Plantation sector. Regional Industry Focus : Steady demand buffer price. DBS Group Research. Equity 27 Nov 2017 JCI : 6,067.

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1 Regional Industry Focus Plantation sector Refer to important disclosures at the end of this report DBS Group Research. Equity 27 Nov : Steady demand buffer price CY18F/CY19F CPO price of US$616/US$608 per MT Global output expected to expand by 4% y-o-y in CY18 Steady CPO demand trend will buffer the price Reiterate our pick Astra Agro (AALI), Lonsum (LSIP), Bumitama (BAL), First Resources (FR), TSH Resources (TSH) CY18F/19F CPO price assumption of US$616/US$608 per MT. We retain our view that current steady CPO price performance will sustain to next year on 1) seasonally low production trend in first semester of the year 2) steady demand outlook on CPO price competitiveness vs. other edible oils. With our supply and demand forecast, next year, we believe the downside potential for CPO price is minimum. Output will expand at lower pace. The uptrend in global CPO output trend will persist next year, albeit at slower pace, partially offset by Indonesia relatively limited room expansion from the smallholders estates and heavy rain, in several Kalimantan areas which will affect the trees production in We see the monthly production pattern will be steadier from month on to month, seeing a strong upcoming fruits in 1H18F followed by a seasonal strong output in the rest of the year. Steady demand will buffer the price. The steady food based demand outlook, supported by the competitive CPO price vs. other edible oils and steady soybean oil price performance. We will see firmer traction on Indonesia biodiesel allocation after the government announced the 1.4m KL of biodiesel quotas for Nov 17 Apr 18 recently, which will provide additional volume buffer next year. Strong volume output still in preference. Amid the lack of significant catalyst for CPO price rally to above US$700 per MT next year, we still prefer companies with strong organic CPO volume growth prospect, which also provide a strong support to profitability. We prefer AALI, LSIP, BAL, FR and TSH as our pick in JCI : 6, Analyst William SIMADIPUTRA william.simadiputra@id.dbsvickers.com Regional Research Teamequityresearch@dbs.com STOCKS CPO and soybean price forecasts F 18F 19F 20F 21F CPO price (RM/MT FOB P.Gudang) 2,168 2,652 2,760 2,620 2,600 2,630 2,640 CPO price (US$/MT FOB P.Gudang) Soybean price (US$/MT FOB Chicago) Soybean oil price (US$/MT FOB Chicago) STR20 price (US$/MT) 1,337 1,392 1,497 1,516 1,555 1,595 1,638 Sugar price (US$/MT) Source: DBSVI, DBS Bank 12-mth Price Mkt Cap Target Performance (%) Rp US$m Price Rp 3 mth 12 mth Rating Indonesia (Rp) Astra Agro Lestari 14,250 2,030 17,700 (6.7) (8.7) BUY London Sumatra 1, , (14.9) BUY Singapore (S$) Wilmar International , (1.6) (7.3) HOLD Indofood Agri (13.0) (22.3) HOLD Golden Agri Resources , (2.6) (10.7) NOT First Resources , (0.8) (1.8) BUY Bumitama Agri , (1.9) BUY Malaysia (RM) Felda Global Ventures , HOLD Genting Plantations , (0.4) (0.2) HOLD IOI Corporation , (2.2) 1.1 HOLD TSH Resources (2.9) (13.6) BUY KL Kepong , HOLD Sime Darby , (2.1) 10.9 HOLD Source: DBSVI, DBS Bank, Bloomberg Finance L.P. Closing price as of 24 Nov 2017 ed: CK/ sa:ma, PY, CS

2 Industry Focus Plantation companies Steady demand buffer price Reiterate our CY18F/19F CPO price assumption of US$616/US$608 per MT. Our view toward 2018 CPO price remain unchanged at this point. We retain our view that current steady CPO price performance will sustain to next year on 1) seasonally low production trend in first semester of the year 2) steady demand outlook on CPO price competitiveness vs. other edible oils. With our supply and demand forecast, next year, we believe the downside potential for CPO price is minimum. CPO supply and demand forecast CPO price (US$/MT) FOB Ending Stocks (k MT) Global demand (k MT) Global supply (k MT) Stock/ usage ratio (%) Soybean oil price (US$/MT) FOB ,890 62,341 58, % F ,174 63,599 64, % F ,007 66,773 67, % F ,056 69,906 70, % F ,978 72,659 73, % F ,519 75,168 75, % 750 Source: USDA, Oil World, EIA short-term outlook (Jan15), Bloomberg Finance L.P., DBS Bank estimates The uptrend in global CPO trend will persist next year, albeit at slower pace, partially offset by Indonesia relatively limited room for meaningful output expansion, mainly from the smallholders estates and limited upcoming new trees from both countries amid the low new planting activities in the last five years. Indonesia smallholders estates account for 50% of Indonesia planted palm oil area, and older estates with declining yield prospect will partially offset the yield recovery from existing planted area. We do not see any significant output expansion next year given the latest batch of new planting in Indonesia is in their prime age. With limited new entrant and new planting program in the last five years, Indonesia CPO output expansion will not be significant. We retain our estimate that Indonesia CPO output to grow by 4.4% y-o-y to 37.6m MT. Half of Indonesia s estates are facing an ageing crisis Privately owned estates 53.1% Source: Indonesia Directorate General of Agriculture, DBSVI Heavy rain around some Kalimantan area mainly Central Kalimantan in 3Q17 also will affect trees production performance in 1H17, on the back of less effective pollination activities during the raining weather. Moreover, we are expecting mild production output from Malaysia estates, still on yield recovery trend. However, we see the monthly production pattern will be more steady month on month basis, seeing a strong upcoming fruits in 1H18F followed by a seasonal strong output in the rest of the year, on the absence of El Nino recovery effect as seen this year. We expect the Malaysia CPO output to grow by 3.7% y-o-y to 19.6m MT in Risk to our view State owned estates 6.7% Smallholders 40.3% CPO output. We believe the key short term risk for CPO price is the weather issue. The La Nina symptom emerged with 55%-65% chance according to several media reports. La Nina will affect the raining density and hinder the pollination of the male and female fruits. With potential of lower than expected output, upside risk for our CPO price assumption. Output issue is the key puzzle in the market on the lack of data disclosure in Indonesia. Stronger than expected small holders estates yield ahead may cause the stronger than expected output expansion from Indonesia. Energy price volatility and biodiesel volumes. We assumed certain biodiesel volume as a key palm oil demand driver which ultimately is dependent on actual allocation as a percentage of overall diesel consumption. Indonesia annual biodiesel consumption account for 4%-5% of global palm oil demand. Should this fail to materialise, our CPO price forecast would be affected. Page 2

3 Industry Focus Plantation companies Summary of CPO, soybean, and soybean oil price revisions (unchanged) F 18F 19F 20F 21F CPO price (RM/MT FOB P.Gudang) 2,168 2,652 2,760 2,620 2,600 2,630 2,640 CPO price (US$/MT FOB P.Gudang) Soybean price (US$/MT FOB Chicago) Soybean oil price (US$/MT FOB Chicago) STR20 price (US$/MT) 1,337 1,392 1,497 1,516 1,555 1,595 1,638 Sugar price (US$/MT) g p Source: Bloomberg Finance L.P., Datastream, DBS Bank estimates Page 3

4 Industry Focus Plantation companies Food based demand will support stockpile, meanwhile Indonesia biodiesel is the upside risk Food based demand will be a strong buffer for CPO price next year. Stickier than expected CPO means we will see a steady growth on CPO demand from food staples. CPO based vegetable oil remain the preference for food manufacturer. Beyond the price, CPO vegetable oil also will affect the food taste and qualities, albeit we understand CPO contain higher saturated fats. The biodiesel program in Indonesia will be the game changer. The recent announcement on 1.4m KL of biodiesel quota for Nov 17 Apr 18 period is a positive sign on government seriousness toward the biodiesel program. We maintain Indonesia biodiesel production blending target of 4.2m KL. We believe Indonesia domestic biodiesel consumption will gain more traction as Indonesia CPO fund to kicks in, and government effort to cope with the more competitive export market on import tax implementation from US. Indonesia installed biodiesel refining capacity still below 50% in 2017; capacity constraint is not an issue, enhancing local demand is one another key program to reform. Mild soybean acreage expansion to keep stock usage in check Our forecast accounted a conservative soybean price outlook on modest acreage expansion, tally with the growing demand outlook. Estimate the soybean stock to usage ratio will stay at 26.3% in 2018, at the similar to 2017 level at 26.8%. Soybean supply and demand forecast y Price of soybeans (US$/MT) (FOB) Ending Stocks (k MT) Global demand (k MT) Global supply (k MT) Stock/ usage ratio (%) Crude oil price (US$/bbl) , , , % F , , , % F , , , % F , , , % F , , , % F , , , % 64.4 Source: USDA, Oil World, DBS Bank estimates We expect global soybean production to be flat y-o-y at 347 MT in CY18. Our Argentine s and Brazil soybean output forecasts to 58m tons and 109m tons, respectively, to account the limited acreage expansion from Brazil on planting delay due to weather issue this year. We maintain our 2018 global soybean demand forecast at 342m MT driven by food based demand. World crushing is expected to expand 5% y-o-y on demand recovery from China after soy meal demand hit a one-year low, offset by lower crushing activities in Argentina due to weaker-thanexpected demand for soybean meal as well as slow stock release by farmers. Our stock pick : Planters with volume growth prospect We believe the market priced the higher edible oil output in Market believe the CPO output will continue to pressurise the CPO price, and CPO planters earnings next year. This is reflected by the sector P/E multiple which is still below their five years average multiple. We still favour planters with younger age profile for their higher volume growth. We also like planters with strong balance sheets, which would allow them to take advantage of any opportunistic brown field acquisitions, to expand value chain downstream, and/or to diversify their businesses into other crops. Our new TP still provide 11%-15% share price upside potential, excluding the dividend yield potential of 2%- 4%. As we continue to see value emerging from our picks (even with our more conservative edible oil assumption), we continue to advise investors to increase exposure to Astra Agro Lestari (AALI: BUY, TP: Rp17,550), London Sumatra (LSIP: BUY, TP: Rp1,780); TSH Resources (TSH: BUY, TP: RM2.25), Bumitama Agri (BAL: BUY, TP: S$0.94) and First Resources (FR: BUY, TP: S$2.18). Page 4

5 Industry Focus Plantation companies Palm oil hectarage forecasts Oil palm planted area ('000 hectares) F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F Mature 4, , , , , , , , , , , ,639.0 Immature New planting Malaysia 5, , , , , , , , , , , ,948.6 Mature 8, , , , , , , , , , , ,494.3 Immature 2, , , , , , , , , , , ,471.2 New planting Indonesia 10, , , , , , , , , , , ,965.5 Mature 12, , , , , , , , , , , ,133.3 Immature 3, , , , , , , , , , , ,780.8 New planting Total 16, , , , , , , , , , , ,914.1 % growth Source: Oil World, MPOB, Ministry of Agriculture of Indonesia, DBS Bank estimates Palm oil supply forecasts CPO production (m MT) F 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F Malaysia vol. growth % growth Indonesia vol. growth % growth Others vol. growth % growth Total vol. growth % growth Source: Oil World, MPOB, Ministry of Agriculture of Indonesia, DBS Bank estimates Page 5

6 Industry Focus Plantation companies Malaysia forward P/E band 30 Malaysia 1-year Forward PE 28 +2sd: 26.5x sd: 22x Avg: 17.5x Singapore forward P/E band 24 Singapore 1-year Forward PE sd: 23x +1sd: 17.4x Avg: 11.7x -1sd: 6x sd: 13x Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 - Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Source: Company, DBSVI, DBS Bank Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: Company, DBSVI, DBS Bank Indonesia forward P/E band 45 Indonesia 1-year Forward PE Regional forward P/E band 30 Regional 1-year forward PE 40 +2sd: 23.7x sd: 20.3x sd: 27.4x +1sd: 20.7x 20 Avg: 17x sd: 13.6x Avg: 14x -1sd: 7.3x 10-2sd: 10.2x Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Source: Company, DBSVI, DBS Bank Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: Company, DBSVI, DBS Bank Page 6

7 Industry Focus Plantation companies Indonesia s biodiesel demand projections Indonesia F 2018F 2019F 2020F 2021F Transport diesel consumption (m litres) 26,437 26,142 26,220 26,966 27,053 27,152 27,253 27,353 in m MT growth -5% -1% 0% 3% 0% 0% 0% 0% GDP growth 5.0% 4.7% 5.1% 5.4% 5.5% 6.3% 6.3% 6.3% correlation -108% -24% 6% 6% 6% 6% 6% 6% Biodiesel exports (m litres) 1, Domestic biodiesel PSO (m litres) 1, ,490 3,332 4,062 4,259 4,703 5,052 implied blend 6% 3% 9% 12% 15% 16% 17% 18% Domestic biodiesel non subsidised (m litres) implied blend 0% 0% 1% 1% 1% 1% 1% 1% Chg. in inventory (m litres) Total biodiesel produced (m litres) 3,000 1,180 2,937 3,576 4,207 4,404 4,848 5,199 growth 7% -61% 149% 22% 18% 5% 10% 7% Nameplate capacity (m litres) 5,670 6,750 7,280 7,628 7,628 7,628 7,628 7,628 utilisation rate 53% 17% 40% 47% 55% 58% 64% 68% Indonesia palm oil production (MT) 31,400,000 33,400,000 31,800,000 34,992,452 36,990,451 38,793,219 39,994,589 41,040,570 growth 9% 6% -5% 10% 6% 5% 3% 3% Palm oil required for biodiesel production (MT) 2,904,725 1,142,525 2,843,600 3,462,469 4,073,348 4,264,508 4,694,510 5,033,467 % energy recovery rate 91% 91% 91% 91% 91% 91% 91% 91% Non biodiesel palm oil consumption (MT) 5,688,275 5,884,475 6,206,400 5,928,786 6,254,869 6,648,926 7,067,808 7,513,080 growth 6% 3% 5% -4% 6% 6% 6% 6% correlation to GDP 118% 73% 107% -83% 100% 100% 100% 100% Total domestic palm oil consumption (MT) 8,593,000 7,027,000 9,050,000 9,391,255 10,328,217 10,913,434 11,762,318 12,546,548 growth 6% -18% 29% 4% 10% 6% 8% 7% Indonesia palm oil available for exports (MT) 22,807,000 26,373,000 22,750,000 25,601,197 26,662,233 27,879,785 28,232,271 28,494,022 growth 11% 16% -14% 13% 4% 5% 1% 1% Sources: USDA, Handbook of Energy & Economic Statistics of Indonesia, Oil World, Pertamina, Kontan newspaper, DBS Bank estimates Biodiesel pricing formula: CPO price + US$125/MT Malaysia s biodiesel demand projections Malaysia F 2018F 2019F 2020F 2021F Diesel consumption (m litres) 5,286 5,416 5,544 5,793 6,054 6,326 6,611 6,908 in m MT growth 2% 2% 2% 5% 5% 5% 5% 5% GDP growth 6% 5% 5% 5% 5% 5% 5% 5% correlation 41% 50% 47% 90% 90% 90% 90% 90% Biodiesel exports (m litres) Domestic on-road biodiesel (m litres) implied blend 7% 10% 10% 13% 13% 13% 13% 13% Domestic biodiesel non subsidised (m litres) implied blend 0% 0% 0% 0% 0% 0% 0% 0% Chg. in inventory (m litres) Total biodiesel produced (m litres) growth -12% 22% 27% 12% 12% 4% 4% 4% Nameplate capacity (m litres) 2,880 2,880 2,880 2,880 2,880 2,880 2,880 2,880 utilisation rate 16% 19% 24% 27% 30% 32% 33% 34% Malaysia palm oil production (MT) 19,666,993 19,961,581 18,428,981 19,461,990 20,071,662 21,075,633 22,039,556 22,906,013 growth 2% 1% -8% 6% 3% 5% 5% 4% Palm oil required for biodiesel production (MT) 436, , , , , , , ,293 % energy recovery rate 91% 91% 91% 91% 91% 91% 91% 91% Non biodiesel domestic palm oil consumption (MT) 2,381,367 2,384,467 2,058,464 2,161,387 2,269,456 2,382,929 2,502,075 2,627,179 growth 31% 0% -14% 5% 5% 5% 5% 5% correlation to GDP 516% 3% -273% 100% 100% 100% 100% 100% Total domestic palm oil consumption (MT) 2,818,000 2,917,000 2,732,893 2,920,054 3,119,767 3,268,299 3,424,083 3,587,472 growth 22% 4% -6% 7% 7% 5% 5% 5% Malaysia palm oil available for exports (MT) 16,848,993 17,044,581 15,696,088 16,541,936 16,951,895 17,807,334 18,615,473 19,318,541 growth 0% 1% -8% 5% 2% 5% 5% 4% Source: USDA, MPOB, DBS Bank estimates Biodiesel pricing formula: RBD Palm Oil price + RM515/MT Page 7

8 Industry Focus Plantation companies Company Guides Page 8

9 Indonesia Company Guide Astra Agro Lestari Version 9 Bloomberg: AALI IJ Reuters: AALI.JK Refer to important disclosures at the end of this report DBS Group Research. Equity 27 Nov 2017 BUY Last Traded Price ( 24 Nov 2017): Rp14,250 (JCI : 6,067.14) Price Target 12-mth: Rp17,700 (24% upside) Analyst William SIMADIPUTRA william.simadiputra@id.dbsvickers.com What s New 3Q17 performance was largely in line with our forecast Expecting stronger performance in 4Q17 on peak production quarter of the year No change to our earnings forecast at this point Maintain BUY rating with TP of Rp17,700 Price Relative Efficiencies cushioned earnings 3Q17 performance largely in line with our expectation. AALI s 3Q17 performance supported by its steady yield performance and efficiencies, led to improved earnings q-o-q. Revenue and NPAT reached Rp3.95tr (+21.7% y-o-y, -2.7% q-o-q) and Rp362bn (+2.6% y-o-y, +49.4% -q-o-q) respectively, both were largely in line with our forecast. We are expecting Astra Agro Lestari (AALI) s earnings to steadily improve in 4Q17, supported by seasonally higher yields from trees in its estates and stable overall operational cost in the period. No change to our earnings forecast at this point. Where we differ: We like AALI efficiencies strategy and yield enhancement program. We expect EBITDA to continue to recover in FY17F, premised on higher FFB yields, resilient ASP, and expanded downstream operations. Moreover, AALI s estate management mechanisation programme will continue to optimise operational efficiencies and yields, resulting in a steady long-term profitability outlook. Forecasts and Valuation FY Dec (Rp m) 2016A 2017F 2018F 2019F Revenue 14,121 15,731 16,146 17,977 EBITDA 3,398 4,459 4,575 4,945 Pre-tax Profit 2,209 3,195 3,312 3,718 Net Profit 2,007 2,145 2,224 2,496 Net Pft (Pre Ex.) 2,007 2,145 2,224 2,496 Net Pft Gth (Pre-ex) (%) EPS (Rp) 1,043 1,115 1,155 1,297 EPS Pre Ex. (Rp) 1,043 1,115 1,155 1,297 EPS Gth Pre Ex (%) Diluted EPS (Rp) 1,274 1,362 1,412 1,585 Net DPS (Rp) BV Per Share (Rp) 8,903 9,541 10,187 10,956 PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) CASH ROAE (%) Earnings Rev (%): Consensus EPS (Rp): 1,070 1,049 1,147 Other Broker Recs: B: 15 S: 2 H: 7 Yield recovery and steady profitability are positive to stock price performance. We believe AALI s share price will react positively to its improving profitability outlook on the back of its strong operational performance, coupled with CPO yield expansion. Valuation: We employed DCF methodology (FY18F base year) to arrive at a fair value of Rp17,700/share (WACC 12.0%, TG 3%). This translates into 21% potential upside from the current level. Our TP implies 15.8x FY18 PE, which is lower than its 5-year average of 20x. Key Risks to Our View: CPO price. There would be downside risk to our CPO price forecasts if Pertamina s biodiesel off-take fails to live up to our expectations (3.1m MT) this year. At A Glance Issued Capital (m shrs) 1,925 Mkt. Cap (Rpbn/US$m) 27,427 / 2,030 Major Shareholders (%) PT Astra International Tbk 79.7 Free Float (%) m Avg. Daily Val (US$m) 0.70 ICB Industry : Consumer Goods / Food Producers Source of all data on this page: Company, DBSVI, Bloomberg Finance L.P ed: JS / sa:ma, PY, CS

10 Astra Agro Lestari WHAT S NEW Efficiencies cushioned earnings Earnings performance: 3Q17 performance was largely in line with our forecast. AALI booked NPAT of Rp362bn (+2.6% y-o-y, +49.4% q-o-q), largely in line with our forecast. The improvement in earnings was driven by AALI s initiatives raise efficiencies to mitigate the still soft yield and lower ASP in the period. Gross profit margin and net profit margin expanded to 21.4% and 9.2% respectively, higher vs. the previous quarter s 16.4% and 6.0% but this is still lower compared to 3Q16 s 34.5% an 10.9%, due to higher base effect, on the back of stronger CPO price trend last year. Revenue reached Rp3.9tr (+21.7% y-o-y, -2.7% q-o-q), also on track to meet our forecast. The strong y-o-y revenue expansion was driven by CPO output recovery post El Nino issue last year, but performance was lower q-o-q due to the lower ASP. No official operational figures have been released yet, however, we believe these would be in line with our forecast, as reflected by AALI s top line performance. Maintain BUY and TP of Rp17,700: Maintained our earnings forecast. We made no changes to our FY17 and FY18 earnings forecast at this point as we believe the potential nucleus CPO yield expansion in 4Q17, coupled with relatively flat operational cost in the period will lead to higher earnings versus the last two quarters. We employed DCF methodology (FY18F base year) to arrive at a fair value of Rp17,700/share (WACC 12.0%, TG 3%). This translates into 21% potential upside from the current level. Our TP implies 15.8x FY18 PE, which is lower than its 5-year average of 20.0x. Maintain BUY. We believe the market has priced in the concern on the age of AALI s trees which may affect its yield and profitability performance in the short term. Mitigating this are AALI s initiatives on estates intensification and focus to raise efficiencies, and to address the lower profitability on its downstream operation vs. its upstream plantation division. AALI currently is trading at 12.6x FY18F P/E, which we believe is undemanding considering its strong balance sheet and room to improve the financial performance led by its estates intensification program. Quarterly profitability and CPO price trend Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 GPM OPM NPATM Average CPO price (RM/ton) RHS) Source: Company, DBSVIDBSVI Quarterly revenue performance 5,000 4,546 4,5344,491 4,500 4,351 4,282 3,996 4,0553,947 4,000 3,726 3,752 3,500 3,233 3,327 3,118 3,243 3,018 3,000 2,7242,7722,828 2,712 2,500 2,000 1,500 1, Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Source: Company, DBSVIDBSVI Revenue Page 10

