6 Mutiara Damansara Petaling Jaya Selangor Malaysia Page 10 of 10