11 Astra Agro Lestari Quarterly / Interim Income Statement (Rpbn) FY Dec 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq Revenue 3,243 4,055 3, (2.7) Cost of Goods Sold (2,464) (3,391) (3,104) 26.0 (8.5) Gross Profit Other Oper. (Exp)/Inc (241) (265) (285) Operating Profit Other Non Opg (Exp)/Inc 16.7 (3.1) (5.5) nm 79.1 Associates & JV Inc nm nm Net Interest (Exp)/Inc (9.6) (25.4) (26.7) (178.4) (5.4) Exceptional Gain/(Loss) nm nm Pre-tax Profit (3.5) 41.5 Tax (167) (115) (140) (15.9) 22.1 Minority Interest (24.3) (13.9) (22.6) Net Profit Net profit bef Except EBITDA Margins (%) Gross Margins Opg Profit Margins Net Profit Margins Source of all data: Company, DBSVI Page 11

12 Astra Agro Lestari CRITICAL DATA POINTS TO WATCH CPO price (RM/MT) Critical Factors CPO price is key driver of earnings and share price. As a commodity producer, AALI is a price-taker. The movement in international CPO prices would directly impact the group s profitability. We currently expect CPO prices (FOB Pasir Gudang) to average US$645/MT (+0.1% y-o-y) in CY17 and US$616/MT in CY18 (-4.5% y-o-y). CPO price movements is also key driver to share price (See next page Appendix section). Trees profile: Yield enhancement program should keep trees productive. As at end-december 2016, AALI s trees were estimated to have an average age of 19 years. AALI will continuously implement its yield enhancement program to maximise yields of the relatively older trees. CPO volume growth: Steady volume output. Despite lack of aggressive expansion since 2012, AALI S FFB expanded at a CAGR of 6%in FY16-18F on the back of recovering yields.we imputed 10.3% y-o-y higher nucleus FFB output in FY17F, albeit from a low base, principally on account of the dissipating effect of the 2015 El Nino. In order to maximise its CPO processing mill, AALI purchases 30% of its processed fruits from third parties planters. CPO yield expansion and estate mechanisation program will support AALI s profitability. We are expecting CPO yield to expand steadily from 4.3MT/ha in 2017 to 4.6MT/ha in 2019 on maturing estates and AALI s yield enhancement program. Relative to other oil crops, palm oil has the highest productivity per hectare at 5 MT/ha, while soybean oil s productivity is typically 0.5 MT/ha. Besides, CPO yield also reflects planters management strength, which ultimately affects return on invested capital (ROIC) and profitability. Revenue exposure to domestic market. AALI sells its CPO output to third parties locally under spot pricing mechanism. While the group is not subject to biodiesel export levies (US$50/MT on CPO) on all of its CPO sales volume, local ASP would nevertheless roughly reflect the same discount, given the increasing domestic supply as a result of the export levies. We have already imputed this into our forecast. Mature oil palm hectareage CPO sales volume (MT) Palm kernel sales vol. (MT) Avg. USD/IDR rate Source: Company, DBSVI Page 12

13 Astra Agro Lestari Appendix 1: A look at Company's listed history what drives its share price? Stock performance relative JCI (Jakarta Composite Index) Yield is upstream planters critical success factor Historically, CPO price is a key catalyst for plantation stocks, as the share price generally tracks spot CPO prices. However, the outperformance/underperformance of plantation stocks in relation to CPO prices is dictated by the productivity factor, where stronger/weaker-than-expected yields have led to higher/lower share price sensitivity to CPO prices AALI Strong earnings momentum on high CPO price trend, coupled with AALI s strong CPO output era JCI Under performance in 2H16 after prolonged outperformance last decade Looking at Indonesia s plantation sector index since 2003, this 0 correlation is still relevant today. We have identified two notable periods of divergence for share price and CPO price: 1. Outperformance during the August 2009-April 2010 period, Source: Bloomberg Finance L.P., DBSVI due to better-than-expected CPO yields 2. Conversely, underperformance from September 2015 to Stock performance vs. CPO price now, as yields have not been fully recovered from the episode AALI of El Nino that took place in ,500 Jan 03 Aug 03 Mar 04 Oct 04 May 05 Dec 05 Jul 06 Feb 07 Sep 07 Apr 08 Nov 08 Jun 09 Jan 10 Aug 10 CPO Mar 11 Oct 11 May 12 Dec 12 Jul 13 Feb 14 Sep 14 Apr 15 Nov 15 Jun 16 Jan Indonesia-listed CPO planters AALI and London Sumatra (LSIP) in Indonesia saw their share price performances mirror the CPO yield differentials, particularly from 2012 onwards. CPO yield seems to be a common driver for CPO planters share price movement, as planters are subject to the same weather vagaries and CPO price movements. Besides, CPO yield also reflects planters management strength, which ultimately affects return on invested capital (ROIC) and profitability. 2,000 1,500 1, Jan 03 Aug 03 Mar 04 Oct 04 May 05 Dec 05 Jul 06 Feb 07 Sep 07 Apr 08 Nov 08 Yield disruption on El Nino caused share price underperformed vs. CPO price Jun 09 Jan 10 Aug 10 Mar 11 Oct 11 May 12 Dec 12 Jul 13 Feb 14 Sep 14 Apr 15 Nov 15 Jun 16 Jan We reckon that the sector s outperformance was driven by better estate management that resulted in a higher yield than regional peers regardless of the stage of the cycle. A higher yield ensures better economies of scale, thus enabling the company to attain a higher operating margin and better earnings performance. Source: Bloomberg Finance L.P, DBSVI Stock performance relative to yield outperformance 1Q08 = 100 AALI share price performance vs AALI CPO yield performance relative to sector 120% 60% 110% 30% 100% 90% 80% Share price outperformance supported by AALI s CPO yield expansion on maturing trees in the period 0% -30% -60% 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 Source: Bloomberg Finance L.P., DBSVI Page 13

14 Astra Agro Lestari Balance Sheet: Conservative balance sheet. AALI has mostly taken a conservative approach to borrowings. However, the group took on additional leverage over the past three years as it embarked on high capex outlays to fund immature estates, additional mills, as well as to build its downstream business. As at end September 2017, the group s net debt-to-total equity ratio was 16% (vs. 20% at end-december 2016); as output surged. Leverage & Asset Turnover (x) Capex trend to moderate. At end-december 2016, AALI s 4- quarter rolling cash conversion cycle stood at 54 days (vs. 41 days at end-september 2016) mainly representing higher receivable and inventory days. This year, we expect the group to spend c.rp1.2tr (assuming no new planting) on new mills, as well as on immature estates from Rp2.5tr in FY16. Rpbn Capital Expenditure Share Price Drivers: Strong earnings as near-term catalyst. We believe AALI could achieve our FY17 earnings forecast this year on the back of resilient CPO and PK price performance, as well as AALI s internal efficiency programme, which will keep AALI s operational cost at a low level. Key Risks: Volatility in CPO prices and USD exchange rates. Continued strength in CPO prices may lead to better-than-expected earnings, while lower energy prices from expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect the profitability of planters in general. ROE (%) Setback in expansion plans. Our forecasts are based on assumed hectarage for new planting/replanting. Any setback on these plans would negatively affect our valuation due to slower volume growth. Forward PE Band (x) Regulatory changes. Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/ Malaysian export taxes would impact the demand for CPO/refined oils. Company Background AALI is the largest listed plantation company in Indonesia with c.230k ha of planted oil palm estates. Approximately 72% of its revenues are from sales of CPO and PK, while the remaining 27% is from its 600k MT p.a. refining operations. The group also has a 300k MT p.a. refinery under a JV with Kuala Lumpur Kepong. AALI is majority-owned (c.80%) by Astra International, a prominent conglomerate in Indonesia known for its good corporate governance. PB Band (x) Source: Company, DBSVI Page 14

15 Astra Agro Lestari Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F CPO price (RM/MT) 2,168 2,652 2,760 2,620 2,600 Mature oil palm 196, , , , ,768 CPO sales volume (MT) 1,041,895 1,013,965 1,189,713 1,286,145 1,505,193 Palm kernel sales vol. (MT) 334, , , , ,662 Avg. USD/IDR rate 13,717 13,237 13,356 13,456 13,529 Segmental Breakdown FY Dec 2015A 2016A 2017F 2018F 2019F Revenues (Rpbn) CPO 7,263 7,876 9,454 9,800 11,361 PK 1,468 1,751 2,286 2,418 2,707 PKO Refined products 3,806 2,934 3,991 3,928 3,909 Others 522 1, Total 13,059 14,121 15,731 16,146 17,977 Income Statement (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 13,059 14,121 15,731 16,146 17,977 Cost of Goods Sold (9,977) (10,445) (11,420) (11,669) (13,064) Gross Profit 3,082 3,676 4,311 4,478 4,913 Other Opng (Exp)/Inc (1,229) (1,017) (1,168) (1,241) (1,336) Operating Profit 1,853 2,659 3,144 3,237 3,577 Other Non Opg (Exp)/Inc (580) (331) Associates & JV Inc Net Interest (Exp)/Inc (97.7) (119) (84.4) (21.6) 41.2 Exceptional Gain/(Loss) Pre-tax Profit 1,176 2,209 3,195 3,312 3,718 Tax (480) (94.5) (895) (927) (1,041) Minority Interest (76.6) (107) (155) (161) (181) Preference Dividend Net Profit 619 2,007 2,145 2,224 2,496 Net Profit before Except ,007 2,145 2,224 2,496 EBITDA 2,197 3,398 4,459 4,575 4,945 Growth Revenue Gth (%) (19.9) EBITDA Gth (%) (51.6) Opg Profit Gth (%) (50.2) Net Profit Gth (Pre-ex) (%) (75.3) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) NM Source: Company, DBSVI Page 15

16 Astra Agro Lestari Quarterly / Interim Income Statement (Rpbn) FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 Revenue 3,243 4,534 4,491 4,055 3,947 Cost of Goods Sold (2,464) (2,971) (3,094) (3,391) (3,104) Gross Profit 779 1,563 1, Other Oper. (Exp)/Inc (241) (261) (277) (265) (285) Operating Profit 537 1,302 1, Other Non Opg (Exp)/Inc 16.7 (699) 22.4 (3.1) (5.5) Associates & JV Inc Net Interest (Exp)/Inc (9.6) (17.8) (18.0) (25.4) (26.7) Exceptional Gain/(Loss) Pre-tax Profit , Tax (167) 337 (288) (115) (140) Minority Interest (24.3) (60.3) (35.1) (13.9) (22.6) Net Profit Net profit bef Except EBITDA , Growth Revenue Gth (%) (2.5) 39.8 (1.0) (9.7) (2.7) EBITDA Gth (%) (54.6) 25.3 Opg Profit Gth (%) (14.0) (64.3) 39.5 Net Profit Gth (Pre-ex) (%) (5.7) (7.0) (69.7) 49.4 Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 9,362 10,028 10,049 9,778 9,626 Invts in Associates & JVs Other LT Assets 9,337 10,147 10,340 10,366 10,421 Cash & ST Invts ,181 1,756 Inventory 1,692 2,097 2,071 2,116 2,369 Debtors Other Current Assets ,068 Total Assets 21,512 24,226 23,957 25,449 25,295 ST Debt 2,025 1, , Creditor ,047 Other Current Liab 764 1, ,015 1,124 LT Debt 5,708 2,116 2, Other LT Liabilities Shareholder s Equity 11,285 17,135 18,363 19,607 21,087 Minority Interests Total Cap. & Liab. 21,512 24,226 23,957 25,449 25,295 Non-Cash Wkg. Capital 1,022 1,562 1,149 1,175 1,321 Net Cash/(Debt) (7,438) (3,569) (1,942) (287) 1,356 Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) CASH Net Debt/Equity ex MI (X) CASH Capex to Debt (%) Z-Score (X) Source: Company, DBSVI Page 16

17 Astra Agro Lestari Cash Flow Statement (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 1,176 2,209 3,195 3,312 3,718 Dep. & Amort ,070 1,179 1,241 1,268 Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. (1,340) (623) 404 (36.5) (157) Other Operating CF (568) (825) (895) (927) (1,041) Net Operating CF 191 1,830 3,883 3,589 3,788 Capital Exp.(net) (2,722) (2,529) (1,210) (918) (1,038) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF (49.5) (53.7) (57.4) Net Investing CF (2,588) (1,827) (1,260) (971) (1,095) Div Paid (743) (191) (946) (980) (1,016) Chg in Gross Debt 3,307 (3,619) (1,643) 12.4 (2,067) Capital Issues , Other Financing CF (483) 73.2 (79.9) 15.5 (35.6) Net Financing CF 2, (2,641) (952) (3,118) Currency Adjustments Chg in Cash (317) 237 (16.9) 1,666 (425) Opg CFPS (Rp) 972 1,275 1,808 1,884 2,050 Free CFPS (Rp) (1,607) (363) 1,389 1,388 1,429 Source: Company, DBSVI Target Price & Ratings History Source: DBSVI Analyst: William SIMADIPUTRA Page 17

18 Indonesia Company Guide London Sumatra Indonesia Version 13 Bloomberg: LSIP IJ Reuters: LSIP.JK Refer to important disclosures at the end of this report DBS Group Research. Equity 27 Nov 2017 BUY Last Traded Price ( 24 Nov 2017): Rp1,425 (JCI : 6,067.10) Price Target 12-mth: Rp1,780 (25% upside) Analyst William SIMADIPUTRA william.simadiputra@id.dbsvickers.com What s New Raise TP to Rp1,780; maintain BUY rating Brighter productivity outlook prompted upward earnings revision 3Q17 performance above our and consensus forecasts Expect the strong performance to persists in 2018 Price Relative Raising TP for solid profit outlook Maintain BUY with new TP of Rp1,780. Our discounted cash flow (DCF) target price rises to Rp1,780, as we bump up our FY17/18/19 earnings by 7% for an improved output outlook for LSIP s nucleus plantation estates. We believe our earnings forecast revisions are reasonable, given LSIP s robust 3Q17 earnings of Rp180bn (+12.7% y-o-y, % q-o-q), which is above our and consensus forecasts. LSIP s 3Q17 performance was stellar, thanks to the combination of sound volume growth and cost control to cope with the lower q-o-q CPO ASP. Where we differ: Steady yield and margin will drive earnings. We continue to believe LSIP s share price could outperform its peers, thanks to its solid estate yield and profitability outlook which should persist in light of stable overall operating costs. However, consensus is concerned about its flat volume growth; LSIP s earnings should broadly reflect ASP movements for crude palm oil (CPO), palm kernel (PK) and rubber. We also believe such fears are well priced in at the current share price level. Forecasts and Valuation FY Dec (Rp m) 2016A 2017F 2018F 2019F Revenue 3,848 4,392 4,584 4,665 EBITDA ,031 1,012 Pre-tax Profit 779 1,018 1,124 1,133 Net Profit Net Pft (Pre Ex.) Net Pft Gth (Pre-ex) (%) (4.7) EPS (Rp) EPS Pre Ex. (Rp) EPS Gth Pre Ex (%) (5) Diluted EPS (Rp) Net DPS (Rp) BV Per Share (Rp) 1,120 1,196 1,275 1,349 PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) Earnings Rev (%): Consensus EPS (Rp): Other Broker Recs: B: 15 S: 2 H: 4 Source of all data on this page: Company, DBSVI, Bloomberg Finance L.P Potential catalyst: Steady CPO price to drive earnings and dividend payment. We expect LSIP s earnings to expand at a CAGR of 11% between FY16 and FY19F (due to low-base effect). This will be primarily driven by FFB yield recovery and resilient ASP performance. The solid earnings growth will also come with decent dividend yields of 3%-4% going forward. Valuation: We have employed DCF methodology (FY18F base year) to arrive at a fair value of Rp1,780/share (WACC 12.9%; TG 3%). Our TP implies an FY18 PE of 14.4x. Key Risks to Our View: CPO price. There would be downside risk to our CPO price forecasts if Pertamina s biodiesel off-take fails to live up to our expectations (3.1m MT) next year. CPO prices could also move ahead of our forecast if there is significant yield deterioration in South American soybean crops. At A Glance Issued Capital (m shrs) 6,823 Mkt. Cap (Rpbn/US$m) 9,723 / 720 Major Shareholders (%) Salim Invomas 59.5 Free Float (%) m Avg. Daily Val (US$m) 1.5 ICB Industry : Consumer Goods / Food Producers ed: CK / sa:ma, PY, CS

19 London Sumatra Indonesia WHAT S NEW Bumping up TP for solid profit outlook 3Q17 performance: Above our and consensus expectations. Quarterly financial performance LSIP booked a NPAT of Rp180bn (+12.7% y-o-y, % q- o-q) in 3Q17, coming in above our and consensus forecasts on the back of its stellar cost control and production volume expansion. LSIP has successfully grown its earnings despite the lower CPO average selling price trend (ASP) in 3Q17. This has led to profitability expansion on a q-o-q basis, thanks to its less intensive fertilising activities and stable overall other operational costs. 1,600 1,400 1,200 1, Revenue (Rpbn) GP LHS NPAT LHS 40% 35% 30% 25% 20% 15% 10% Revenue reached Rp1.1tr (+14.7% y-o-y, +10.3% q-o-q), which is slightly above our forecast. The strong top-line performance was driven by steady CPO and PK sales volumes of 105k MT (+22% y-o-y, +13% q-o-q) and 31.2k MT (+29% y-o-y, +39% q-o-q), respectively, coupled with strong realised ASPs for both products at Rp7,805 per kg (-3% y-o-y, -3% q- o-q) and Rp6,427 per kg (-17% y-o-y, +5% q-o-q). The revenue of the other segment, mainly relating to palm oil seeds, also met our expectation. LSIP also delivered sound operational performance, as seen in its productivity and extraction metric, with CPO and PK outputs coming in at 107k MT (+8% y-o-y, +25% q-o-q) and 38.4k MT (+44% y-o-y and +176% q-o-q) respectively. Total processed FFB reached 468k MT (+4% y-o-y, +25% q-o-q), with a strong comeback performance from third-party planters (plasma + external estates) that delivered 238k MT fruits (+91% y-o-y, +165% q-o-q) Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Source: DBSVI, Company CPO and PK ASP trend (Rp/kg) CPO PK 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 5% 0% 2Q17 New TP of Rp1,780: As we nudge up nucleus fruits output, our earnings forecasts also rise. We nudge up LSIP s nucleus production by 5% to 1.44m MT in 2018 and 1.48m MT in We also tweak our LSIP CPO ASP assumption closer to our CPO benchmark price with a narrower spread. These changes result in 2018 earnings rising to Rp818bn (+10.4% y-o-y). We maintain our overall operational assumptions, such as the total planted area and yield performance from its both nucleus and plasma estates, as well as the CPO extraction rate, at this point. Source: DBSVI, company Nucleus and external fruits trend (MT) FFB nucleus FFB external 450, , , , , , ,000 With the revisions, our discounted cash flow-based (DCF) target price rises to Rp1,780, which implies an FY18F PE of 14.4x. Our TP valuation multiple is still below LSIP s 5-year average PE multiple of 16.2x. Currently, LSIP is still trading at 12.0x FY8F PE and we believe LSIP deserves a valuation rerating given its steady earnings performance on the back of its sound nucleus fruits productivity and net-cash balance sheet. 100,000 50, Q13 2Q13 3Q13 4Q13 1Q14 2Q14 Source: DBSVI, company 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 Page 19

20 London Sumatra Indonesia Quarterly / Interim Income Statement (Rpbn) FY Dec 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq Revenue 965 1,004 1, Cost of Goods Sold (658) (815) (798) 21.3 (2.1) Gross Profit Other Oper. (Exp)/Inc (77.0) (81.4) (88.7) Operating Profit (4.2) Other Non Opg (Exp)/Inc (16.6) (1.8) (0.7) 95.7 (59.8) Associates & JV Inc nm nm Net Interest (Exp)/Inc (23.3) Exceptional Gain/(Loss) nm nm Pre-tax Profit Tax (60.0) (36.8) (52.6) (12.3) 42.9 Minority Interest Net Profit Net profit bef Except EBITDA Margins (%) Gross Margins Opg Profit Margins Net Profit Margins Source of all data: Company, DBSVI Page 20

21 London Sumatra Indonesia CRITICAL DATA POINTS TO WATCH CPO price (RM/MT) Critical Factors CPO price is key driver of earnings and share price. As a commodity producer, LSIP is a price-taker. Movements in international CPO prices would directly impact the group s profitability. We currently expect CPO prices (FOB Pasir Gudang) to average US$645/MT (+0.1% y-o-y) in CY17 and US$616/MT in CY18 (-4.5% y-o-y). CPO price movements are also key driver for its share price too. Trees profile: Prime age trees. As at end-december 2016, LSIP s trees were estimated to have an average age of 13 years. Approximately 5,600ha will mature in FY17F through FY18F representing 7% of its own mature hectare at the end of FY16 but not enough to keep its average age from rising towards 15 years by end- FY19F. CPO volume growth: Steady volume output, nucleus estates will drive output. Despite its lack of aggressive expansion since 2009, LSIP S FFB expanded at a CAGR of 8%in FY16-18F on the back of recovering yields.we imputed a 12.9% y-o-y higher FY17F nucleus FFB output, albeit from a low base, principally on account of the dissipating effect of the 2015 El Nino. CPO yield expansion will support LSIP s profitability. We are expecting CPO yield to expand steadily from 3.6MT/ha in 2017 to 3.9MT/ha in 2019 on maturing estates. Relative to other oil crops, palm oil has the highest productivity per hectare at 5 MT/ha, while soybean oil s productivity is typically 0.5 MT/ha.. Besides, CPO yield also reflects planters management strength, which ultimately affects return on invested capital (ROIC) and profitability. Revenue exposure to domestic market. LSIP sells more than half of its CPO output to its parent company, Salim Ivomas Pratama (SIMP IJ, Not Rated), while the remaining CPO is sold locally. LSIP sells its CPO under spot pricing mechanism. While the group is not subject to biodiesel export levies (US$50/MT on CPO) on all of its CPO sales volume, local ASP would nevertheless roughly reflect the same discount, given the increasing domestic supply as a result of the export levies. We have already imputed this into our forecast. Mature oil palm hectareage CPO sales volume (MT) Palm kernel sales vol. (MT) Avg. USD/IDR rate Source: Company, DBSVI Page 21

22 London Sumatra Indonesia Appendix 1: A look at Company's listed history what drives its share price? Stock performance relative to CPO price Yield as upstream planters critical success factor Historically, CPO price is a key catalyst for plantation stocks, as the share price generally tracks spot CPO prices. However, the outperformance/underperformance of plantation stocks in relation to CPO prices is dictated by the productivity factor, where stronger/weaker-than-expected yields have led to higher/lower share price sensitivity to CPO prices. 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Valuation re-rating on LSIP s strong operational performance triggered valuation re-rating. Share price was catching up with CPO price bullish trend However, underperformance persisted in 3Q15 onward Looking at Indonesia s plantation sector index since 2003, this correlation is still relevant today. We have identified two notable periods of divergence for share price and CPO price: 1. Outperformance during the August 2009-April 2010 period, due to better-than-expected CPO yields 2. Conversely, underperformance from September 2015 to now, as yields have not been fully recovered from the episode of El Nino that took place in Indonesia-listed CPO planters AALI and LSIP in Indonesia saw share price performances mirror their CPO yield differentials, particularly from 2012 onwards. CPO yield seems to be a common driver for CPO planters share price movement, as planters are subject to the same weather vagaries and CPO price movements. Besides, CPO yield also reflects planters management strength, which ultimately affects return on invested capital (ROIC) and profitability. We reckon that the sector s outperformance was driven by better estate management that resulted in a higher yield than regional peers regardless of the stage of the cycle. A higher yield ensures better economies of scale, thus enabling the company to attain a higher operating margin and better earnings performance. 0 Jan 03 Aug 03 Mar 04 Oct 04 May 05 Dec 05 Jul 06 Feb 07 Sep 07 Apr 08 Nov 08 Jun 09 Jan 10 Aug 10 Mar 11 Oct 11 May 12 Dec 12 Jul 13 Feb 14 Sep 14 Apr 15 Nov 15 Jun 16 Jan 17 Source: Bloomberg Finance L.P., DBSVI Stock performance relative to JCI index 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Source: Bloomberg Finance L.P., DBSVI LSIP share price vs. CPO yield performance 1Q08 = 100 LSIP share price performance vs LSIP CPO yield performance relative to sector 180% Subtle CPO yield followed by lower profitability performance caused share price correction 140% Outperformed JCI on strong earnings momentum era due to uptrend in CPO price LSIP Jan 03 Aug 03 Mar 04 Oct 04 May 05 Dec 05 Jul 06 Feb 07 Sep 07 Apr 08 Nov 08 Jun 09 Jan 10 Aug 10 Mar 11 Oct 11 May 12 Dec 12 Jul 13 Feb 14 Sep 14 Apr 15 Nov 15 Jun 16 Jan 17 LSIP CPO Share price underperformed the JCI amid profitability contraction trend JCI 0 0 1,600 1,400 1,200 1, % 25% 100% 0% 60% -25% 20% -50% 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 Source: Bloomberg Finance L.P., DBSVI Page 22

23 London Sumatra Indonesia Balance Sheet: Net cash balance sheet. As at end-december 2016, LSIP remained debt-free. This reflects the group s lack of major expansion projects on both its biological assets and its processing capacity. As at end-december 2016, the group s 4- quarter rolling cash conversion cycle stood at 68 days up from 51 days in September 2016 on higher inventory days. Leverage & Asset Turnover (x) Headroom for leverage. Amid strict sustainability standards, we expect more private estates to be on offer. Given its net cash position, we believe LSIP is in a strong position to acquire more brownfields to boost its flattish output growth outlook. Failing this, we believe the group should be able to increase its dividend payout to enhance ROE. Rpbn Capital Expenditure Share Price Drivers: Due for re-rating. The stock is currently trading around -1SD of its 5-year average PE, having plummeted from its December 2016 high. Although no massive expansion is expected, we believe the market has yet to fully appreciate its strong recovery in production and free cash flow position Key Risks: Volatility in CPO prices and USD exchange rates. Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from the expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect the profitability of planters in general. Setback in expansion plans. Our forecasts are based on assumed hectarage for new planting and replanting. Any setback on these plans would negatively affect our valuation due to slower volume growth. ROE (%) Forward PE Band (x) Regulatory changes. Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/ Malaysian export taxes would impact the demand for CPO/refined oils. Weather. Changes in rainfall pattern (caused by either El Nino or La Nina) would affect FFB yields with some time lag. Company Background London Sumatra Indonesia (LSIP) is the second largest listed upstream player in Indonesia and is a subsidiary of Indofood Agri Resources (IFAR SP). Besides palm oil, LSIP has rubber, cocoa and seed businesses. PB Band (x) Source: Company, DBSVI Page 23

24 London Sumatra Indonesia Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F CPO price (RM/MT) 2,168 2,652 2,760 2,620 2,600 Mature oil palm 78,656 83,056 85,996 87,145 87,480 CPO sales volume (MT) 471, , , , ,048 Palm kernel sales vol. (MT) 122, , , , ,845 Avg. USD/IDR rate 13,717 13,237 13,356 13,456 13,529 Segmental Breakdown FY Dec 2015A 2016A 2017F 2018F 2019F Revenues (Rpbn) Crude palm oil 3,223 2,839 3,332 3,487 3,545 Palm kernel Rubber Seeds Others Total 4,190 3,848 4,392 4,584 4,665 Income Statement (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 4,190 3,848 4,392 4,584 4,665 Cost of Goods Sold (3,074) (2,737) (3,097) (3,214) (3,317) Gross Profit 1,116 1,111 1,295 1,371 1,347 Other Opng (Exp)/Inc (280) (300) (287) (291) (292) Operating Profit ,008 1,080 1,056 Other Non Opg (Exp)/Inc (60.9) (59.7) (53.7) (48.4) (43.5) Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit ,018 1,124 1,133 Tax (205) (186) (255) (281) (283) Minority Interest Preference Dividend Net Profit Net Profit before Except EBITDA ,031 1,012 Growth Revenue Gth (%) (11.4) (8.2) EBITDA Gth (%) (32.1) (3.1) (1.9) Opg Profit Gth (%) (33.5) (3.0) (2.2) Net Profit Gth (Pre-ex) (%) (32.9) (4.7) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) NM NM NM NM NM Source: Company, DBSVI Page 24

25 London Sumatra Indonesia Quarterly / Interim Income Statement (Rpbn) FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 Revenue 965 1,230 1,464 1,004 1,107 Cost of Goods Sold (658) (767) (916) (815) (798) Gross Profit Other Oper. (Exp)/Inc (77.0) (52.8) (84.4) (81.4) (88.7) Operating Profit Other Non Opg (Exp)/Inc (16.6) (6.3) (1.6) (1.8) (0.7) Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax (60.0) (89.9) (98.7) (36.8) (52.6) Minority Interest 0.10 (1.3) (0.5) Net Profit Net profit bef Except EBITDA Growth Revenue Gth (%) (31.4) 10.3 EBITDA Gth (%) (64.5) 66.4 Opg Profit Gth (%) (76.9) Net Profit Gth (Pre-ex) (%) (77.2) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 3,428 3,436 3,464 3,390 3,243 Invts in Associates & JVs Other LT Assets 4,152 4,103 3,868 3,886 3,919 Cash & ST Invts 737 1,141 1,924 2,568 3,248 Inventory Debtors Other Current Assets Total Assets 8,849 9,459 10,000 10,616 11,205 ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities 940 1,033 1,080 1,134 1,193 Shareholder s Equity 7,331 7,640 8,162 8,697 9,207 Minority Interests Total Cap. & Liab. 8,849 9,459 10,000 10,616 11,205 Non-Cash Wkg. Capital (39.7) (1.6) (8.2) (6.7) (5.0) Net Cash/(Debt) 737 1,141 1,924 2,568 3,248 Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) N/A N/A N/A N/A N/A Z-Score (X) Source: Company, DBSVI Page 25

26 London Sumatra Indonesia Cash Flow Statement (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit ,018 1,124 1,133 Dep. & Amort Tax Paid (205) (186) (255) (281) (283) Assoc. & JV Inc/(loss) Chg in Wkg.Cap. (197) (32.5) 4.40 (3.7) (4.0) Other Operating CF 86.1 (65.0) Net Operating CF ,246 1,324 1,361 Capital Exp.(net) (497) (359) (393) (379) (345) Other Invts.(net) (577) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF (29.3) (99.3) Net Investing CF (1,103) (279) (220) (370) (338) Div Paid (362) (252) (240) (310) (342) Chg in Gross Debt Capital Issues 14.3 (40.3) (2.3) Other Financing CF Net Financing CF (347) (293) (243) (310) (342) Currency Adjustments Chg in Cash (619) Opg CFPS (Rp) Free CFPS (Rp) Source: Company, DBSVI Target Price & Ratings History Source: DBSVI Analyst: William SIMADIPUTRA Page 26

27 Singapore Company Guide Wilmar International Version 11 Bloomberg: WIL SP Reuters: WLIL.SI Refer to important disclosures at the end of this report DBS Group Research. Equity 27 Nov 2017 HOLD Last Traded Price ( 24 Nov 2017): S$3.17 (STI : 3,442.15) Price Target 12-mth: S$3.50 (9% upside) (Prev: S$3.52) Analyst William SIMADIPUTRA william.simadiputra@id.dbsvickers.com Singapore Research Team equityresearch@dbs.com What s New 3Q17 results largely in- line with our full year forecasts Oilseeds and Grains buffered performance in the quarter after Tropical Oils disappoint On track for IPO plans in FY2019 Maintain HOLD, TP of S$3.50 Price Relative Forecasts and Valuation FY Dec (US$ m) 2016A 2017F 2018F 2019F Revenue 41,402 42,526 43,165 43,877 EBITDA 2,162 2,360 2,518 2,533 Pre-tax Profit 1,300 1,429 1,575 1,605 Net Profit 972 1,002 1,103 1,123 Net Pft (Pre Ex.) 962 1,002 1,103 1,123 Net Pft (ex. BA gains) 983 1,002 1,103 1,123 Net Pft Gth (Pre-ex) (%) (13.9) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth Pre Ex (%) (14) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (S cts): Other Broker Recs: B: 7 S: 1 H: 10 Await steadier close for the year Oilseeds and Grains buffered performance. Wilmar had been affected by weaker margins in Tropical Oils and one-off trading losses in Sugar through 9M17. Going forward, we expect Wilmar to see a stronger close for the year, on improving contributions from its Oilseeds and Grains segment due to positive crush margins and volumes, as evidenced in 3Q17. Wilmar is gradually extending penetration of its well-established brands via its vast distribution networks in Asia s growing markets, which will provide another long-term earnings upside potential. Our FY17/18 earnings revisions of -11%/-7% to US$1bn/US$1.1bn reflected the latest development above. Where we differ: We do not anticipate any catalysts that would move the stock significantly higher in the near term. We believe the potential earnings recovery in the next few quarters have already been priced in. In the longer term, with a greater presence in India (through Adani-Wilmar s proposed JV with Ruchi), and gradual penetration of well-established brands including Goodman Fielder in China, Wilmar s FY16-19F earnings are expected to expand at a c.8% CAGR (low-base effect). Beyond earnings performance: Catalyst from China operations' listings. Possible IPO plans (A-share listing) for its China operations may drive its share price closer to its potential listing date. Wilmar is expected to file for IPO earliest in 1H19. We note that in 9M17, the group s China pretax contribution amounted to c.50%. Valuation: We employed DCF methodology (FY18F base year) to arrive at our revised TP of S$3.50 (WACC 7%, TG 3%). Our TP offers 9% upside from last close price of S$3.19 and 2.1% dividend yield for FY17F. Key Risks to Our View: CPO and soybean prices. Wilmar s share price is influenced by palm oil refining/soybean crushing margins on top of crude palm oil (CPO)/sugar price expectations. At A Glance Issued Capital (m shrs) 6,325 Mkt. Cap (S$m/US$m) 20,050 / 14,893 Major Shareholders (%) Archer-Daniels-Midland Co 20.0 Longhlin Asia Limited 5.3 Kerry Group Ltd 4.6 Free Float (%) m Avg. Daily Val (US$m) 12.7 ICB Industry : Consumer Goods / Food Producers Source of all data on this page: Company, DBSVI, DBS Bank, Bloomberg Finance L.P. ed: TH / sa: YM, PY, CS

28 Wilmar International WHAT S NEW 3Q17 results largely in line with our expectations Highlights 3Q17 results largely in line with our expectations. Core NPAT reached US$323.7m (-16% y-o-y, +867% q-o-q), rebounded strongly q-o-q on track to our forecast and management guidance on stronger performance outlook in 2H17 despite the relatively weak performance in 2Q17, lower than consensus and in line with our expectations. The positive improvement in 3Q17 was supported by the improving performance of its Oilseeds and Grains division, which was successfully offset by the relatively weak result of tropical oils and sugar businesses. Consolidated revenue reached US$11.2bn (flat y-o-y, +5% q-o-q), which is also on track to meet our/consensus forecasts. All divisions' revenue performance met our forecast, and the best performer was Oil seeds and Grains at S$5.5bn (+17% y-o-y, +27% q-o-q), followed by the Tropical Oils and Sugars at S$4.3bn (-2% y-oy, -3% q-o-q) and S$1bn (-41% y-o-y, -35% q-o-q) respectively. Tropical Oils hit by downstream business Profit before tax from Tropical Oils segment was weak at US$83.1m (-51% y-o-y, +140% q-o-q) mainly on the back of lower processing margins, despite seeing higher production yield and volumes for plantation. Lower biodiesel quota awarded in Indonesia also affected sales volume in 3Q17. We are expecting full-year profit before tax to be US$467m on improving processing margins in 4Q17. Strong performance from Oilseeds and Grains Profit before tax from Oil seeds and Grains performed strongly at US$254.7m (+3% y-o-y, +323% q-o-q) on higher crush volume and good crush margins, reflected by the segments revenue performance and profit before tax margin of 4.6% (3Q16/2Q17 PBT margin 5.2%/1.4%). According to management, crushing utilisation remains high at >80% into 4Q17. We note that the slight decline in Consumer Products volumes relates to its consumer packs business, offset by better volumes in its bulk packs business. Sugar returns to profitability Profit before tax from Sugar segment recovered from losses in 2Q17 arising from its first-ever trading losses due to untimely purchases of sugar, to US$75.2m (-13% y-o-y). Decline from 3Q16 was largely attributed to timing effect of Australia s new sugar marketing programme. According to Wilmar, subsequent quarters would see sales of certain proportion of sugar produced. Going forward, write-downs for the Sugar business may have to be effected in view of lower-thanexpected margins. Associates and Others segment Others segment saw better profit before tax of US$56.4m (+61% y-o-y, +96% q-o-q) as the group saw higher dividend income and gains from its investment portfolio and shipping and fertiliser business. Stable gearing ratio Ending cash & cash were lower at US$3.4bn (-8.6% ytd), while gross debts expanded to US$18.6bn (+9.4% ytd, +6.9% q-oq). This translates into reported net gearing ratio of 0.72x (0.30x including liquid working capital); 3Q17 capex (excluding associates) was higher at US$228m (3Q16: US$180m). Outlook and recommendation Positive on Oilseeds and Grains segment. Management is expecting good performance in 4Q17 in Oilseeds and Grains segment on the back of positive crush margins and volumes. We expect the core NPAT to reach US$328.6m (-27 y-o-y, +1% q-o-q) in 4Q17. We believe the good performance in Oilseeds and Grains segment to continue in 4Q17. We also expect a slight improvement in its Tropical Oils division, mainly on the better processing margin in 4Q17. China IPO plans on track. Wilmar is in the midst of restructuring its China entities in preparation for listing. The restructuring is on track for completion by end of the year. Thereafter, Wilmar would need to prepare one full-year of financials (FY18) before filing for IPO application in FY19. Wilmar is expected to file for IPO earliest in 1H19. With a listing cap of 23x PE, there is potential to unlock value in Wilmar and newsflow may drive its share price closer to its potential listing date. We note that the group s China pretax contribution is typically ~45-50%. We have yet to input this into our valuations. Maintain HOLD, TP of S$3.50 Our FY17/18 earnings revisions of -11%/-7% to US$1bn/US$1.1bn key in the lower-than-expected Tropical Oils' PBT, but offset by the strong performance of Oilseeds and Grains segment. Our new earnings forecasts are slightly below consensus as we are more cautious on Wilmar's overall profitability outlook next year. New earnings forecast resulted a new discounted cash flow (DCF) target price of S$3.50 (previously S$3.52). Our DCF TP implies FY18F PE of 15.0x, which is around its five-year average PE multiple of 14.7x. We do not see the potential of any meaningful re-rating catalysts in the next 12 month unless Wilmar can show a meaningful profitability improvement in its Tropical Oils division. Page 28

29 Wilmar International Revenue trend (US$m) Tropical oils Oilseeds & grains Sugar 7,000 6,000 5,000 4,000 3,000 2,000 Profit before tax trend (US$m) , Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Tropical oils Oilseeds & grains Sugar Source: Company, DBSVI, DBS Bank Source: Company, DBSVI, DBS Bank Quarterly / Interim Income Statement (US$m) FY Dec 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq Revenue 11,084 10,599 11, Cost of Goods Sold (9,943) (10,046) (10,112) Gross Profit 1, ,017 (10.9) 83.7 Other Oper. (Exp)/Inc (569) (480) (561) (1.5) 16.8 Operating Profit (20.3) Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (41.3) (57.0) (40.9) Exceptional Gain/(Loss) Pre-tax Profit (8.7) Tax (150) (2.8) (120) (19.7) 4,188.2 Minority Interest (25.0) (1.0) (27.5) (9.8) 2,620.3 Net Profit (5.7) Net profit bef Except (17.1) EBITDA (11.4) Margins (%) Gross Margins Opg Profit Margins Net Profit Margins Source of all data: Company, DBSVI, DBS Bank Page 29

30 Wilmar International CRITICAL DATA POINTS TO WATCH Critical Factors CPO and soybean prices. Approximately 20% of its EBIT comes from sales of CPO and Palm Kernel. Movements in CPO price hence directly affect the group s Plantation segment profit. As one of the largest processors of both CPO and soybeans globally, the group holds varying amount of inventories, if any. Generally, changes in commodity prices would also affect the group s Consumer segment with some lag. CPO price (RM/MT) Oilseeds & grains pretax (US$/MT) Capacity utilisation and volume output. Wilmar continually assesses its capacity utilisation. Changes in soybean imports by competitors into China and in soybean prices may prompt Wilmar to adjust its crushing volumes as well as margins. Weather and supply chain congestion. A worse-than-expected drop in FFB yield would still adversely impact our forecast this year, in view of continued dry weather in some parts of Malaysia and Indonesia. Wilmar continually assesses its originations supply chain to avoid delay in deliveries to customers. Changes in export tax policy. Prospective increase in biodiesel production in Indonesia may cause an oversupply and lower prices of glycerin (by-product of biodiesel output) in Wilmar s Oleo chemical unit although it may make up only a small share of the group s downstream operations. Zero export taxes instituted for much of CY15 in both Malaysia and Indonesia had an adverse impact on palm oil refining margins. Changes in tax policy should therefore have a direct impact on Wilmar s refining profits. Tropical oils pretax (US$/MT) Sugar pretax (US$/MT) Movement in crude oil prices. Global demand for both ethanol and biodiesel are subject to certain crude oil price threshold. Below this level, demand for both products would be adversely affected, and would influence sugarcane, corn and palm oil prices. Wilmar s sugar milling segment is exposed to volatility in sugar price if left unhedged. Geographic exposure. Wilmar s consolidated revenue is globally distributed, with China contributing over 50% in FY16. Southeast Asia accounted for 20%, while Europe contributed 6% of revenue. This means that currency movements in China and Southeast Asia would affect Wilmar s earnings. Prospective economic recoveries in these markets should also improve Wilmar s earnings outlook. Yet, we should also note that competing processors are also vying for the same markets - which would make recoveries not unique to Wilmar. The group also requires a significant amount of working capital, which would affect its borrowing cost. Oil palm planted area (Ha) Source: Company, DBSVI, DBS Bank Page 30

31 Wilmar International Appendix 1: A look at Wilmar s listed history what drives its share price? CPO prices (in IDR) as a critical factor Remarks S$ 8 IDR Palm oil price is the key catalyst for plantation stocks; the share price movement trend generally 7 tracks the palm oil spot price However, the outperformance 6 and underperformance of plantation stocks to CPO price are dictated by the productivity 4 factor, where the stronger- or 6000 weaker-than 3 -expected yields have led its share price sensitivity to palm oil price. Share price correlation with CPO prices over the last 16 years is ~78%, the highest among SGXlisted Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-10 Jul-12 Jul-14 Jul-16 plantation stocks. Share price (LHS) CPO price (RHS) Soy crushing margin vs. share price performance Remarks S$ CNY/mT While historically, spot margin calculations had no direct correlation with Wilmar s Oilseeds & Grains pretax margins, soy crushing margin has a somewhat correlation of ~67% with Wilmar s share price Wilmar's hedging strategy offers some protection to its consolidated profitability (see chart below), with only 1Q16 consolidated pre-tax losses since Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Share price (LHS) Crushing margin (RHS) Operating profit margin as a critical factor 225% 150% 75% Remarks % Wilmar s share price generally tracks 12 that of its operating profit margin 10 (OPM), with the exception of 2Q16 where Wilmar saw a one-time 8 significant realised mark-to-market 6 loss in its short positions % -2 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 Source : Bloomberg Finance L.P, Company, DBSVI, DBS Bank Page 31

32 Wilmar International Balance Sheet: Decent balance sheet. Adjusted for liquid working capital, the group s net debt-to-total equity ratio was 35% as at end of December We forecast FY17 EBITDA/interest ratio at 6.8x, while FY17 current ratio is forecast at 1.2x. But slightly negative ROE-WACC. We expect the group to earn a ROE-WACC spread of 1.0%/0.9% in FY17F/18F. With forecast capex outlay of c.us$ m p.a. in FY17F-18F, we expect Wilmar to incur negative free cash flow in FY17F before rebounding to positive in FY18F, yielding 7.7% of intrinsic value. Share Price Drivers: Rising contribution from Consumer/JV. Wilmar currently trades close to -1SD forward PE (traded at +1SD in 2016), principally reflecting the concerns on the latest development in China soybean crush margins. We believe the market has already priced in the group s improved performance. Any visible improvements from Consumer contribution (i.e. rice & flour milling) and/or JV contribution from Goodman Fielder, as well as potential inclusion of Soya Ruchi would drive Wilmar s share price higher, in our view. Key Risks: Volatility in CPO prices and USD exchange rates. Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect profitability of planters in general. Regulatory changes. Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact demand for CPO/refined oils. Leverage & Asset Turnover (x) Capital Expenditure ROE (%) Forward PE Band (x) Market sentiment. Changes in fund flows towards or out of emerging markets would affect valuations of plantation counters. Company Background Wilmar International (Wilmar) is an integrated agribusiness company. It is involved in oil palm cultivation, edible oil refining, oilseed crushing, consumer pack edible oil processing and merchandising, specialty fats, oleochemical and biodiesel manufacturing, and grain processing and merchandising. Wilmar also manufactures and distributes fertilisers and owns a fleet of vessels. PB Band (x) Source: Company, DBSVI, DBS Bank Page 32

33 Wilmar International Key Assumptions FY Dec 2015A 2016F 2017F 2018F 2019F CPO price (RM/MT) 2,168 2,652 2,760 2,620 2,600 Oilseeds & grains pretax Tropical oils pretax Sugar pretax (US$/MT) Oil palm planted area 240, , , , ,892 Segmental Breakdown FY Dec 2015A 2016F 2017F 2018F 2019F Revenues (US$ m) Tropical oils 15,607 16,855 16,357 15,584 15,365 Oilseeds & grains 17,623 18,577 20,284 21,334 21,879 Sugar 4,404 5,862 6,422 6,809 7,192 Others 2,252 1,868 1,959 2,055 2,155 Elimination (1,110) (1,760) (2,496) (2,616) (2,714) Total 38,777 41,402 42,526 43,165 43,877 Pretax (US$ m) Tropical oils Oilseeds & grains Sugar Others Unallocated costs Total 1,379 1,300 1,429 1,575 1,605 Pretax Margins (%) Tropical oils Oilseeds & grains Sugar Others Total Income Statement (US$ m) FY Dec 2015A 2016F 2017F 2018F 2019F Revenue 38,777 41,402 42,526 43,165 43,877 Cost of Goods Sold (34,867) (37,391) (38,337) (38,850) (39,533) Gross Profit 3,909 4,011 4,190 4,315 4,344 Other Opng (Exp)/Inc (2,566) (2,704) (2,758) (2,793) (2,834) Operating Profit 1,343 1,306 1,432 1,521 1,511 Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc 26 (157) (178) (157) (116) Exceptional Gain/(Loss) (95) Pre-tax Profit 1,379 1,300 1,429 1,575 1,605 Tax (282) (206) (302) (333) (339) Minority Interest (74) (121) (125) (138) (142) Preference Dividend Net Profit 1, ,002 1,103 1,123 Net Profit before Except. 1, ,002 1,103 1,123 Net Pft (ex. BA gains) 1, ,002 1,103 1,123 EBITDA 2,122 2,162 2,360 2,518 2,533 Growth Revenue Gth (%) (10.0) EBITDA Gth (%) (2.9) Opg Profit Gth (%) (7.0) (2.8) (0.7) Net Profit Gth (%) (11.5) (5.0) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) NM Source: Company, DBSVI, DBS Bank Page 33

34 Wilmar International Quarterly / Interim Income Statement (US$ m) FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 Revenue 11,084 11,947 10,570 10,599 11,129 Cost of Goods Sold (9,943) (10,523) (9,621) (10,046) (10,112) Gross Profit 1,141 1, ,017 Other Oper. (Exp)/Inc (569) (836) (538) (480) (561) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (41) (39) (38) (57) (41) Exceptional Gain/(Loss) 7 (19) Pre-tax Profit Tax (150) 23 (84) (3) (120) Minority Interest (25) (60) (21) (1) (27) Net Profit Net profit bef Except EBITDA Growth Revenue Gth (%) (11.5) EBITDA Gth (%) 2, (26.5) (56.0) Opg Profit Gth (%) (415.9) 2.8 (30.3) (82.1) Net Profit Gth (%) (278.2) 43.0 (35.5) (83.3) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (US$ m) FY Dec 2015A 2016F 2017F 2018F 2019F Net Fixed Assets 8,983 8,297 8,065 7,777 7,417 Invts in Associates & JVs 2,731 2,903 3,078 3,288 3,499 Other LT Assets 6,345 6,396 6,526 6,601 6,691 Cash & ST Invts 5,265 5,375 6,420 7,389 8,401 Inventory 6,318 7,022 7,091 7,186 7,312 Debtors 6,652 6,442 8,056 8,177 8,312 Other Current Assets Total Assets 36,926 37,032 39,835 41,020 42,236 ST Debt 11,076 12,689 14,411 14,627 14,869 Creditor 3,034 3,420 3,500 3,547 3,609 Other Current Liab LT Debt 6,348 4,331 4,480 4,480 4,480 Other LT Liabilities Shareholder s Equity 14,394 14,435 15,118 15,857 16,592 Minority Interests ,069 1,208 1,350 Put Equity Reserve N/A N/A N/A N/A N/A Total Cap. & Liab. 36,926 37,032 39,835 41,020 42,236 Non-Cash Wkg. Capital 9,987 10,026 11,619 11,777 11,976 Net Cash/(Debt) (12,159) (11,645) (12,470) (11,718) (10,947) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X) Source: Company, DBSVI, DBS Bank Page 34

35 Wilmar International Cash Flow Statement (US$ m) FY Dec 2015A 2016F 2017F 2018F 2019F Pre-Tax Profit 1,379 1,300 1,429 1,575 1,605 Dep. & Amort Tax Paid (320) (307) (302) (333) (339) Assoc. & JV Inc/(loss) (105) (141) (175) (210) (210) Chg in Wkg.Cap. 398 (523) (1,604) (169) (199) Other Operating CF (5) (6) (17) Net Operating CF 2,232 1, ,642 1,650 Capital Exp.(net) (865) (777) (628) (558) (517) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF (448) (33) (21) (76) (88) Net Investing CF (1,313) (811) (649) (634) (605) Div Paid (381) (371) (318) (364) (389) Chg in Gross Debt (7,989) (2,157) 1, Capital Issues (149) (7) Other Financing CF 3,907 2,423 (29) Net Financing CF (4,612) (113) 1,523 (116) (115) Currency Adjustments Chg in Cash (3,693) Opg CFPS (S cts) Free CFPS (S cts) (8.3) Source: Company, DBS Bank Target Price & Ratings History Source: DBSVI, DBS Bank Analyst: William SIMADIPUTRA Singapore Research Team Page 35

36 Singapore Company Guide Indofood Agri Resources Version 12 Bloomberg: IFAR SP Reuters: IFAR.SI Refer to important disclosures at the end of this report DBS Group Research. Equity 27 Nov 2017 HOLD Last Traded Price ( 24 Nov 2017): S$0.40 (STI : 3,442.15) Price Target 12-mth: S$0.48 (19% upside) Analyst William SIMADIPUTRA william.simadiputra@id.dbsvickers.com Singapore Research Team What s New 3Q17 core profit slightly below our expectation Higher input cost resulted in lower downstream oil margin Cut CY17/18 earnings by 13%/5% TP lowered to S$0.48, maintain HOLD rating Price Relative Forecasts and Valuation FY Dec (Rpbn) 2016A 2017F 2018F 2019F Revenue 14,531 16,610 16,893 17,629 EBITDA 3,665 3,349 3,231 3,307 Pre-tax Profit 1,690 1,451 1,344 1,402 Net Profit Net Pft (ex. BA gains) Net Pft (Pre Ex.) Net Pft Gth (Pre-ex) (%) nm 16.3 (5.3) 3.3 EPS (S cts) EPS Pre Ex. (S cts) EPS Gth Pre Ex (%) (1,152) 16 (5) 3 Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (S cts): Other Broker Recs: B: 3 S: 3 H: 3 Source of all data on this page: Company, DBSVI, DBS Bank, Bloomberg Finance L.P. Profitability yet to pick up Lowered TP slightly to S$0.48 while maintaining HOLD rating. We lowered our 2017/2018 earnings forecasts by 13%/5% post 3Q17 results announcement, on lower downstream edible oil and fats division margin and higher operating expenses mainly in CY17, despite the nudged-up upstream plantation performance, driven by LSIP s 7% higher earnings forecasts in 2018/2019. IFAR s core NPAT (excl. biological and forex gain/losses) was slightly below our expectation at Rp65.8bn (-53% y-o-y, -48% q-o-q), on lower-than-expected edible oil downstream division, despite the strong performance of its CPO upstream segment, which prompted us to lower our forecast. Our new earnings forecast imply a flat earnings growth next year, still below consensus. Where we differ: Limited profitability expansion story in sight. Our view is that there is likely to be insignificant margin expansion ahead (which is a critical factor for IFAR s share price). Moreover, in our view, steady CPO price outlook means IFAR has limited room to improve its downstream division's profitability performance. Potential catalyst: Improving downstream division market. Improving downstream market may provide room for IFAR to fix its downstream division profitability. In the meantime, IFAR's performance will be supported by its profitable upstream plantation division, such as London Sumatra (LSIP). Valuation: We lowered our DCF-based TP (FY18F base year) of S$0.48, with WACC and terminal growth rate assumption of 11.6% and 3% respectively. Our target price implies 1% share price upside potential; maintain HOLD. Key Risks to Our View: Commodities price. IndoAgri s share price is driven by CPO price expectations and, to a certain extent, by refining margins and sugar prices. There would be downside risk to our CPO price forecasts if the output grow substantially ahead. At A Glance Issued Capital (m shrs) 1,396 Mkt. Cap (S$bn/US$m) 0.56 / 415 Major Shareholders (%) First Pacific Company Limited 74.3 Free Float (%) m Avg. Daily Val (US$m) 0.15 ICB Industry : Consumer Goods / Food Producers ed: TH / sa: DT, PY, CS

37 Indofood Agri Resources WHAT S NEW Profitability has yet to pick up 3Q17 earnings performance: Slightly below our expectation, still unrecovered downstream margin and higher-thanexpected opex dragged performance. Revenue achievement of Rp3.75tr (+5% y-o-y, -10% q-o-q) was on track with our forecast on steady overall average selling price (ASP) across the segment, and in-line sales volume. However, more importantly, IFAR s EBITDA and core NPAT (excluding biological assets and foreign exchange gains/losses) came slightly below our expectation at Rp766.4bn (-26% y-o-y, +9% q-o-q) and Rp65.8bn (-53% y-o-y, -48% q- o-q) respectively. The 3Q17 earnings performance was affected by the lower-than-expected profitability achievement, mainly from the downstream division. Moreover, IFAR's performance was also affected by the higher operating expenses in the period. Selling & distribution costs and General administrative expenses reached Rp172bn (+35% y-o-y, +19% q-o-q) and Rp264bn (+18% y-o-y, +5% q-o-q) respectively. The lower-than-expected edible oil downstream division was one of the key earnings performance overhang, in our view, reflected by its quarterly edible oil EBITDA margin in 3Q17 of 0.5% at Rp12bn. On the other hand, IFAR s upstream division performed well, despite the higher fertilising application in 3Q17. IFAR reported stable plantation EBITDA margin at 28.2% at Rp712bn. The upstream figures are also reflected in London Sumatra's (LSIP IJ, Buy) earnings performance, which topped our earnings forecast. We believe LSIP is a good indicator of IFAR s upstream division, as LSIP accounted for 38% of IFAR's total CPO planted area in September Overall operational performance was on track with our forecast. On the upstream plantation division, CPO and palm kernel (PK) production reached 233,000 MT (+6% y-o-y, +26% q-o-q) and 57,000 MT (+8% y-o-y, +33% q-o-q) on track with our forecast on steady yield performance on its nucleus estates, supported by external fruits purchase. IFAR s robust own estates fruits yield of 4.2 MT per hectare was higher vs. 2Q17 s and 3Q16 s 3.3 MT per hectare and 4.0 MT per hectare respectively. plantation where heavier rainfall was seen. ASP for sugar in 2017 was 9,450 Rp/kg (-17% y-o-y), due to price limits on retail sugar (12,500 Rp/kg) put forth by the Indonesian government to control food inflation. TP lowered to S$0.48, maintain HOLD rating: Re-rating catalyst not in the sight; key to watch IFAR s quarterly profitability performance. We slightly lowered our target price to S$0.48 per share post the earnings revision. Our new discounted cash flow (DCF) target price implies FY18F PE of 11.4x. Although the valuation appears undemanding, we think a potential share price rerating due to profitability recovery story of its downstream edible oil division is still not in sight. We lowered our 2017/2018 earnings by 13%/5%, mainly on lower downstream edible oil and fats division margin and higher operating expenses mainly in CY17, despite the nudged-up upstream plantation performance, mainly driven by LSIP s 7% higher earnings forecast in 2018/2019 mainly on its strong nucleus fruits output outlook, coupled with stable operational cost outlook. Edible, oil & fats quarterly performance 12,000 10,000 8,000 6,000 4,000 2,000 0 Edible oil and fats revenue (Rpbn) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Source: DBS Bank, Company Segment EBITDA margin Quarterly plantations division performance (0) At the sugar division, compared to a year ago, 9M17 EBITDA for sugar was down 53% y-o-y to Rp137bn due to lower volumes and ASP. Sugar sales volume for 3Q17 came in at 24,000 MT, down 25% y-o-y, as sugar cane harvest for 3Q17, which is the peak harvest season, was 374,000 MT (-14% y-o-y) and production was at 32,000 MT (-11% y-o-y). Sugar production was mainly affected by weather conditions in South Sumatra s Page 37

38 Indofood Agri Resources Upstream plantation division LHS Segment EBITDA margin RHS % % 40% % 30% % % 15% % 5% 0 0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Source: DBS Bank, Company Page 38

39 Indofood Agri Resources Quarterly revenue and profitability performance Revenue (Rpbn) LHS GP margin (%) RHS NPAT margin (%) RHS 5, , , ,500 3,000 2,500 2,000 1, , (5) 0 (10) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Source: DBS Bank, Company Quarterly / Interim Income Statement (Rpbn) FY Dec 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq Revenue 3,552 4,117 3, (9.8) Cost of Goods Sold (2,725) (3,456) (2,967) 8.9 (14.2) Gross Profit (9.5) 13.2 Other Oper. (Exp)/Inc (269) (370) (353) 31.4 (4.6) Operating Profit (29.2) 35.8 Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (151) (137) (137) Exceptional Gain/(Loss) Pre-tax Profit (36.5) 68.2 Tax (225) (74.3) (145) (35.8) 94.6 Minority Interest (22.6) 20.0 (13.2) 41.7 (165.8) Net Profit (36.8) 1.3 Net profit bef Except (36.8) 1.3 EBITDA 1, (22.9) 22.1 Margins (%) Gross Margins Opg Profit Margins Net Profit Margins Source of all data: Company, DBSVI, DBS Bank Page 39

40 Indofood Agri Resources CRITICAL DATA POINTS TO WATCH CPO price (RM/MT) Critical Factors CPO price. As a commodity producer, IndoAgri is a price-taker. Movements in international CPO prices would directly impact the group s profitability. We currently expect CPO prices (FOB Pasir Gudang) to average US$645/MT (+0.1% y-o-y) in CY17 and US$616 in CY18 (-4% y-o-y). Palm tree profile supports CPO output. As at the end of FY15, IndoAgri s oil palm trees (excluding the smallholders' estates) had an estimated average age of 12 years. Based on its age profile, approximately 29,000 ha will mature between FY17-18F, representing c.16% of its own mature area at the end of FY18F. This should keep the average age of its trees at 13 years by the end of FY18F. Geographically, the group s North, Central and South Sumatra estates, as well as Kalimantan estates, saw yield recovery ex. El Nino strike last year. We expect FY17 FFB yields to grow by 12.4% y-o-y to 3.35m MT. Refining facility provide margin buffer. IndoAgri does not have a biodiesel production facility hence, it is not a direct beneficiary of the government s biodiesel programme. However, the group has 1.425m MT of refining capacity which benefits from lower feedstock (CPO) cost as a result of biodiesel. Export levies. Under the programme, Indonesian refiners have differentiated export levies between CPO (US$ 50/MT) and RBD Olein (US$30/MT). This spread should more than cover the refining cost. However, on a consolidated basis, the group would also suffer from lower domestic CPO ASP next year. Demand seasonality. As a major vegetable oil with 38% market share globally, palm oil is an important food staple. The other major vegetable oils are soybean oil with 29% market share, followed by rapeseed/canola oil and sunflower oil (high price elasticity of demand), although certain vegetable oils are more suitable than others in certain applications. Relative to other oil crops, palm oil has the highest productivity per hectare (c.5 MT/ha), while only 0.5 MT/ha for soybean oil. Demand for palm oil is dominant in Asia, where local festivities (i.e. Ramadan) typically drive up demand in certain months of the year. Mature oil palm hectareage CPO sales volume (MT) Cooking oil sales vol. (MT) Avg. USD/IDR rate Source: Company, DBSVI, DBS Bank Page 40

41 Indofood Agri Resources Appendix 1: A look at Company's listed history what drives its share price? Chart 1: IFAR s share price performance vs CPO yield performance relative to sector 1Q2007 = 100% IFAR s share price correlates to IFAR s profitability performance. The downtrend in the profitability performance in the last decade caused the share price downtrend. Remarks IFAR s operating profit margin (OPM) performance correlates well with share price movements in general. Revenue performance may track commodity prices, mainly CPO price and its output performance. However, IFAR s management productivity and cost control may be seen in their profitability performance. Chart 2: CPO prices (in IDR) as a critical factor S$ IDR 000 Share price correlation to CPO prices for IFAR has 5 broken down in recent years, and we believe OPM is 14,000 a main driver of share price regardless of CPO prices, as long as refining margin is kept positive. 12, Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Source: Bloomberg Finance L.P., DBS Bank Jul-09 Jul-10 Share price (LHS) Jul-11 Jul-12 Jul-13 Jul-14 CPO price (RHS) Jul-15 Jul-16 Jul-17 10,000 8,000 6,000 4,000 2,000 0 Remarks Palm oil price is the key catalyst for plantation stocks; the share price movement trend generally tracks the palm oil spot price. However, the outperformance and underperformance of plantation stocks to CPO price are dictated by the productivity factor, where the stronger- or weaker- than-expected yields lead its share price sensitivity to palm oil price. Share price correlation to CPO prices for IFAR has broken down in recent years, and we believe OPM is a main driver of share price regardless of CPO prices, as long as refining margin is kept positive. Page 41

42 Indofood Agri Resources Balance Sheet: High capex. We expect IndoAgri to incur capex outlay of Rp tr p.a. over the next three years principally to maintain its immature estates and to expand its palm oil milling capacity as maturity rates ramp up. Based on our forecast, total interestbearing debt will reach Rp8,903bn by end-fy17f of which 30% is USD-denominated. This translates into a net debt-to-total equity ratio of 24%. FY17F blended borrowing cost is estimated at 7.6% and interest cover should be 4.1x. At end-december 2016, IndoAgri s 4-quarter rolling cash conversion cycle stood at 54 days (vs. 39 days at end-september 2016) representing higher receivable days and lower payable days. Leverage & Asset Turnover (x) Capital Expenditure Stable free cash flow. We expect IndoAgri to still generate positive free cash flow of Rp1tr in FY17F and FY18F thanks to anticipated FFB yield recovery and rising output from maturing estates, despite the lower CPO and PK ASP outlook. Share Price Drivers: Execution is key. Historically, IndoAgri's quarterly results have, more often than not, underperformed consensus forecasts since 2013 (based on Bloomberg data). The counter s P/BV ratio has likewise been below 1.0x since 2013 thus underperforming its own subsidiary, Lonsum. For this reason, we believe execution is key to its share price performance. Key Risks: Volatility in CPO prices and USD exchange rates. Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from the expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect profitability of planters in general. ROE (%) PB Band (x) Setback in expansion plans. Our forecasts are based on assumed hectarage for new planting and replanting. Any setback on these plans would negatively affect our valuation due to slower volume growth. Regulatory changes. Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact demand for CPO/refined oils. Market sentiment. Changes in fund flows in or out of emerging markets would affect valuations of plantation counters. Source: Company, DBSVI, DBS Bank Weather. Changes in rainfall patterns (caused by either El Nino or La Nina) would affect FFB yields with some lag time. Company Background Indofood Agri Resources (IndoAgri) is an integrated agribusiness company. The company and its subsidiaries are involved in sugarcane and oil palm cultivation and milling, research and development, and seed breeding. IndoAgri also refines, brands and markets its cooking oil, margarine, shortening and other palm oil products. As at end-december 2016, its own oil palm planted area stood at 247,430 ha; while sugarcane estates stood at 13,249 ha. Page 42

43 Indofood Agri Resources Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F CPO price (RM/MT) Mature oil palm CPO sales volume (MT) Cooking oil sales vol. (MT) Avg. USD/IDR rate Segmental Breakdown FY Dec 2015A 2016A 2017F 2018F 2019F Revenues (Rpbn) Plantations 4,829 5,068 5,656 5,709 5,867 Edible Oil & Fats 9,006 9,463 10,954 11,185 11,762 Total 13,835 14,531 16,610 16,893 17,629 Income Statement (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 13,835 14,531 16,610 16,893 17,629 Cost of Goods Sold (10,867) (11,042) (12,990) (13,415) (14,044) Gross Profit 2,969 3,489 3,621 3,478 3,585 Other Opng (Exp)/Inc (1,835) (1,125) (1,635) (1,724) (1,809) Operating Profit 1,134 2,364 1,986 1,754 1,776 Other Non Opg (Exp)/Inc Associates & JV Inc (232) (101) (3.0) Net Interest (Exp)/Inc (573) (573) (537) (440) (371) Exceptional Gain/(Loss) Pre-tax Profit 329 1,690 1,451 1,344 1,402 Tax (292) (897) (420) (368) (393) Minority Interest (84.7) (286) (442) (419) (432) Preference Dividend Net Profit (48.1) Net Profit before Except. (48.1) Net Pft (ex. BA gains) (46.8) EBITDA 2,217 3,665 3,349 3,231 3,307 EBITDA (ex. BA gains) 2,440 3,547 2,935 2,790 2,898 Growth Revenue Gth (%) (7.5) EBITDA Gth (%) (33.4) 65.3 (8.6) (3.5) 2.3 Opg Profit Gth (%) (57.3) (16.0) (11.6) 1.2 Net Profit Gth (Pre-ex) (%) nm nm 16.3 (5.3) 3.3 Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) (0.3) ROAE (%) (0.4) ROA (%) (0.1) ROCE (%) Div Payout Ratio (%) N/A Net Interest Cover (x) Source: Company, DBSVI, DBS Bank Page 43

44 Indofood Agri Resources Quarterly / Interim Income Statement (Rpbn) FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 Revenue 3,552 4,263 4,401 4,117 3,715 Cost of Goods Sold (2,725) (2,855) (3,344) (3,456) (2,967) Gross Profit 827 1,408 1, Other Oper. (Exp)/Inc (269) (243) (439) (370) (353) Operating Profit 558 1, Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (151) (134) (135) (137) (137) Exceptional Gain/(Loss) Pre-tax Profit 407 1, Tax (225) (540) (154) (74.3) (145) Minority Interest (22.6) (270) (158) 20.0 (13.2) Net Profit Net profit bef Except EBITDA 1,055 1, Growth Revenue Gth (%) (0.5) (6.4) (9.8) EBITDA Gth (%) (32.3) (28.8) 22.1 Opg Profit Gth (%) (47.0) (52.9) 35.8 Net Profit Gth (Pre-ex) (%) (23.3) (41.8) 1.3 Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 21,402 21,397 21,779 22,187 22,619 Invts in Associates & JVs Other LT Assets 8,318 8,352 8,441 8,560 8,648 Cash & ST Invts 1,969 2,405 2,385 2,364 2,352 Inventory 1,937 2,271 2,173 2,222 2,303 Debtors 1,109 1,123 1,274 1,283 1,325 Other Current Assets Total Assets 35,287 36,504 36,610 37,181 37,833 ST Debt 4,399 2,481 4,559 4,571 4,583 Creditor 1,803 1,500 2,186 2,257 2,363 Other Current Liab LT Debt 5,742 7,546 4,249 3,822 3,396 Other LT Liabilities 2,914 3,429 3,343 3,264 3,195 Shareholder s Equity 11,281 11,835 12,424 12,981 13,558 Minority Interests 8,899 9,043 9,485 9,904 10,337 Total Cap. & Liab. 35,287 36,504 36,610 37,181 37,833 Non-Cash Wkg. Capital 1,546 2,181 1,454 1,433 1,448 Net Cash/(Debt) (8,172) (7,623) (6,423) (6,030) (5,627) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X) Source: Company, DBSVI, DBS Bank Page 44

45 Indofood Agri Resources Cash Flow Statement (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 329 1,690 1,451 1,344 1,402 Dep. & Amort. 1,316 1,402 1,361 1,446 1,534 Tax Paid (654) (504) (420) (368) (393) Assoc. & JV Inc/(loss) Chg in Wkg.Cap. (452) (935) (15.5) Other Operating CF Net Operating CF 1,546 2,069 3,129 2,457 2,541 Capital Exp.(net) (1,818) (1,309) (1,753) (1,866) (1,978) Other Invts.(net) Invts in Assoc. & JV (958) (24.0) Div from Assoc & JV Other Investing CF (405) (291) (47.4) (75.7) (43.7) Net Investing CF (3,181) (1,624) (1,800) (1,942) (2,022) Div Paid (71.9) (68.3) Chg in Gross Debt (8.9) (13.5) (1,219) (415) (414) Capital Issues Other Financing CF (183) 77.2 (129) (123) (116) Net Financing CF (27.9) 2.44 (1,348) (537) (531) Currency Adjustments 47.1 (11.3) Chg in Cash (1,617) 436 (19.4) (21.9) (11.2) Opg CFPS (S cts) Free CFPS (S cts) (1.9) Source: Company, DBSVI, DBS Bank Target Price & Ratings History Source: DBSVI, DBS Bank Analyst: William SIMADIPUTRA Singapore Research Team Page 45

46 Singapore Company Guide First Resources Version 10 Bloomberg: FR SP Reuters: FRLD.SI Refer to important disclosures at the end of this report DBS Group Research. Equity 27 Nov 2017 BUY Last Traded Price ( 24 Nov 2017): S$1.89 (STI : 3,442.15) Price Target 12-mth: S$2.18 (15% upside) Analyst William SIMADIPUTRA william.simadiputra@id.dbsvickers.com Singapore Research Team; equityresearch@dbs.com What s New 3Q17 earnings affected by inventory buildup Operating margin still expanded q-o-q in 3Q17 reflecting strong core operational performance Projecting 18% y-o-y earnings growth in 2018 Maintain BUY rating with TP of S$2.18 Price Relative Forecasts and Valuation FY Dec (US$m) 2016A 2017F 2018F 2019F Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) Net Pft (ex. BA gains) Net Pft Gth (Pre-ex) (%) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth Pre Ex (%) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) CASH CASH ROAE (%) Earnings Rev (%): Consensus EPS (S cts): Other Broker Recs: B: 12 S: 0 H: 7 Source of all data on this page: Company, DBSVI, DBS Bank, Bloomberg Finance L.P. Bright outlook in Q17 earnings affected by inventory timing - retain our bullish view for FY18 and beyond. First Resource (FR) s 3Q17 earnings of US$31.9m (-11% y-o-y, +38% q-o-q) was affected by 33k MT of inventory buildup. This resulted in 9M17 COGS being 4% ahead our estimate, despite top line and operational performance tracking our forecast. We have lowered our FY17F earnings by 12% to account for the inventory item. We lowered our FY18F earnings slightly by 4% and retained our bullish earnings growth assumption of 18% y-o-y to US$174m in 2018 due to 9.1% higher CPO output to 813k MT, and operational efficiencies. Where we differ: We like FR s organic growth prospects. We believe FR s young trees will continue to boost its CPO yield and drive CPO volume growth. Higher CPO yields on upcoming maturing trees will improve FR s ROIC and profitability on the back of better operating scale, resulting in strong earnings growth momentum ahead. FR s aggressive planting in East and West Kalimantan between FY12 and FY14 should contribute to the group s strong volume and earnings growth in FY18F. Potential Catalyst: consistent earnings delivery. We believe consistent earnings delivery should move FR s stock price higher. Moreover, stabilising CPO price outlook will mean that FR s earnings growth will be driven by volume and CPO yield expansion. Valuation: We employed DCF methodology (FY18F as base year; WACC 11.8%; TG 3%) to arrive at a slightly higher fair value of S$2.18/share after imputing our earnings forecast adjustments. Key Risks to Our View: CPO output may affect CPO price trend. Stronger than expected yield across Indonesia and Malaysia may pressurise CPO price trends next year. At A Glance Issued Capital (m shrs) 1,584 Mkt. Cap (S$m/US$m) 2,994 / 2,224 Major Shareholders (%) Eight Capital Inc 64.1 King Fortune International Inc 5.6 Free Float (%) m Avg. Daily Val (US$m) 1.3 ICB Industry : Consumer Goods / Food Producers ed: JS / sa: YM, PY, CS

47 First Resources WHAT S NEW Strong earnings outlook in Q17: Inventory buildup affected 3Q17 earnings performance 3Q17 earnings of US$31.9m (-11% y-o-y, +38% q-o-q), slightly below our forecast, but largely in line with the consensus. Earnings was affected by 33k MT (net) of CPO inventory buildup, which also resulted in higher than expected cost of sales in the quarter, despite top line and overall operational performance tracking our forecast. We estimate the inventory buildup added US$24m to 9M17 COGS 4% higher than our estimate. Inventory adjustments do take place in CPO plantation business due to sales recognition timing. The rest of the cost of sales components were on track with our forecast. FR s core operational performance remains solid as seen in EBIT and EBITDA of US$53.1m (-17% y-o-y, +27% q-o-q) and US$69m (-11% y-o-y, +21% q-o-q) respectively in 3Q17, largely in line with our forecast. The trend is in line with the strong q-o-q rebound for revenue and CPO output. Revenue in 3Q17 reached US$137.4m (-9% y-o-y; +2% q-o-q) due to high base effect in 3Q16 from the ASP component, in line with our projection. CPO sales volume grew strongly 26% q-o-q to 187.5k MT (+12% y-o-y), despite 7% q-o-q weaker CPO ASP of US$576 per ton (-6% y-o-y). The strong CPO sales volume trend in 3Q17 was in line with FR s CPO production trend. CPO production reached 194k MT (+6% y-o-y, +35% q-o-q) as a result of seasonally high output in 2Q17, coupled with 11.9k ha of additional mature areas this year. Earnings revision : Earnings adjustment in FY17 mainly to adjust for inventory. We lowered our FY17 earnings by 12% to adjust for the inventory item in 3Q17. Our FY17F earnings are now in line with the consensus forecast. No further changes to FR s operational assumptions at this point, given its strong achievement in 3Q17 on CPO output growth and operational cost structure. Moreover, higher CPO yield on upcoming maturing trees will improve the company s ROIC and profitability on the back of better operational of scale, resulting in strong earnings growth momentum ahead. FR s aggressive planting in East and West Kalimantan between FY12 and FY14 will contribute to FR s strong volume and earnings growth in FY18F. Rating and valuation : Maintain BUY with a slightly higher TP of S$2.18 We believe the market has priced in the 3Q17 inventory item, as reflected in their conservative earnings forecast for Going forward, we expect FR to deliver stronger earnings growth momentum which will be the key share price driver. Moreover, FR s operating margin had expanded q-o-q, reflecting its solid core operational performance, which dictates share price direction. We retain our BUY rating with TP of S$2.18. Our TP implies FY18F P/E of 14.5x, which we believe is attractive since it is lower than its 5-year average P/E multiple of 17.8x. Beyond adjustments made in FY17/18, we slightly revised up our long term CPO output assumption by 2% p.a. in FY20F-25F supported by our confidence on its long term productivity outlook. CPO output and ASP trend CPO production (LHS) '000 MT 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Source: Company, DBSVI, DBS Bank CPO ASP (RHS) US$/MT 1, We lowered our FY18F earnings slightly by 4% in FY18 to US$174m (+18% growth y-o-y), and retain our FY19 earnings at US$192m (+15% growth y-o-y) respectively. The adjustment consists of higher financing cost as we believe that FR would need to set aside some funds for its capital expenditure needs in Beyond financing cost, our earnings forecast still reflects our view that FR s young trees will continue to boost FR s CPO yield and drive CPO volume growth as seen in its 3Q17 performance. Page 47

48 First Resources Quarterly / Interim Income Statement (US$m) FY Dec 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq Revenue 151, , ,448 (9.3) 2.1 Cost of Goods Sold (71,026) (77,232) (66,134) (6.9) (14.4) Gross Profit 80,499 57,373 71,314 (11.4) 24.3 Other Oper. (Exp)/Inc (16,773) (15,440) (18,230) Operating Profit 63,726 41,933 53,084 (16.7) 26.6 Other Non Opg (Exp)/Inc (147) (529) 1,676 nm (416.8) Associates & JV Inc Net Interest (Exp)/Inc (6,742) (5,045) (5,142) 23.7 (1.9) Exceptional Gain/(Loss) Pre-tax Profit 56,837 36,359 49,618 (12.7) 36.5 Tax (18,530) (12,198) (15,632) (15.6) 28.2 Minority Interest (2,450) (1,010) (2,081) Net Profit 35,857 23,151 31,905 (11.0) 37.8 Net profit bef Except. 35,857 23,151 31,905 (11.0) 37.8 EBITDA 63,579 41,404 54,760 (13.9) 32.3 Margins (%) Gross Margins Opg Profit Margins Net Profit Margins Source of all data: Company, DBSVI, DBS Bank Page 48

49 First Resources CRITICAL DATA POINTS TO WATCH Critical Factors CPO price is key driver of earnings and share price. As a commodity producer, FR is a price-taker. Movements in international CPO prices would directly impact the group s profitability. We currently expect CPO prices (FOB Pasir Gudang) to average US$645/MT (+0.1% y-o-y) in CY17 and US$616/MT in CY18 (-4.5% y-o-y). CPO price movements is key driver to plantation companies share price (see appendix). CPO price (RM/MT) Mature oil palm hectareage Trees profile : Young tree age. As at end-december 2016, the average age of FR s trees was estimated to be 11 years. Approximately 15,000ha per annum will mature in FY17F and FY18F representing 20% of its own mature hectarage at the end of FY19 which would raise the average age of its trees to 12 years by end- FY19F. CPO volume growth : CPO output recovery in FR s aggressive planting in East and West Kalimantan between FY12 and FY14 will contribute to the group s strong volume and earnings growth through to FY18F. FR s FFB expanded at a CAGR of 8.3% in FY16-18F on the back of recovering yields. We imputed 15.2% y-o-y higher FY17F nucleus FFB output, albeit from a low base, principally on account of the dissipating effect of the 2016 El Nino. Sustaining high CPO yield means strong profitability outlook. We are expecting CPO yield to sustain at 4.0MT/ha in from its maturing estates. Relative to other oil crops, palm oil has the highest productivity per hectare of 5 MT/ha, while soybean oil s productivity is typically 0.5 MT/ha. Besides, CPO yield also reflects planters management strength, which ultimately affects return on invested capital (ROIC) and profitability. Revenue exposure to domestic market. FR sells its CPO output to third parties locally based on a spot pricing mechanism. While the group is not subject to biodiesel export levies (US$50/MT on CPO) on all of its CPO sales volume, local ASP would nevertheless roughly reflect the same discount, given the increasing domestic supply as a result of the export levies. We have already imputed this into our forecast. CPO sales volume (MT) Palm kernel sales vol. (MT) Avg. USD/IDR rate Source: Company, DBSVI, DBS Bank Page 49

50 First Resources Appendix 1: A look at Company's listed history what drives its share price? First Resources share price performance vs CPO yield performance relative to sector 1Q2008 = 100% 300% 225% 150% 30% 15% 0% Remarks FR s share price is sensitive to CPO yields. The share price has consistently outperformed its index (GGR, FR, BAL), averaging 14% p.a. in 1Q08-4Q12. 75% -15% 0% -30% 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 Share price index (LHS) CPO yield (RHS) Operating profit margin as a critical factor Remarks 1Q2008 = 100% OPM % Share price outperformance over 1Q08-4Q12 may be 300% 100 explained by its high operating 90 profit margin (OPM) over the 225% 80 period. OPM is still relevant in 70 explaining share price 60 sensitivity. 150% 50 Source : Bloomberg Finance L.P, Company, DBS Bank 40 75% % 0 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 CPO prices (in IDR) as a critical factor S$ IDR' Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Share price (LHS) Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 CPO price (RHS) Apr-16 Sep-16 Feb-17 Jul-17 Remarks Palm oil price is the key catalyst for plantation stocks; the share price movement trend generally tracks palm oil spot prices. However, the outperformance and underperformance of plantation stocks to CPO prices has been dictated by the productivity factor. Share price correlation with CPO prices over the last 9 years is ~44%. Source: Bloomberg Finance L.P., DBSVI, DBS Bank Page 50

51 First Resources Balance Sheet: Balance sheet deleveraging potential. On our estimates, FR s debt cost is a paltry 3.9% p.a. The low cost comes primarily from Sukuk issuances between 2012 and 2014 which were subsequently swapped into USD. While the group had indicated its intention to refinance maturing Sukuk this year, we are maintaining our debt profile forecast for now. The group s net debt-to-total equity ratio stood at 20% at end-sept 2017 vs. 20% at end-december Strong free cash flow generation. We expect the group to spend c.us$2.8m on biological assets (c.2k ha on new plantings and c.29k ha immature) in FY17 and US$2.2m in FY18 (c.2k ha on new planting and 15k ha immature). This would translate into free cash flow generation of US$196m in FY17F and US$208m in FY18F translating into free cash flow yield of ~9% relative to its intrinsic value. Share Price Drivers: Trading at a discount. The stock is currently trading close to - 1SD from average historical PE. We believe consistent earnings delivery in 4Q17 and FY18 should move the stock price higher. Leverage & Asset Turnover (x) Capital Expenditure ROE (%) Key Risks: Volatility in CPO prices and USD exchange rates. Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from expansion of US shale gas would have adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect profitability of planters in general. Setback in expansion plans. Our forecasts are based on assumed hectarage for new planting and replanting. Any setback on these plans would negatively affect our valuation due to slower volume growth. Forward PE Band (x) Regulatory changes. Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact demand for CPO/refined oils. Market sentiment. Changes in fund flows towards or out of emerging markets would affect valuations for plantation counters. PB Band (x) Company Background First Resources (FR) is a mid-sized planter with a strong balance sheet and decent growth outlook. FR has been aggressively planting since 2004, and is one of the few upstream planters that have successfully expanded downstream albeit on a small scale. Source: Company, DBSVI, DBS Bank Page 51

52 First Resources Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F CPO price (RM/MT) 2,168 2,652 2,760 2,620 2,600 Mature oil palm 128, , , , ,963 CPO sales volume (MT) 669, , , , ,027 Palm kernel sales vol. (MT) 159, , , , ,136 Avg. USD/IDR rate 13,717 13,237 13,356 13,456 13,529 Segmental Breakdown FY Dec 2015A 2016A 2017F 2018F 2019F Revenues (US$m) CPO Palm kernel Olein, RBDPO, biodesel PKO Others (200) (306) (230) (221) (218) Total (US$m) Income Statement (US$m) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue Cost of Goods Sold (222) (308) (334) (322) (329) Gross Profit Other Opng (Exp)/Inc (62) (60) (74) (78) (82) Operating Profit Other Non Opg (Exp)/Inc (3) (1) (1) (1) (1) Associates & JV Inc Net Interest (Exp)/Inc (22) (24) (15) (12) (9) Exceptional Gain/(Loss) Pre-tax Profit Tax (45) (51) (52) (58) (64) Minority Interest (4) (6) (7) (9) (10) Preference Dividend Net Profit Net Profit before Except EBITDA Growth Revenue Gth (%) (26.3) EBITDA Gth (%) (28.3) Opg Profit Gth (%) (37.3) Net Profit Gth (%) (44.8) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Source: Company, DBSVI, DBS Bank Page 52

53 First Resources Quarterly / Interim Income Statement (US$m) FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 Revenue Cost of Goods Sold (71) (80) (102) (77) (66) Gross Profit Other Oper. (Exp)/Inc (17) (8) (20) (15) (18) Operating Profit Other Non Opg (Exp)/Inc (1) 2 Associates & JV Inc Net Interest (Exp)/Inc (7) (6) (6) (5) (5) Exceptional Gain/(Loss) Pre-tax Profit Tax (19) (21) (17) (12) (16) Minority Interest (2) (3) (2) (1) (2) Net Profit Net profit bef Except EBITDA Growth Revenue Gth (%) (30.7) 2.1 EBITDA Gth (%) (15.1) (44.1) 32.3 Opg Profit Gth (%) (17.7) (41.8) 26.6 Net Profit Gth (%) (16.5) (52.2) 37.8 Margins Gross Margins (%) Opg Margins (%) Net Profit Margins (%) Balance Sheet (US$m) FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets 1,568 1,700 1,746 1,873 1,957 ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder s Equity ,106 1,247 Minority Interests Put Equity Reserve N/A N/A N/A N/A N/A Total Cap. & Liab. 1,568 1,700 1,746 1,873 1,957 Non-Cash Wkg. Capital Net Cash/(Debt) (290) (190) (111) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) CASH CASH Net Debt/Equity ex MI (X) CASH CASH Capex to Debt (%) Z-Score (X) Source: Company, DBSVI, DBS Bank Page 53

54 First Resources Cash Flow Statement (US$m) FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit Dep. & Amort Tax Paid (75) (49) (52) (58) (64) Assoc. & JV Inc/(loss) Chg in Wkg.Cap. (49) 12 (56) 0 (2) Other Operating CF 0 (16) Net Operating CF Capital Exp.(net) (117) (81) (72) (64) (61) Other Invts.(net) Invts in Assoc. & JV (72) Div from Assoc & JV Other Investing CF 0 0 (3) (6) (5) Net Investing CF (189) (81) (75) (69) (65) Div Paid (43) (23) (40) (43) (51) Chg in Gross Debt 17 (25) (16) (4) (73) Capital Issues Other Financing CF 59 (5) Net Financing CF 34 (53) (55) (46) (123) Currency Adjustments (62) Chg in Cash (146) Opg CFPS (S cts) Free CFPS (S cts) (3) Source: Company, DBSVI, DBS Bank Target Price & Ratings History Source: DBSVI, DBS Bank Analyst: William SIMADIPUTRA Singapore Research Team Page 54

55 Singapore Company Guide Bumitama Agri Version 11 Bloomberg: BAL SP Reuters: BUMI.SI Refer to important disclosures at the end of this report DBS Group Research. Equity 27 Nov 2017 BUY Last Traded Price ( 24 Nov 2017): S$0.78 (STI : 3,442.15) Price Target 12-mth: S$0.94 (21% upside) Analyst William SIMADIPUTRA william.simadiputra@id.dbsvickers.com Singapore Research Team; equityresearch@dbs.com What s New 3Q17 NPAT slightly above our forecast Well-mixed own and external fruits supported margins Retaining our earnings forecast expecting y-o-y recovery trend to continue in 4Q17 Maintain BUY rating with TP of S$0.94 Price Relative Positive y-o-y improvement 3Q17 earnings slightly above our forecast. BAL reported NPAT of Rp266.3bn (+29% y-o-y, -7% q-o-q) slightly above our/consensus estimates. The strong y-o-y earnings recovery trend continued in 3Q17 due to the rebounding nucleus estates' fruit production volume. The strong profitability performance was also attributed to its well-mixed own estates' and external fruits which brought more optimum margins. We retain our earnings forecast and TP at this point as we expect the strong performance to continue in 4Q17 and the market has not reacted to its positive performance trend. Where we differ: Higher mill utilisation rate is positive for margins. Higher milling capacity outlook is positive for BAL s profitability. We forecast BAL to increase its third-party FFB purchase to achieve milling capacity utilisation rate of 68%. Moreover, we believe aggressive expansion in FY05-13 has kept BAL s tree-age profile younger relative to peers, with doubledigit fruit output outlook of 11% CAGR in FFB (Fresh Fruit Bunch) output (including smallholder estates) between FY16F and FY19F. Forecasts and Valuation FY Dec (Rpbn) 2016A 2017F 2018F 2019F Revenue 6,630 7,200 8,128 8,546 EBITDA 1,933 2,134 2,469 2,574 Pre-tax Profit 1,516 1,552 1,831 1,924 Net Profit 1,005 1,016 1,189 1,249 Net Pft (ex. BA gains) 985 1,016 1,189 1,249 Net Pft (Pre Ex.) 1,005 1,016 1,189 1,249 Net Pft Gth (Pre-ex) (%) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth Pre Ex (%) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (S cts): Other Broker Recs: B: 6 S: 1 H: 0 Source of all data on this page: Company, DBSVI, DBS Bank, Bloomberg Finance L.P. Potential catalyst: Re-rating on performance delivery. We believe there is currently excessive liquidity discount on the counter. Moreover, higher CPO yield on upcoming maturing trees will improve company ROIC and profitability, resulting in consistent earnings delivery. Valuation: With no changes made to our earnings forecast, we maintain our BUY rating with discounted cash flow (DCF)-based fair value of S$0.94/share (WACC: 10.4%, Rf: 8.4%, Rm: 13.3%, β: 0.8, TG: 3%) offering c.36% potential upside from the current level. Our TP implies FY18F PE of 13.7x. Key Risks to Our View: CPO price. There would be downside risk to our CPO price forecasts if the 2018 output grows beyond our expectation. Stronger-than-expected yield across Indonesia and Malaysia may pressurise CPO price trend next year. At A Glance Issued Capital (m shrs) 1,743 Mkt. Cap (S$bn/US$m) 1.36 / 1,010 Major Shareholders (%) Fortune Holdings Ltd 51.5 IOI Corp Bhd Free Float (%) m Avg. Daily Val (US$m) 0.43 ICB Industry : Consumer Goods / Food Producers ed: TH / sa: AS, PY, CS

56 Bumitama Agri WHAT S NEW Positive y-o-y improvement 3Q17 earnings : Y-o-y earnings recovery trend sustained in 3Q17 BAL reported NPAT of Rp266.3bn (+29% y-o-y, -7% q-o-q) slightly above our and consensus estimate. The strong y-o-y earnings recovery trend continued in 3Q17 due to the rebounding nucleus estates' fruit production volume which is also reflected on its lucrative top-line growth. A well-mixed processed fruit composition, coupled with relatively stable operational costs, helped BAL to maintain a strong profitability in 3Q17 despite the q-o-q lower average selling price (ASP) trend. Revenue reached Rp2.0tr (+37% y-o-y, +7% q-o-q) on track to meet our/consensus forecasts. The revenue trend was supported by the strong CPO sales volume trend in the quarter at 217,367 MT (+39% y-o-y, +4% q-o-q), with realised ASP of Rp7,778 per kg (-1% y-o-y, -3% q-o-q). The sales volume trend tracked BAL s CPO output trend in 3Q17. CPO production volume reached 208,300 MT (+24% y- o-y, -4% q-o-q). The strong y-o-y CPO output achievement was contributed by the higher external fruits of 925,000 MT (+23% y-o-y, -4% q-o-q) with a well-mixed between BAL s own fruits with smallholders' and external fruits, which is also positive for its profitability performance. Revenue and profitability trend 2,500 2,000 1,500 1, Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Revenue (Rpbn) LHS EBIT margin RHS NPAT margin RHS Source: Company, DBSVI, DBS Bank CPO output trend CPO production ('000 MT) LHS FFB yield (MT/ha) RHS % 40% 35% 30% 25% 20% 15% 10% 5% 0% Rating and valuation : Earnings forecast unchanged reiterate our BUY rating with TP of S$0.94. Given the 3Q17 performance are within expectations, we retain our FY17/18 forecasts. We expected NPAT to grow by 17% y-o-y to Rp1.19tr in FY18 before increasing by a further 5% y-o-y to Rp1.25tr in FY19. We also maintain our BUY rating with unchanged TP of S$0.94, which implies FY18F PE of 13.7x. We like Bumitama on its lucrative earnings growth outlook on yield improvement on maturing existing trees and upcoming newly matured trees. We also witnessed a good estates management on the last site visit to its Central Kalimantan estates which strengthen our positive view on this counter on its good estate management. 0 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Source: Company, DBSVI, DBS Bank CPO average selling price trend 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, ,7868,715 8,104 8,140 8,0577,778 7,8327,8687,520 7,7757,8237,7708,450 6,493 6,7747,175 6,746 5,931 6,280 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Source: Company, DBSVI, DBS Bank CPO ASP 0 Page 56

57 Bumitama Agri Quarterly / Interim Income Statement (Rpbn) FY Dec 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq Revenue 1,495 1,920 2, Cost of Goods Sold (1,070) (1,358) (1,441) Gross Profit Other Oper. (Exp)/Inc (85.0) (81.7) (123) Operating Profit Other Non Opg (Exp)/Inc (25.9) (4.9) (60.2) (132.6) 1,123.0 Associates & JV Inc ,652.2 Net Interest (Exp)/Inc (4.5) (9.3) (6.5) (43.9) 30.8 Exceptional Gain/(Loss) Pre-tax Profit (9.1) Tax (75.6) (129) (114) 51.1 (11.6) Minority Interest (31.3) (52.1) (43.5) (39.2) (16.4) Net Profit (6.6) Net profit bef Except (6.6) EBITDA (9.5) Margins (%) Gross Margins Opg Profit Margins Net Profit Margins Source of all data: Company, DBSVI, DBS Bank Page 57

58 Bumitama Agri CRITICAL DATA POINTS TO WATCH Critical Factors Earnings driver CPO price is key driver of earnings and share price. As a commodity producer, BAL is a price-taker. Movement in international CPO prices, would directly impact the group s profitability. We currently expect CPO prices (FOB Pasir Gudang) to average US$645/MT (+0.1% y-o-y) in CY17 and US$616/MT in CY18 (-4.5% y-o-y). CPO price movements are also key driver to plantation companies' share price (see appendix). CPO price (RM/MT) Own mature oil palm hectarage Tree profile: Primage age. As at end-december 2016, BAL s trees were estimated to have an average age of 15 years. A sizeable estate of 11,000ha will mature in FY17F representing 10% of its own mature hectare at the end of FY17 which is enough to keep its average age from rising towards 16 years by end- FY19F. CPO volume growth: CPO output recovery in We believe aggressive expansion in FY05-13 has kept BAL s tree-age profile younger relative to peers, with double digit fruit output outlook. We forecast 11% CAGR in FFB (Fresh Fruit Bunch) output (including smallholder estates) between FY16F and FY19F, albeit from a low base, principally on account of the dissipating effect of the 2016 El Nino. To maximie its CPO processing mills capacity, BAL will continue to purchase fruits from third-party farmers. We forecast CPO sales volume to grow by 9% CAGR in FY Sustaining high CPO yield means strong profitability outlook. We are expecting CPO yield to expand from 3.4MT/ha in to 3.8MT/ha in 2019 on maturing estates. Relative to other oil crops, palm oil has the highest productivity per hectare at 5 MT/ha, while soybean oil s productivity is typically 0.5 MT/ha. Besides, CPO yield also reflects planters management strength, which ultimately affects return on invested capital (ROIC) and profitability. Revenue exposure to domestic market.fr sells its CPO output to the third parties locally at spot pricing mechanism. While the group is not subject to biodiesel export levies (US$50/MT on CPO) on all of its CPO sales volume, local ASP would nevertheless roughly reflect the same discount, given the increasing domestic supply as a result of the export levies. We have already imputed this into our forecast. CPO sales volume (MT) Palm kernel sales vol. (MT) Avg. USD/IDR rate Source: Company, DBSVI, DBS Bank Page 58

59 Bumitama Agri Appendix 1: A look at Company's listed history what drives its share price? Bumitama s share price performance vs CPO yield performance relative to sector 2Q12 = 100% 130% 120% 110% 100% Yield recovery in 1Q17 was not followed by margin expansion, share price stagnated 15% 0% -15% Remarks Bumitama's share price had been tracking the CPO yield performance since 2Q12. However, the share price diverged in 2Q16 as yield expansion was not followed by margin expansion. 90% 80% 70% Share price had been tracking CPO yield performance since 2Q12-30% -45% 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Share price index (LHS) CPO yield (RHS) Operating profit margin as a critical factor Remarks Share price index Profitability did not expand Market has not OPM% Bumitama s operating despite the higher CPO yield reacted to BAL s profit margin (OPM) is 130% due to higher third-party fruit positive purchase profitability and 45 generally able to explain its earnings trend in share price direction in 120% 9M17 40 general, with exceptions 35 noted in 2H13 and 2H % 100% 90% % 15 70% 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 CPO prices (in IDR) as a critical factor Remarks S$ 1.4 IDR Palm oil price is the key catalyst for plantation 1.2 stocks; the share price movement trend generally tracks the palm oil spot 0.8 price. However, the outperformance and Concern on profitability 4000 underperformance of 0.4 caused share price performance diverged from plantation stocks to CPO 0.2 CPO price since price are dictated by the productivity factor, where the stronger- or weakerthan-expected yields have Share price (LHS) CPO price (RHS) led its share price sensitivity to palm oil price. Source: Bloomberg Finance L.P., DBSVI, DBS Bank Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr Page 59

60 Bumitama Agri Balance Sheet: Balance sheet can withstand downcycle. BAL s net gearing ratio is forecast to settle at 30% by the end of FY17 and 20% at end-fy18. In our estimation, BAL s borrowing costs should continue to remain lower than peers'. BAL s interest coverage is forecast to average 9.1x in FY17 and 13.8x in FY18. Share Price Drivers: No urgency to expand downstream. In our estimation, BAL s mature estates are due to expand by 12,400 ha in FY17F, followed by 3,600 ha in FY18F (reflecting the lack of new expansion in FY14 as the group had worked towards ensuring sustainable development). BAL s milling capacity should nevertheless expand through FY21F, and we should see expansion of its workforce to process the exponential growth in harvested FFB. Until its CPO output reaches critical mass of 1m MT or more, we do not seee BAL expandingdownstream. BAL s relatively higher margins (even with export tax policies) vis-àvis integrated players should maximise its shareholders return on equity, in our view. Steady expansion ahead. Having committed itself to a sustainable development programme, the group has slowed its expansion pace since FY14, and intends to undertake a more sustainable 3,000-ha p.a. expansion (including smallholder estates) from FY17F onwards. Leverage & Asset Turnover (x) Capital Expenditure ROE (%) Key Risks: Where we may go wrong. Our earnings expectations and valuation are based on several key assumptions. Any setback in FFB yields (due to severe weather) or expansion (i.e. lower than 3,000 ha p.a.) would adversely impact our long-term forecast and valuation. Forward PE Band (x) BAL s share price is also linearly driven by CPO price expectations and partly by rupiah movements. A drop in CPO prices may drag the share price lower than our fair value, and vice versa. Company Background Fast-growing palm oil producer Bumitama Agri (BAL) was established in 1996 by Harita Group through the acquisition of 17,500 ha of land bank in Central Kalimantan. After aggressive new plantings and a string of subsequent acquisitions, BAL controlled an aggregate of c.207,778 ha of land as at end (including land under the smallholder schemes), of which 167,954 ha were planted as at end-june BAL was listed on the Singapore Exchange in April PB Band (x) Source: Company, DBSVI, DBS Bank Page 60

61 Bumitama Agri Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F CPO price (RM/MT) 2,168 2,652 2,760 2,620 2,600 Own mature oil palm 89, , , , ,895 CPO sales volume (MT) 704, , , , ,292 Palm kernel sales vol. (MT) 137, , , , ,474 Avg. USD/IDR rate 13,717 13,237 13,356 13,456 13,529 Segmental Breakdown FY Dec 2015A 2016A 2017F 2018F 2019F Revenues (Rpbn) CPO 4,889 5,417 5,930 6,711 7,059 PK ,116 1,189 Biodiesel Glycerin Total 5,542 6,630 7,200 8,128 8,546 Income Statement (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 5,542 6,630 7,200 8,128 8,546 Cost of Goods Sold (3,888) (4,654) (5,153) (5,772) (6,077) Gross Profit 1,655 1,976 2,047 2,355 2,469 Other Opng (Exp)/Inc (399) (394) (423) (466) (496) Operating Profit 1,256 1,581 1,623 1,889 1,974 Other Non Opg (Exp)/Inc (177) (62.8) (27.9) (36.8) (45.3) Associates & JV Inc (67.4) (21.8) (19.6) (17.4) (15.2) Net Interest (Exp)/Inc (9.9) 18.9 (24.1) (3.6) 10.8 Exceptional Gain/(Loss) Pre-tax Profit 1,002 1,516 1,552 1,831 1,924 Tax (196) (328) (351) (425) (448) Minority Interest (91.8) (183) (185) (217) (227) Preference Dividend Net Profit 714 1,005 1,016 1,189 1,249 Net Profit before Except ,005 1,016 1,189 1,249 Net Pft (ex. BA gains) ,016 1,189 1,249 EBITDA 1,369 1,933 2,134 2,469 2,574 EBITDA (ex. BA gains) 1,460 1,906 2,134 2,469 2,574 Growth Revenue Gth (%) (3.7) EBITDA Gth (%) (31.1) Opg Profit Gth (%) (36.7) Net Profit Gth (Pre-ex) (%) (38.1) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) NM NM Source: Company, DBSVI, DBS Bank Page 61

62 Bumitama Agri Quarterly / Interim Income Statement (Rpbn) FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 Revenue 1,495 2,270 2,094 1,920 2,051 Cost of Goods Sold (1,070) (1,376) (1,558) (1,358) (1,441) Gross Profit Other Oper. (Exp)/Inc (85.0) (120) (129) (81.7) (123) Operating Profit Other Non Opg (Exp)/Inc (25.9) (86.9) 2.34 (4.9) (60.2) Associates & JV Inc 3.82 (2.1) Net Interest (Exp)/Inc (4.5) 23.2 (1.8) (9.3) (6.5) Exceptional Gain/(Loss) Pre-tax Profit Tax (75.6) (144) (90.5) (129) (114) Minority Interest (31.3) (102) (43.7) (52.1) (43.5) Net Profit Net profit bef Except EBITDA Growth Revenue Gth (%) (7.7) (8.3) 6.8 EBITDA Gth (%) (39.4) 14.7 (9.5) Opg Profit Gth (%) (47.3) Net Profit Gth (Pre-ex) (%) (39.7) 2.4 (6.6) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 3,244 3,307 3,398 3,540 3,726 Invts in Associates & JVs Other LT Assets 8,048 9,163 8,829 8,551 8,304 Cash & ST Invts ,435 2,385 Inventory Debtors Other Current Assets 1, Total Assets 14,372 14,767 14,934 15,705 16,682 ST Debt 1,984 1, , Creditor Other Current Liab LT Debt 3,547 3,860 3, ,802 Other LT Liabilities 1,342 1,469 1,489 1,472 1,455 Shareholder s Equity 5,661 6,718 7,617 8,601 9,611 Minority Interests ,205 1,433 Total Cap. & Liab. 14,372 14,767 14,934 15,705 16,682 Non-Cash Wkg. Capital 1, Net Cash/(Debt) (4,932) (4,351) (2,939) (1,681) (429) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X) Source: Company, DBSVI, DBS Bank Page 62

63 Bumitama Agri Cash Flow Statement (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 1,002 1,516 1,552 1,831 1,924 Dep. & Amort Tax Paid (356) (231) (351) (425) (448) Assoc. & JV Inc/(loss) Chg in Wkg.Cap. (1,782) (253) (6.0) (21.8) (9.2) Other Operating CF 2,047 (116) 120 (19.2) (19.2) Net Operating CF 1,334 1,372 1,873 1,999 2,109 Capital Exp.(net) (1,639) (901) (704) (832) (883) Other Invts.(net) (2.8) (96.2) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF (295) Net Investing CF (1,937) (705) (345) (539) (619) Div Paid (299) (112) (117) (205) (240) Chg in Gross Debt 1,399 (499) (1,216) (536) (303) Capital Issues (17.9) Other Financing CF (207) (137) Net Financing CF 875 (748) (1,331) (739) (540) Currency Adjustments 14.9 (0.8) Chg in Cash 288 (81.7) Opg CFPS (S cts) Free CFPS (S cts) (1.7) Source: Company, DBSVI, DBS Bank Target Price & Ratings History Source: DBSVI, DBS Bank Analyst: William SIMADIPUTRA Singapore Research Team Page 63

64 Malaysia Company Guide Felda Global Ventures Version 14 Bloomberg: FGV MK Reuters: FGVH.KL Refer to important disclosures at the end of this report DBS Group Research. Equity 27 Nov 2017 HOLD Last Traded Price ( 24 Nov 2017): RM1.80 (KLCI : 1,717.23) Price Target 12-mth: RM1.85 (3% upside) Analyst Regional Research Team What s New equityresearch@dbs.com 3Q/9M17 core earnings beat expectations, turning around y-o-y and q-o-q Sugar segment turned around on lower raw material costs; Plantations lifted by volume rebound Growth outlook for FFB improved as yields start to normalise, expect more earnings stability Raise FY17/18/19F earnings by 77%/20%/9% for better Sugar margins and improved FFB yields, TP raised to RM1.85 maintain HOLD Price Relative Forecasts and Valuation FY Dec (RM m) 2016A 2017F 2018F 2019F Revenue 17,241 17,423 17,917 18,503 EBITDA 985 1,154 1,388 1,534 Pre-tax Profit Net Profit Net Pft (Pre Ex.) (156) Net Pft Gth (Pre-ex) (%) (38.0) nm EPS (sen) EPS Pre Ex. (sen) (4.3) EPS Gth Pre Ex (%) 38 (226) Diluted EPS (sen) Net DPS (sen) BV Per Share (sen) PE (X) PE Pre Ex. (X) nm P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (sen): Other Broker Recs: B: 1 S: 2 H: 9 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P Back to shipshape? Earnings start to stabilise. FGV produced a strong 3Q performance to maintain its 9M17 core earnings turnaround, in part due to its Sugar arm swinging back into the black as raw sugar prices ease. Plantations operations also benefited from continuingly firm CPO prices, while FFB yields began to normalise as labour issues were worked through. We think the rebound in bottomline and improved corporate and management stability will also improve investor sentiment on the stock. Following our earnings revisions, our TP rises to RM1.85 maintain HOLD. Where we differ. Plantations segment has room to improve. Consensus views are quite diverged on FGV. Our forward year (FY18 onwards) forecasts are higher than the market average as we pencil in the normalisation of margins, vs some forecasts of continued loss-making or minimal profits. Potential catalyst. Bottomline improvement. The key barrier to FGV s re-rating is the persistence of weak profitability and/or losses. Improvements on this front in the near term via stronger Sugar segment earnings or effective cost measures will help buoy its share price. Valuation: Our DCF-based TP is raised to RM1.85, which takes into account our revised CY17/18/19F CPO price forecasts of RM2,760/2,620/2,600 per MT. Maintain HOLD. Key Risks to Our View: A consistent delivery of profitability above our forecasted levels may enhance the stock s fundamentals, which will bode well for its share price performance. At A Glance Issued Capital (m shrs) 3,648 Mkt. Cap (RMm/US$m) 6,567 / 1,596 Major Shareholders (%) Lembaga Kemajuan Tanah Persekutuan 20.0 Federal Land Development Authority 12.4 Lembaga Tabung Haji 7.9 Free Float (%) m Avg. Daily Val (US$m) 2.6 ICB Industry : Consumer Goods / Food Producers ed: CK / sa:bc, PY, CS

65 Felda Global Ventures WHAT S NEW Sugar and volume uplift helped sequential rebound Comfortably in the black. FGV announced a 3Q17 headline profit of RM38.8m (turned around y-o-y, +50% q-o-q), which after stripping out net LLA charges and impairments reveals core earnings of RM78.2m, turning around both y-o-y and q- o-q. Thus, 9M17 core earnings came to RM124.5m, which was ahead of expectations. An interim dividend of 5 sen was also announced with an ex-date of 7 Dec (vs none last year). Plantations were lifted by better yields and prices. 3Q17 Plantations EBIT (pre-lla charges) was also firmly stronger at RM206.4m (+35% y-o-y, +15% q-o-q), driven by higher CPO production of 844.7k MT (+8% y-o-y, +18% q-o-q). This in turn was supported by FFB volume recovery to 1.23m MT (+10% y-o-y, +18% q-o-q) as FFB yields leapt to 4.44 MT/ha (+7% y-o-y, +17% q-o-q). The other key contributor was CPO ASPs of RM2,665/MT (+7.5% y-o-y, -4.5% q-o-q). 9M17 Plantations EBIT thus came to RM490m, or 78% higher y-o-y. Much needed Sugar segment turnaround. The Sugar segment returned to positive EBIT in 3Q17 to the tune of RM23.3m, though still 32% lower y-o-y which represents a swifter breakeven than we had expected. This recovery was spurred by the lower raw sugar prices (-11% q-o-q), which helped restore margins. This reduced 9M17 Sugar LBIT to RM17.9m (vs EBIT of RM137.6m in 9M16). Group projecting higher optimism, especially on output. In its earnings call, management retained its FFB output target of 4.3m MT in FY17 (+10% y-o-y), supported by improving yields from both rising young palm contributions and progress towards getting its optimal number of workers. This implies a potential 31% rise for 4Q17 output given the small base in 4Q16. Further, the group expects FFB growth in FY18 to rebound to 13%, given a full year of yield normalisation and assuming no weather anomalies. Core earnings on a good path. The group is expecting CPO prices to be stable around the RM2,600-2,800/MT level in the coming months, which together with its volume trajectory, imply strong Plantations earnings ahead. On its Sugar arm, raw sugar prices are also expected to stay around the current levels, thus giving rise to more profitable margins. All in, the outlook for core earnings is strong though 4Q17 may be marred by some one-off items as financial housekeeping activities are carried out, including some impairments and the likely sale of its stake in AXA Affin. With regard to cost measures, the group is also carrying a VSS exercise plus plans to apply more stringent controls to its capex going forward. More comfort in improved stability. We raise FY17/18/19F earnings by 77%/20%/9%, mainly on increasing FFB output assumptions by +7%/+9%/+9% for normalising yields (implying FFB growth of +8%/6%/2%); plus lifted margins for FY17F Sugar operations plus rising ASP for Plantations. The large swings are due to FGV s presently thin margins the implied net margins are still <2%. We think that the resumption of earnings consistency plus corporate and management stability will help ensure operational efficiency. After the earnings adjustments, our DCF-based TP is also raised to RM1.85. That said, even after revisions, we find that prospects are well baked in at the current share price maintain HOLD. Page 65

66 Felda Global Ventures Quarterly / Interim Income Statement (RMm) FY Dec 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq Revenue 4,192 4,224 4,149 (1.0) (1.8) Cost of Goods Sold (3,733) (3,825) (3,552) (4.9) (7.1) Gross Profit Other Oper. (Exp)/Inc (438) (240) (497) Operating Profit (37.1) Other Non Opg (Exp)/Inc nm nm Associates & JV Inc (58.5) nm (43.9) Net Interest (Exp)/Inc (23.2) (33.8) (30.2) (30.1) 10.5 Exceptional Gain/(Loss) 63.0 (47.2) 39.4 (37.5) (183.5) Pre-tax Profit , Tax (23.2) (58.4) (60.3) Minority Interest (52.6) (2.9) (15.3) Net Profit (73.6) nm 49.6 Net profit bef Except. (10.6) (21.2) 78.2 nm (468.0) EBITDA (37.6) nm (37.5) Margins (%) Gross Margins Opg Profit Margins Net Profit Margins (1.8) Source of all data: Company, DBS Bank Page 66

67 Felda Global Ventures CRITICAL DATA POINTS TO WATCH Critical Factors Vast, but relatively old hectarage. FGV has c.338k ha of oil palm planted land in Peninsular Malaysia, the bulk of which (c.300k ha) is held under the Land Lease Agreement (LLA) it has with the Federal Land Development Authority (FELDA). It also has c.13k ha of plantations in Sabah from its acquisition of Pontian United Plantations in 2013, 13.5k ha in Sarawak from Asian Plantations Ltd in 2014, and 8.5k ha from Golden Land in Its overall age profile is old/mature as 40% of trees are 20 years or older. To remedy the age issue, FGV had earlier committed to a replanting scheme of 15k ha per year. We otherwise do not expect much new planting to commence as replanting is a higher priority. Expect a dip in production. We expect FGV to process c.13.7m MT of FFB in FY17 from its own plantations, FELDA settlers and third parties. FY17F CPO production expectation of c.2.9m MT (+8% y-o-y) relies on the sustainability of FFB yields from these sources. We view this as an indicator to focus on, as production in 2016 had been severely impacted by the lack of rainfall in CPO price (RM/MT) Mature palm oil hectarage CPO produced (k MT) CPO prices. Over 50% FGV s top-line comes from the sale of CPO and RBD (refined, bleached & deodorised) products. Growth in the ASP of CPO and the RBD products will be reflected in its revenue. Sugar arm contributions. FGV has a 51% stake in listed sugar manufacturer MSM Malaysia. It is the most profitable division as pretax contribution has been larger than group PBT, despite making up c.15% of revenues. However, PBT had come down 59% in 2016 due to higher raw sugar costs, which resulted in the group falling into the red. However, a hike in the retail sugar price came in March 2017 came as a relief to help ease margin pressures. Furthermore, following a fall in raw sugar costs in 3Q17, the unit managed to return to the black. Rubber plantation exposure. FGV derives c.5% of revenue from the sale of rubber products, comprising latex concentrate, Standard Malaysian Rubber (SMR), Standard Indonesian Rubber (SIR) and Cambodian Standard Rubber (CSR). Over 110k MT of rubber products are processed per year at its seven assets across the region, though management estimates its total capacity at around 258k MT. FGV also owns 12.4k ha of planted rubber land in Malaysia, with 3.5k ha unplanted. Sugar revenue (RM m) Average USD/MYR Source: Company, DBS Bank Page 67

68 Felda Global Ventures Appendix 1: FGV price correlation with critical factors Graph 1: Share price vs key benchmarks Indexed: Jun12 = FGV MK FBMKLCI KLPLN Index Spot CPO price (RM/mt) Expectations of weaker earnings Entrance of new CEO 25 0 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Source: Company, Bloomberg L.P., DBS Bank First instance of headline losses in 3Q14; acquisition of Asian Plantations Ltd Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Proposed acquisition of Eagle High Plantations stake Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Weaker than expected 2Q16 announcement Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 FGV share price vs operating margins and core profit Remarks Indexed: Jun12 = FGV MK Operating margin Core profit FGV s share price tracks the performance of its operating margins and core earnings. Negative share price movements were seen as FGV sunk into core losses since 4Q Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Source: Company, Bloomberg L.P., DBS Bank FGV share price vs CPO prices Remarks Indexed: Jun12 = FGV MK Spot CPO price (RM/mt) FGV CPO production Over a prolonged timeframe, FGV s share price appears to be not heavily influenced by CPO prices. The relationship only held from its listing to end-2014 (correlation coefficient of >0.7), following which FGV s valuation became more impacted by its profitability (or lack thereof). 0 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Source: Company, MPOB, Bloomberg L.P., DBS Bank Page 68

69 Felda Global Ventures Balance Sheet: Borrowings manageable for now but cash flows are pressured. FGV has is maintaining a net debt-to-equity of about 0.6x due to a cash pile of c.rm2.5bn at end-dec However, due to a thin free cash flow base, we forecast negative net cash flow which will cut into its liquidity. Thus, any deterioration in performance may require more debt to be taken on. Share Price Drivers: Sustainably improving profitability. FGV s fundamental performance is limited by its low margins relative to its peers despite its sizeable turnover. Management intends to look at various initiatives to manage its cost base, including staff-related measures. If these efforts are successful, FGV may re-rate. Key Risks: Volatility in commodity prices and exchange rates. Continued depressed CPO prices would hurt earnings, especially for primarily upstream planters. Additionally, low crude oil prices may affect CPO demand for biofuel. Finally, CPO prices in ringgit terms are also directly affected by the currency s strength relative to the US dollar. Leverage & Asset Turnover (x) Capital Expenditure ROE (%) Regulatory changes. Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact the demand for CPO/refined oils. Extreme changes in the weather. Sudden and significant changes in rainfall and humidity can affect FFB yields in the later quarters. Weather. Changes in rainfall patterns (caused by either El Nino or La Nina) will affect FFB yields with some time lag. PB Band (x) Company Background FGV is an integrated agri-business player with significant palm oil hectarage in Peninsular Malaysia, involved in upstream and downstream palm oil operations, including harvesting, milling, processing, refining and distribution. It also has rubber plantations, and a 49% stake in major sugar manufacturer MSM Malaysia. Source: Company, DBS Bank Page 69

70 Felda Global Ventures Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F CPO price (RM/MT) 2,168 2,652 2,760 2,620 2,600 Mature palm oil hectarage 272, , , , ,993 CPO produced (k MT) 3,101 2,664 2,826 3,009 3,134 Sugar revenue (RM m) 2,307 2,657 2,712 2,758 2,793 Average USD/MYR Segmental Breakdown FY Dec 2015A 2016A 2017F 2018F 2019F Revenues (RMm) Plantations 5,983 7,771 7,087 7,223 7,521 Sugar 2,307 2,664 2,712 2,758 2,793 Downstream 5,499 6,625 6,094 6,361 6,566 Others 1, ,530 1,575 1,623 Total 15,559 17,241 17,423 17,917 18,503 Income Statement (RMm) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 15,559 17,241 17,423 17,917 18,503 Cost of Goods Sold (13,613) (15,671) (15,680) (15,965) (16,430) Gross Profit 1,946 1,570 1,743 1,952 2,074 Other Opng (Exp)/Inc (1,645) (1,382) (1,371) (1,398) (1,427) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (128) (125) (132) (139) (143) Exceptional Gain/(Loss) Pre-tax Profit Tax (160) (194) (83.0) (127) (151) Minority Interest (185) (35.0) (15.7) (66.6) (64.4) Preference Dividend Net Profit Net Profit before Except. (113) (156) EBITDA 1, ,154 1,388 1,534 Growth Revenue Gth (%) EBITDA Gth (%) (0.3) (18.6) Opg Profit Gth (%) (53.7) (37.5) Net Profit Gth (Pre-ex) (%) nm (38.0) nm Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Source: Company, DBS Bank Page 70

71 Felda Global Ventures Quarterly / Interim Income Statement (RMm) FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 Revenue 4,192 5,196 4,323 4,224 4,149 Cost of Goods Sold (3,733) (4,704) (3,947) (3,825) (3,552) Gross Profit Other Oper. (Exp)/Inc (438) (80.2) (450) (240) (497) Operating Profit (73.3) Other Non Opg (Exp)/Inc Associates & JV Inc (58.5) Net Interest (Exp)/Inc (23.2) (16.1) (33.3) (33.8) (30.2) Exceptional Gain/(Loss) 63.0 (206) 65.1 (47.2) 39.4 Pre-tax Profit (31.3) Tax (23.2) (114) 0.23 (58.4) (60.3) Minority Interest (52.6) (2.9) (15.3) Net Profit (73.6) Net profit bef Except. (10.6) (95.4) 67.6 (21.2) 78.2 EBITDA (37.6) 442 (63.1) Growth Revenue Gth (%) (16.8) (2.3) (1.8) EBITDA Gth (%) nm nm nm nm (37.5) Opg Profit Gth (%) (92.1) 1,862.7 (117.8) (316.4) (37.1) Net Profit Gth (Pre-ex) (%) (143.0) (170.8) (131.4) (468.0) Margins Gross Margins (%) Opg Profit Margins (%) (1.7) Net Profit Margins (%) (1.8) Balance Sheet (RMm) FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 9,238 10,074 10,271 10,441 10,582 Invts in Associates & JVs Other LT Assets 3,442 2,925 2,925 2,925 2,925 Cash & ST Invts 2,503 1,854 1,505 1, Inventory 2,078 2,189 2,111 2,149 2,212 Debtors 1,894 1,755 1,843 1,895 1,957 Other Current Assets 685 1,341 1,131 1,150 1,173 Total Assets 20,741 21,027 20,699 20,636 20,658 ST Debt 3,143 3,692 3,692 3,692 3,692 Creditor 1,282 1,460 1,357 1,382 1,422 Other Current Liab LT Debt 2,092 1,675 1,675 1,675 1,675 Other LT Liabilities 5,115 5,062 4,811 4,554 4,294 Shareholder s Equity 5,827 5,794 5,808 5,904 6,077 Minority Interests 2,512 2,403 2,419 2,485 2,550 Total Cap. & Liab. 20,741 21,027 20,699 20,636 20,658 Non-Cash Wkg. Capital 2,606 2,885 2,790 2,869 2,972 Net Cash/(Debt) (2,732) (3,513) (3,862) (4,232) (4,523) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X) Source: Company, DBS Bank Page 71

72 Felda Global Ventures Cash Flow Statement (RMm) FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit Dep. & Amort Tax Paid (136) (176) (59.1) (103) (126) Assoc. & JV Inc/(loss) (59.1) (10.3) (55.4) (57.1) (58.8) Chg in Wkg.Cap. (1,313) (84.2) (106) Other Operating CF (23.9) (23.9) (25.1) Net Operating CF (253) 1, ,078 Capital Exp.(net) (1,161) (951) (974) (998) (1,021) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF (430) Net Investing CF (1,499) (731) (897) (918) (939) Div Paid (219) (73.0) (182) (182) (173) Chg in Gross Debt 1, Capital Issues (23.6) (5.7) Other Financing CF (625) (820) (254) (252) (256) Net Financing CF 183 (558) (437) (434) (430) Currency Adjustments Chg in Cash (1,553) (154) (349) (369) (291) Opg CFPS (sen) Free CFPS (sen) (38.8) (0.4) 1.55 Source: Company, DBS Bank Target Price & Ratings History Source: DBS Bank Analyst: Regional Research Team Page 72

73 Malaysia Company Guide Genting Plantations Version 11 Bloomberg: GENP MK Reuters: GENP.KL Refer to important disclosures at the end of this report DBS Group Research. Equity 27 Nov 2017 HOLD Last Traded Price ( 24 Nov 2017): RM10.50 (KLCI : 1,717.23) Price Target 12-mth: RM10.95 (4% upside) Analyst Regional Research Team What s New equityresearch@dbs.com 3Q17 earnings decline y-o-y, trailing expectations Inventory build-up at refinery division, group sales volume came in below potential FFB volume still growing from Indonesian contribution, expect more double-digit growth in FY18 from new acquisitions Cut FY17/18/19F earnings 15%/7%/5% for milder refining performance, TP to RM10.95 maintain HOLD Price Relative Forecasts and Valuation FY Dec (RM m) 2016A 2017F 2018F 2019F Revenue 1,480 1,728 2,240 2,434 EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) Net Pft Gth (Pre-ex) (%) EPS (sen) EPS Pre Ex. (sen) EPS Gth Pre Ex (%) (3) Diluted EPS (sen) Net DPS (sen) BV Per Share (sen) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (sen): Other Broker Recs: B: 8 S: 1 H: 13 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P Gestation period Refinery operation getting on its feet. GENP s 9M17 core earnings were 54% higher y-o-y on stronger CPO prices and a substantial volume rebound yet remained below potential, as inter-segment sales to its newly started refinery operations were not translated into external sales, leading to an inventory buildup. We expect improvements in the coming year as refinery utilisation is bumped up to above 50%, while group volumes get a boost from newly acquired estates however, we believe the market may price in execution risks from its refining division. Maintain HOLD. Where we differ. Imputing full impact of downstream venture. We have imputed GENP s new refinery operations into our forecasts, resulting in higher topline assumptions than the street however, due to the thinner margins, there is less bottomline accretion. Potential catalyst. Faster-than-expected ramp-up of refinery. GENP aims to reach 50% utilisation by end-2017 at its 600k MT p.a. refinery in Lahad Datu, Sabah, a collaboration with the Musim Mas Group. Faster or further ramp-up of utilisation will allow for bottom-line accretion as breakeven is reached and more external CPO is processed. Valuation: After earnings adjustments, our SOP-based TP (FY18F base year; Plantations segment valued using DCF) drops to RM Key Risks to Our View: A strong recovery in CPO prices (either data, weather or regulatory-driven) would lift the share price above our fair value, and vice versa. At A Glance Issued Capital (m shrs) 803 Mkt. Cap (RMm/US$m) 8,434 / 2,050 Major Shareholders (%) Genting Berhad 51.2 Employees Provident Fund 13.1 Kumpulan Wang Persaraan 5.1 Free Float (%) m Avg. Daily Val (US$m) 2.1 ICB Industry : Consumer Goods / Food Producers ed: CK / sa:bc, PY, CS

74 Genting Plantations WHAT S NEW Softer-than-expected 3Q, as refinery gestation keeps lid on volume sales Earnings softened. GENP announced a 3Q17 net profit of RM76.5m (-19% y-o-y, +8% q-o-q), which after stripping out forex and other non-recurring items resulted in core earnings of RM79.1m (-13% y-o-y, +2% q-o-q) including restatements for FRS116. Thus, 9M17 core earnings came to RM232.6m, which is up 54% y-o-y on a small 1H base but missed our/street expectations. Group sales volume not at potential as refinery remains in teething stage. In its earnings call, management highlighted volume movement issues, which came in the aftermath of its foray into downstream refining this year. It was revealed that c.25k MT of additional (refined) palm oil sits in inventory visà-vis previous year levels primarily an issue of securing sufficient shipments/month out, rather than marketing. The group estimates c.rm32m in unrecognised earnings from this in 9M17 (as sales have been made internally from Plantations to its refining unit) which would have lifted financial performance to meet our expectations. All in, 3Q17 Downstream Manufacturing EBITDA was positive, turning around y-o-y to the tune of RM2.6m (-7% q-o-q), though it was still mostly buoyed by biodiesel operations. The refinery operations had hit c.45% utilisation in the quarter. Plantations saw soft ASPs, not offset by normalising volume rebound. 3Q17 Plantation EBITDA was 8% lower y-o-y at RM141.6m (-1% q-o-q). The decline was primarily caused by the flat y-o-y CPO ASP of RM2,617/MT (-3% q-o-q) plus lower PK ASP of RM2,220/MT (-16% y-o-y, +11% q-o-q). Pricing softness was not sufficiently offset by internal FFB rising 11% y-o-y to 487.4k MT (+7% q-o-q), which was driven by its Indonesian hectarage as Malaysian output was revealed to be lower. Positive production outlook, ramped-up downstream operations to increase contribution. The group expects around 15% production growth next year with 8-10% of incremental volume coming from its recently completed acquisition of Knowledge One Investment. New planting on its existing land continues to be slow, and acceleration may not occur as soon as next year. On the other hand, its refinery is aiming for up to 60% utilisation with potential external CPO purchases. The group is still mulling the further expansion of biorefinery facilities near its refining unit (which would offtake their refined palm oil) but is awaiting progress from its intended partner in securing offtake for the final product. This would provide better stability to its overall downstream division, though the timeline may stretch beyond a year. Cutting forecasts. We slash our estimates to account for the reduced sales & inventory build-up and larger start-up costs for the refinery, as we anticipate only gradual easing of the situation. We also impute GENP s purchase of Knowledge One Investment, which involves the addition of c.12.9k ha planted area in Indonesia. Our FY17/18/19F FFB growth forecast is thus adjusted to +16%/+16%/+7% from +16%/+6%/+6% before. All in, our forecasts are lowered by 15%/7%/5% for FY17/18/19F, and our DCF-based TP drops to RM We expect any re-rating to hinge on more improvements in its downstream efficiencies, maintain HOLD. Page 74

75 Genting Plantations Quarterly / Interim Income Statement (RMm) FY Dec 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq Revenue (3.8) Cost of Goods Sold (232) (305) (262) 12.9 (14.3) Gross Profit Other Oper. (Exp)/Inc (34.9) (27.8) (50.5) Operating Profit (9.9) 3.8 Other Non Opg (Exp)/Inc (3.1) nm (59.5) Associates & JV Inc Net Interest (Exp)/Inc (12.7) (16.7) (18.5) (45.1) (10.6) Exceptional Gain/(Loss) 3.08 (6.3) (2.6) nm (59.5) Pre-tax Profit (12.2) 4.1 Tax (35.0) (27.8) (28.8) (17.5) 3.8 Minority Interest 5.98 (5.1) (2.8) nm (45.2) Net Profit (18.7) 7.8 Net profit bef Except (13.2) 2.3 EBITDA (9.9) 3.8 Margins (%) Gross Margins Opg Profit Margins Net Profit Margins Source of all data: Company, DBS Bank Page 75

76 Genting Plantations CRITICAL DATA POINTS TO WATCH CPO price Critical Factors CPO price. As a commodity producer, GENP is a price-taker. Movements in international CPO prices would directly impact the group s profitability. We currently expect CPO prices (FOB Pasir Gudang) to average US$645/MT (+0.8% y-o-y) in CY17, translating to RM2,760/MT (+4.1%); before declining to US$616/MT in CY18 (-4.5% y-o-y) or RM2,620/MT (-5.1%). Volume output. GENP had 131.1k ha of planted area in Malaysia and Indonesia at end-fy16, but we expect this to rise to 146.5k ha in FY18F thanks to its recent purchase of additional hectarage in Indonesia. From F, we expect GENP s internal FFB output to chart a CAGR of 13% as rising Indonesian volumes are slightly offset by reduced Malaysian hectarage, given its replanting programme. GENP has 11 palm oil mills which primarily processes its own FFB. The group s Malaysian hectarage is primarily in Sabah, while its Indonesian plantations are in West and Central Kalimantan. Growing downstream presence. GENP has a 72% stake in a palm oil refinery in Lahad Datu, Sabah, collaborating with the Musim Mas group. The plant has capacity of 600k MT p.a. which began operations in We expect utilisation to gradually ramp up to 30%/55%/60% in FY17/18/19F, initially processing its own CPO feedstock prior to sourcing external volumes. Contribution will rise with higher volumes and more favourable palm oil product spreads; though margins will be thinner than its upstream operations. The group also has a biodiesel plant in the same area of Sabah, though volumes and contribution remains immaterial for now. Demand seasonality. As a major vegetable oil with 38% market share globally, palm oil is an important food staple. The other major vegetable oils are soybean oil with 29% market share, followed by rapeseed/canola oil and sunflower oil with 16% and 10% market shares respectively. There is generally demand substitutability between vegetable oils (high price elasticity of demand), although certain vegetable oils are more suitable than others for certain applications. Relative to other oil crops, palm oil has the highest productivity per hectare (i.e. c.5 MT/ha), while soybean oil s productivity is typically 0.5 MT/ha. Demand for palm oil is dominant in Asia where local festivities drive higher demand in certain months of the year, for example, Ramadan month, Chinese New Year, and Divali are typically high-demand periods in Asia. Mature palm oil hectarage CPO production volume Refined palm oil volume Average MYR/USD Source: Company, DBS Bank Page 76

77 Genting Plantations Appendix 1: GENP price correlation with critical factors Graph 1: Share price vs key benchmarks Indexed: Jun07 = Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Source: Company, Bloomberg L.P., DBS Bank, DBS Bank GENP MK FBMKLCI KLPLN Index Spot CPO price (RM/mt) Substantial increases in y-o-y own FFB production Enters refinery business with partnership with Musim Mas group GENP share price vs CPO prices Indexed: Jan00 = GENP MK Jan-00 Aug-00 Mar-01 Oct-01 May-02 Dec-02 Jul-03 Feb-04 Sep-04 Apr-05 Nov-05 Jun-06 Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12 Jun-13 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17 Source: Company, Bloomberg L.P., DBS Bank Spot CPO price (RM/mt) Remarks GENP s share price is principally influenced by the movement of CPO prices, with a long-run correlation coefficient of 0.8. GENP share price vs production and margins Indexed: Mar08 = 100 GENP MK FFB harvested Plantation EBIT margin (RHS) % 70% % % 40% % 20% 50 10% 0 0% Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Remarks GENP s share price is moved by the growth in its internal production, which can also be beneficial to its operating margins and thus profitability. Source: Company, MPOB, Bloomberg L.P., DBS Bank Page 77

78 Genting Plantations Balance Sheet: Manageable leverage levels. As at end-9m17, GENP had a net gearing ratio of c.0.2x, including USD debts amounting to US$302m, which represented debts incurred by its Indonesian subsidiaries to fund its ongoing capex programme there (interest expense and FX losses are partly capitalised). We expect minimal changes on its leverage, barring further large capex for downstream investments. Leverage & Asset Turnover (x) Share Price Drivers: Value enhancement from downstream venture. Following its venture into the palm oil refinery business since early-2017, GENP has to deliver incrementally improved performances, which can be heightened if its additional biorefinery plans are successful. SOP Valuation Valuation Value Value basis RM m RM/share Plantation DCF 9, Property (own) RNAV@50% disc Property (Premium Outlet JVs) DCF Net Cash (933.5) Outstanding warrant proceeds SOP valuation 9, Enlarged share base (m) Number of shares (m) Warrant conversion (m) 80.0 Capital Expenditure ROE (%) Key Risks: Volatility in CPO prices and USD exchange rate. Large changes in CPO prices would materially affect earnings, while volatility in USD affects both CPO prices and USD debt. Forward PE Band (x) Setback in expansion plans. Our forecasts are based on assumed hectarage for new planting and replanting. Any setback on these plans would negatively affect our valuation due to slower volume growth. Weather. Changes in rainfall pattern (caused by either El Nino or La Nina) would affect FFB yields with some time lag. Company Background GENP is in the palm oil plantation business with over 220k ha of plantations in Malaysia and Indonesia, and nine palm oil mills currently. Its other/non-core businesses are biotechnology and property development. PB Band (x) Source: Company, DBS Bank Page 78

79 Genting Plantations Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F CPO price 2,168 2,652 2,760 2,620 2,600 Mature palm oil hectarage 90,212 92,691 95, , ,713 CPO production volume 441, , , , ,624 Refined palm oil volume 96,148 85,085 99, , ,068 Average MYR/USD Segmental Breakdown FY Dec 2015A 2016A 2017F 2018F 2019F Revenues (RMm) Plantation 1,093 1,258 1,040 1,088 1,198 Property Others ,017 1,096 Total 1,375 1,480 1,728 2,240 2,434 EBIT (RMm) Plantation Property Others (107) Total EBIT Margins (%) Plantation Property Others (19.1) Total Income Statement (RMm) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 1,375 1,480 1,728 2,240 2,434 Cost of Goods Sold (924) (849) (1,053) (1,449) (1,599) Gross Profit Other Opng (Exp)/Inc (224) (135) (261) (264) (272) Operating Profit Other Non Opg (Exp)/Inc 5.76 (66.9) Associates & JV Inc Net Interest (Exp)/Inc (1.5) (20.2) (25.8) (31.3) (34.2) Exceptional Gain/(Loss) (5.8) Pre-tax Profit Tax (70.8) (131) (108) (137) (146) Minority Interest 13.2 (2.5) 26.9 (7.3) (8.8) Preference Dividend Net Profit Net Profit before Except EBITDA Growth Revenue Gth (%) (16.3) EBITDA Gth (%) (42.0) 82.5 (13.7) Opg Profit Gth (%) (52.9) (16.4) Net Profit Gth (Pre-ex) (%) (48.2) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Source: Company, DBS Bank Page 79

80 Genting Plantations Quarterly / Interim Income Statement (RMm) FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 Revenue Cost of Goods Sold (232) (200) (256) (305) (262) Gross Profit Other Oper. (Exp)/Inc (34.9) 3.27 (27.8) (27.8) (50.5) Operating Profit Other Non Opg (Exp)/Inc (3.1) (69.1) Associates & JV Inc Net Interest (Exp)/Inc (12.7) (13.5) (15.3) (16.7) (18.5) Exceptional Gain/(Loss) (3.7) (6.3) (2.6) Pre-tax Profit Tax (35.0) (76.6) (29.5) (27.8) (28.8) Minority Interest 5.98 (6.0) (5.0) (5.1) (2.8) Net Profit Net profit bef Except EBITDA Growth Revenue Gth (%) (22.0) 11.5 (3.8) EBITDA Gth (%) (63.3) (2.8) 3.8 Opg Profit Gth (%) (63.3) (2.8) 3.8 Net Profit Gth (Pre-ex) (%) (52.1) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (RMm) FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 1,562 1,728 1,877 2,045 2,183 Invts in Associates & JVs Other LT Assets 3,131 3,527 3,785 4,040 4,100 Cash & ST Invts 1,925 1,760 1,619 1,611 1,751 Inventory Debtors Other Current Assets Total Assets 7,246 7,858 8,164 8,771 9,216 ST Debt Creditor Other Current Liab LT Debt 2,233 2,316 2,416 2,516 2,516 Other LT Liabilities Shareholder s Equity 4,219 4,676 4,840 5,150 5,512 Minority Interests Total Cap. & Liab. 7,246 7,858 8,164 8,771 9,216 Non-Cash Wkg. Capital Net Cash/(Debt) (365) (585) (826) (934) (794) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X) Source: Company, DBS Bank Page 80

81 Genting Plantations Cash Flow Statement (RMm) FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit Dep. & Amort Tax Paid (70.8) (131) (108) (137) (146) Assoc. & JV Inc/(loss) (22.0) (25.0) (27.6) (30.4) (33.7) Chg in Wkg.Cap. (24.3) (196) (0.3) Other Operating CF (72.0) 122 (5.7) (1.4) (0.6) Net Operating CF Capital Exp.(net) (554) (416) (488) (504) (288) Other Invts.(net) (400) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF 170 (90.0) Net Investing CF (784) (506) (488) (504) (288) Div Paid (73.5) (39.6) (177) (77.3) (86.0) Chg in Gross Debt 1, Capital Issues Other Financing CF (373) (179) Net Financing CF 984 (10.6) (70.7) 28.7 (46.0) Currency Adjustments Chg in Cash 348 (165) (141) (7.8) 140 Opg CFPS (sen) Free CFPS (sen) (51.9) (8.1) (8.7) (4.5) 20.7 Source: Company, DBS Bank Target Price & Ratings History Source: DBS Bank Analyst: Regional Research Team Page 81

82 Malaysia Company Guide IOI Corporation Version 8 Bloomberg: IOI MK Reuters: IOIB.KL Refer to important disclosures at the end of this report DBS Group Research. Equity 27 Nov 2017 HOLD Last Traded Price ( 24 Nov 2017): RM4.45 (KLCI : 1,717.23) Price Target 12-mth: RM4.70 (6% upside) Analyst Regional Research Team Price Relative equityresearch@dbs.com Forecasts and Valuation FY Jun (RM m) 2016A 2017A 2018F 2019F Revenue 11,739 14,127 14,493 14,833 EBITDA 1,791 2,098 2,045 2,176 Pre-tax Profit 966 1,087 1,278 1,331 Net Profit Net Pft (Pre Ex.) 832 1, ,013 Net Pft Gth (Pre-ex) (%) (7.2) 31.0 (12.9) 6.6 EPS (sen) EPS Pre Ex. (sen) EPS Gth Pre Ex (%) (6) 32 (13) 7 Diluted EPS (sen) Net DPS (sen) BV Per Share (sen) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (sen): N/A Other Broker Recs: B: 4 S: 10 H: 9 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P On even footing Stabilising outlook. IOI is on track for an FY17F (YE Jun) earnings rebound with a stronger 2H that is led by volume and CPO price recovery, plus a stronger ringgit. Going into FY18F, we expect tepid prices and mild volume growth however, reduced currency fluctuations will help lift headline profits. Updating our forecasts for 1) spot CY17/18/19F CPO prices of RM2,760/2,620/2,600 (from RM3,040/3,030/2,970), and 2) stronger USDMYR of 4.28 from 4.62; our FY17/18/19F headline earnings forecasts change by +9%/+7%/-3%; and core earnings by +4%/-2%/+3%. Our DCF-based TP remains at RM4.70, maintain HOLD. Where we differ. More conservative margin expansion assumptions. Our earnings are slightly below consensus on more conservative margins for its Manufacturing segment. Potential catalyst. Better demand for downstream products. Stronger pricing and margins for IOI s oleochemicals and specialty oils & fats products will lead to stronger margins for its Manufacturing segment, which will have a substantial impact on group bottomline given that this segment is the primary external revenue contributor. Valuation: Our DCF-based TP is RM4.70, which takes into account our revised CY17/18/19F CPO price forecasts of RM2,760/2,620/2,600 per MT. Maintain HOLD. Key Risks to Our View: A strong recovery in CPO prices (either data, weather or regulatory-driven) would boost the share price beyond our fair value. As IOI is an FBMKLCI component, any changes in its weightings would also make it vulnerable to price swings, resulting in its share price coming in significantly above or below our target price. At A Glance Issued Capital (m shrs) 6,284 Mkt. Cap (RMm/US$m) 27,963 / 6,798 Major Shareholders (%) Vertical Capacity Sdn Bhd 47.1 Employees Provident Fund 6.8 First State Investments 0.0 Free Float (%) m Avg. Daily Val (US$m) 4.9 ICB Industry : Consumer Goods / Food Producers ed: CK / sa:bc, PY, CS

83 IOI Corporation CRITICAL DATA POINTS TO WATCH Critical Factors CPO price. IOI is a vertically integrated producer, processor and merchandiser of palm oil products. More than half of its EBIT comes from sales of CPO and PK, while a third comes from downstream products. Movements in CPO prices will affect the group s Plantations segment profits more so than its Manufacturing segment. With rising contribution from its 31% associate Bumitama Agri (BAL), IOI s earnings are therefore increasingly influenced by CPO price movements. CPO price (RM/MT) Mature palm oil hectarage Volume output. We estimate IOI s trees to have a weighted age of 13 years as at end-fy18f. This categorises the group s age profile as prime. Through earlier replanting in Malaysia and new planting in Indonesia, IOI should see c.12k ha increase in its mature planted area between FY16 and FY19F representing a CAGR of 3%. We expect its FFB volume to grow at a similar pace of 3.6% CAGR, and CPO 3.3%. Manufacturing segment margins. Indonesia s B15 export tax levy would result in lower CPO ASP relative to its Malaysian counterparts. This means rising contribution from its Indonesian estates would offer less compensation to lower output from replanting in Malaysia. The levy also works to give Indonesian refiners higher margins, due to the differentiated levies between CPO and its downstream products. Malaysian CPO export taxes also play a similar role in support margins, and it scales alongside the calculated average CPO spot price which is adjusted monthly. Higher export taxes would help Malaysian refiners such as IOI in terms of feedstock costs. Prospective increase in biodiesel production in Indonesia may also cause oversupply in glycerine (by-product of biodiesel output) and thinner margins in IOI s Oleochemicals unit. For this reason, IOI s earnings should be driven by specialty fats units, higher contribution from BAL, as well as cost containment. Exposure to developed markets. IOI s consolidated revenue is globally distributed, with external sales in Malaysia contributing only 20% in FY16. Europe accounted for a sizeable 35%, while North America contributed 17% of revenue and the rest of Asia accounted for 24%. While the largest palm oil consumers are in Asia, IOI s downstream products are less associated with Asia s demand seasonality compared to other planters. This means economic recoveries in the developed markets should also improve IOI s earnings outlook. Hence, sustainability is important for IOI. CPO sales volume (MT) Oleochem revenue (RMm) Average MYR/USD Source: Company, DBS Bank Page 83

84 IOI Corporation Appendix 1: IOI price correlation with critical factors Graph 1: Share price vs key benchmarks Indexed: Jun07 = 100 IOI MK FBMKLCI KLPLN Index Spot CPO price (RM/mt) Re-listing of property business via dividend in specie to IOI Acquisition of Unico Desa Suspension, and subsequent restoration of RSPO certificates 0 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Source: Company, Bloomberg Finance L.P., DBS Bank IOI share price vs CPO prices Indexed: Jan08 = 100 IOI MK Spot CPO price (RM/mt) Remarks IOI s share price is principally influenced by the movement of CPO prices, with a long-run correlation coefficient of Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Source: Company, Bloomberg L.P., DBS Bank IOI share price vs margins & currency movements Indexed: Jun12 = 100 IOI MK Q-o-q change in USDMYR (RHS) Operating margin (RHS) % % % Remarks IOI s share price is influenced by its profitability or operating margins, which can be moved by price and production levels. However, due to its large proportion of USD-denominated debt, earnings have also been swayed by the movement of the ringgit Mar-06 Aug-06 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun % 0.0% -12.5% -25.0% Source: Company, MPOB, Bloomberg L.P., DBS Bank Page 84

85 IOI Corporation Balance Sheet: High USD debt exposure. As at end-mar 2017, the group had exposure of US$1.3bn in USD-denominated debts, which poses risks via adverse forex translation movements. With the restatements following the adoption of MFRS, the group s net gearing was lowered to 0.7x from 1.0x before. We expect the group to slowly reduce this gearing level, assuming no major capex outlays in the coming financial years. Share Price Drivers: Pricing and profitability. Stronger pricing of CPO and its derivatives are beneficial IOI in addition to the upliftment of sustainability-related risks on its sales. However, strong currency fluctuations also have a significant impact on headline earnings. Key Risks: Volatility in CPO prices and USD exchange rates. Continued strength in CPO prices may lead to better-than-expected earnings, while lower energy prices from expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect the profitability of planters in general. Leverage & Asset Turnover (x) Capital Expenditure ROE (%) Setback to expansion plans. Our forecasts are based on assumed hectarage for new planting and replanting. Any setback to these plans would negatively affect our valuation due to slower volume growth. Regulatory changes. Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact the demand for CPO/refined oils. Weather. Changes in rainfall pattern (caused by either El Nino or La Nina) would affect FFB yields with some time lag. PB Band (x) Company Background IOI Corporation (IOI) is an integrated plantation company, with one of the highest yields in Malaysia and one of the largest oleochemical manufacturing capacities in the world. Source: Company, DBS Bank Page 85

86 IOI Corporation Key Assumptions FY Jun 2015A 2016A 2017A 2018F 2019F CPO price (RM/MT) 2,291 2,410 2,706 2,690 2,610 Mature palm oil hectarage 149, , , , ,470 CPO sales volume (MT) 781, , , , ,269 Oleochem revenue (RMm) 1,517 1,574 1,472 1,528 1,570 Average MYR/USD Segmental Breakdown FY Jun 2015A 2016A 2017A 2018F 2019F Revenues (RMm) Plantation Resource-based 11,338 11,551 13,880 14,281 14,546 Others Total 11,542 11,739 14,127 14,493 14,833 EBIT (RMm) Plantation , Resource-based Others (45.3) Total 1,251 1,239 1,481 1,360 1,453 EBIT Margins (%) Plantation Resource-based Others N/A N/A N/A N/A N/A Total Income Statement (RMm) FY Jun 2015A 2016A 2017A 2018F 2019F Revenue 11,542 11,739 14,127 14,493 14,833 Cost of Goods Sold (9,321) (9,463) (11,633) (12,471) (12,702) Gross Profit 2,220 2,276 2,494 2,022 2,131 Other Opng (Exp)/Inc (969) (1,037) (1,013) (663) (678) Operating Profit 1,251 1,239 1,481 1,360 1,453 Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (189) (165) (174) (233) (229) Exceptional Gain/(Loss) (845) (202) (357) 14.9 (32.2) Pre-tax Profit ,087 1,278 1,331 Tax (262) (320) (332) (300) (335) Minority Interest (2.9) (16.6) (22.9) (14.2) (15.9) Preference Dividend Net Profit Net Profit before Except , ,013 EBITDA 1,790 1,791 2,098 2,045 2,176 Growth Revenue Gth (%) (3.1) EBITDA Gth (%) (28.6) (2.6) 6.4 Opg Profit Gth (%) (41.0) (1.0) 19.6 (8.2) 6.9 Net Profit Gth (Pre-ex) (%) (39.9) (7.2) 31.0 (12.9) 6.6 Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) 1, Net Interest Cover (x) Source: Company, DBS Bank Page 86

87 IOI Corporation Quarterly / Interim Income Statement (RMm) FY Jun 1Q2017 2Q2017 3Q2017 4Q2017 1Q2018 Revenue 3,291 3,666 3,473 3,698 3,731 Other Oper. (Exp)/Inc (2,870) (3,145) (3,245) (3,386) (3,314) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (44.3) (45.8) (47.0) (37.1) (45.9) Exceptional Gain/(Loss) (193) (392) Pre-tax Profit Tax (88.0) (102) (86.6) (55.1) (114) Minority Interest (7.2) (11.0) (0.1) (4.6) (2.8) Net Profit Net profit bef Except EBITDA Growth Revenue Gth (%) (5.3) EBITDA Gth (%) (39.7) Opg Profit Gth (%) (56.2) Net Profit Gth (Pre-ex) (%) (62.3) Margins Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (RMm) FY Jun 2015A 2016A 2017A 2018F 2019F Net Fixed Assets 9,766 9,985 9,890 9,769 9,637 Invts in Associates & JVs ,108 1,247 1,388 Other LT Assets Cash & ST Invts 1,789 1,938 1,943 2,138 2,443 Inventory 2,083 2,284 2,685 2,878 2,931 Debtors 1,106 1,191 1,351 1,386 1,419 Other Current Assets Total Assets 16,449 17,556 18,170 18,615 19,021 ST Debt 813 2,478 2,478 2,478 2,478 Creditor 925 1,130 1,164 1,248 1,271 Other Current Liab LT Debt 5,836 4,903 5,221 5,184 5,221 Other LT Liabilities 1,404 1,412 1,440 1,469 1,498 Shareholder s Equity 7,069 7,138 7,348 7,704 8,004 Minority Interests Total Cap. & Liab. 16,449 17,556 18,170 18,615 19,021 Non-Cash Wkg. Capital 2,330 2,582 3,112 3,261 3,328 Net Cash/(Debt) (4,860) (5,443) (5,756) (5,525) (5,256) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X) Source: Company, DBS Bank Page 87

88 IOI Corporation Cash Flow Statement (RMm) FY Jun 2015A 2016A 2017A 2018F 2019F Pre-Tax Profit 1,161 1,168 1,444 1,263 1,363 Dep. & Amort Tax Paid (262) (320) (332) (300) (335) Assoc. & JV Inc/(loss) (98.8) (94.5) (137) (137) (140) Chg in Wkg.Cap (81.3) (526) (145) (62.7) Other Operating CF (303) 10.5 (36.7) Net Operating CF 1,447 1, ,241 1,372 Capital Exp.(net) (546) (871) (419) (427) (451) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF (2.0) (2.1) (2.2) Net Investing CF (393) (803) (421) (429) (453) Div Paid (1,049) (473) (564) (609) (680) Chg in Gross Debt (875) (36.7) 36.7 Capital Issues (106) (85.7) (16.5) Other Financing CF (1,226) (853) Net Financing CF (3,256) (679) (235) (617) (614) Currency Adjustments Chg in Cash (2,202) Opg CFPS (sen) Free CFPS (sen) Source: Company, DBS Bank Target Price & Ratings History Source: DBS Bank Analyst: Regional Research Team Page 88

89 Malaysia Company Guide TSH Resources Version 11 Bloomberg: TSH MK Reuters: TSHR.KL Refer to important disclosures at the end of this report DBS Group Research. Equity 27 Nov 2017 BUY Last Traded Price ( 24 Nov 2017): RM1.65 (KLCI : 1,717.23) Price Target 12-mth: RM2.05 (24% upside) Analyst Regional Research Team What s New equityresearch@dbs.com 3Q17 core profit up 35% y-o-y, meeting expectations Strong FFB growth from Indonesia offset softer Sabah and external volumes, leading to margin expansion Yield recovery weighed more heavily in FY17, but favourable tree maturity and ageing profile to support 14% FFB CAGR into 2019 Trim earnings by 3%/4%/3% for higher taxation, minority interests; TP stays at RM2.05 maintain BUY Price Relative Forecasts and Valuation FY Dec (RM m) 2016A 2017F 2018F 2019F Revenue 872 1,048 1,077 1,139 EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) Net Pft Gth (Pre-ex) (%) (14.3) EPS (sen) EPS Pre Ex. (sen) EPS Gth Pre Ex (%) (14) Diluted EPS (sen) Net DPS (sen) BV Per Share (sen) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (sen): Other Broker Recs: B: 6 S: 0 H: 5 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P Indonesian volumes kicking in Earnings upcycle in play. TSH s 9M17 core earnings are up 35% y-o-y, thanks to a substantial FFB volume uptick from its Indonesian hectarage and strong CPO prices. Rising weightage of own production (vs milling of external FFB) is also gradually expanding margins. With further FFB growth expected in FY18/19F on the back of its young average tree age, we project earnings expansion even in the face of expectations of mild CPO pricing thus presenting enticing valuations against other lower-growth plantation peers. Maintain BUY. Where we differ. Higher volume growth assumptions. Our FY18-19F earnings are higher than consensus, premised on stronger internal FFB growth assumptions of 14% CAGR over FY16-19F. This will come from rising mature planted area (to rise at 9% CAGR) in addition to recovering yields after bottoming out in FY16. Potential catalyst. Improved earnings delivery. TSH s profits over the past few years have been dragged by low CPO prices, adverse currency effects and the write-off of non-core businesses. The resumption of normalised profits and growth will help re-rate the stock. Valuation: Our DCF-based TP is RM2.05, taking into account CY17/18/19F CPO spot price forecasts of RM2,760/2,620/2,600 per MT. Maintain BUY. Key Risks to Our View: A strong change in CPO prices (either data or regulatorydriven) could raise or lower TSH s share price above or below our fair value. A severe El Nino could also affect TSH s productivity, cash generation, and ultimately its share price performance. At A Glance Issued Capital (m shrs) 1,381 Mkt. Cap (RMm/US$m) 2,278 / 554 Major Shareholders (%) Aik Pen Tan 12.4 Tunas Lestari Sdn Bhd 6.3 Embun Yakin Sdn Bhd 5.6 Free Float (%) m Avg. Daily Val (US$m) 0.09 ICB Industry : Consumer Goods / Food Producers ed: CK / sa:bc, PY, CS

90 TSH Resources WHAT S NEW Indonesian volumes kick in, offsetting softness from East Malaysia Rising bottomline. TSH reported a headline profit of RM30.7m (+177% y-o-y, +11% q-o-q), which after stripping out aggregated forex gain, impairments and disposal losses revealed a core profit of RM29.0m (+37% y-o-y, +16% q-oq). This brings 9M17 headline profit and core profit to RM92.3m and RM81.4m (+16%, +35% y-o-y), respectively, largely in line with expectations. Indonesian plantations deliver. Group FFB production in 3Q17 leapt an impressive 40% y-o-y to 212.3k MT (+21% q-o-q), bringing 9M17 output to 537.2k MT, 33% higher y-o-y. Growth was mainly led by its hectarage in Indonesia, which more than offset some declines in Sabah from the secondary impact of 2016 s El Nino. As such, 3Q17 CPO production rose by a smaller quantum of +13% y-o-y to 69.8k MT (-2% q-oq) given that TSH s milling operations are larger in Sabah, and thus had lower external FFB purchases. Margins improved, reflective of higher harvesting contribution. 3Q17 CPO ASP of RM2,576/MT was 5% higher y-o-y (-3% q-o-q), which together with the volume growth led to group revenues rising 20% y-o-y to RM256.8m. The higher weightage of own harvested volume (relative to purely milling external FFB) also led to core EBIT margins rising 6.7ppts y-o-y and 3.8ppts q-o-q to 22%, supporting core EBIT expansion of 73% y-o-y to RM56.5m. Volume bump up came earlier than we expected, but medium-term outlook remains strong. The yield rebound in 9M17 has thus far differed from our expectations of a recovery spread over That said, TSH s medium term growth is fundamentally tied to its rising mature planted area with between 2.5k and 3k p.a., or c.9% CAGR from F. As such, we now alter our yield assumptions, resulting in FY17/18/19F FFB growth forecasts of +24%/+9%/+9%, vs +9%/+17%/+11% before. We also adjust our external FFB purchase assumptions, resulting in FY17/18/19F CPO production growth forecasts of +16%/+11%/+8% vs +13%/+16%/+7%. However, we also adjust effective tax rates and minority interests to levels seen in 9M17, which results in a net 3%/4%/3% reduction in our core earnings forecasts. Our DCF-based TP remains at RM2.05. Maintain BUY. Quarterly / Interim Income Statement (RMm) FY Dec 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq Revenue (0.5) Cost of Goods Sold (138) (166) (152) 10.8 (8.1) Gross Profit Other Oper. (Exp)/Inc (43.1) (45.5) (47.9) Operating Profit Other Non Opg (Exp)/Inc nm nm Associates & JV Inc (29.2) Net Interest (Exp)/Inc (7.4) (8.8) (10.5) (42.9) (19.0) Exceptional Gain/(Loss) (10.1) nm (36.4) Pre-tax Profit Tax (8.5) (10.2) (13.8) Minority Interest (2.8) (3.7) (8.3) (195.3) Net Profit Net profit bef Except EBITDA Margins (%) Gross Margins Opg Profit Margins Net Profit Margins Source of all data: Company, DBS Bank Page 83

91 TSH Resources CRITICAL DATA POINTS TO WATCH Critical Factors CPO prices. As a commodity producer, TSH is a price-taker. Movements in international CPO prices would directly impact the group s profitability. We are expecting spot CPO prices (FOB Pasir Gudang) to average US$645/MT (RM2,760/MT) in CY17 representing an increase of 4% y-o-y in ringgit terms from 2016, primarily from the effects of a weaker ringgit against the US dollar, plus lower stockpiles following the weaker supply in CPO price Mature palm oil hectarage Size of mature plantations. Due to its aggressive planting over the past few years, TSH is expected to see a steady climb in mature hectarage, which currently makes up 63% of 42.1k ha of total planted area. We expect the mature planted area to grow by 31% to c.34.7k ha from , and total planted area to grow by 12% to 47.2k ha. All these will support its internal FFB output, which we expect to register a CAGR of 13.8%. Production volume. TSH has six palm oil mills: three in Sabah, one in Sumatra, and two in Kalimantan. The Sabah mills currently process the bulk of FFB from external sources, and so its overall CPO production trend also depends on FFB production at nearby plantations. TSH s oil extraction rate has been decent, averaging 20.7% in Sabah and 21.3% in Indonesia. Currently, c.60% of its overall CPO production comes from Sabah, but that ratio will drop as FFB production at its Indonesian plantations picks up. Regulations. Tariff and non-tariff regulations are common in the agricultural commodity sector, and palm oil is no exception. Any changes in export/import tariffs, as well as various taxes and levies, would affect trade flows and prices. The USD50/MT export levy implemented by Indonesia since August 2015 impacts the CPO sales from Indonesia-based operations. Seasonal demand. As a major vegetable oil with 36% global market share, palm oil is an important food staple. The next largest is soybean oil, with 27% market share. These two vegetable oils are direct substitutes (suggesting high price elasticity of demand), although certain vegetable oils are more suitable than others for certain applications. Demand for palm oil is dominant in Asia, where local festivities result in seasonal demand during different months of the year. The Ramadan month, Chinese New Year, and Divali are typically high-demand periods in Asia. CPO sales volume PK sales volume Average MYR/USD Source: Company, DBS Bank Page 84

92 TSH Resources Appendix 1: TSH price correlation with critical factors Graph 1: Share price vs key benchmarks Indexed: Jun07 = 100 TSH MK FBMKLCI KLPLN Index Spot CPO price (RM/mt) Disposal of Pontian United Plantations stake & placement Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Source: Company, Bloomberg L.P., DBS Bank 50 TSH share price vs production and CPO prices Indexed: Mar12 = 100 TSH MK PAL2MALY FFB harvested Remarks TSH s share price has been more heavily influenced by its production volume rather than CPO prices over recent years due to a strong growth phase, especially during Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Source: Company, Bloomberg L.P., DBS Bank TSH share price vs operating margins Remarks Indexed: Mar10 = TSH MK Operating margin (RHS) 25% 20% TSH s share price is influenced by its profitability which can be tracked by operating margins. Margins can be improved by stronger CPO selling prices, or stronger growth from internal FFB output % % % 0 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 0% Source: Company, MPOB, Bloomberg L.P., DBS Bank Page 85

93 TSH Resources Balance Sheet: Gearing elevated from previous aggressive planting. TSH s net gearing is 0.9x at end-fy16 primarily due to aggressive planting in previous years, particularly at its Indonesian estates. Of its overall debt, 29% is denominated in US dollar terms as at end- FY16. Management aims to reduce gearing to near the 0.8x level. We think its leverage will ease naturally from improving earnings, though this may be accelerated by other means such as divestments. Share Price Drivers: Look for sustained output and earnings recovery. We expect TSH to see steady production growth over the coming years from the young age profile of its estates and rising maturities, which should translate into earnings growth given favourable CPO prices. The stock may be re-rated once macro issues (such as weather impact) dissipate and it delivers earnings growth. Key Risks: Volatility in CPO prices and USD exchange rate. Continued depressed CPO prices would hurt earnings, especially for upstream planters. Additionally, low crude oil prices may affect CPO demand for biofuel. Finally, CPO prices in ringgit would also be directly affected by the currency s strength relative to the US dollar. Leverage & Asset Turnover (x) Capital Expenditure ROE (%) Setback in expansion plans. Our forecasts are based on assumed hectarage for new planting and replanting. A setback to these plans could hurt our valuation through slower volume growth. Market sentiment. Changes in fund flows towards or out of emerging markets would affect the valuation of plantation counters. Forward PE Band (x) Extreme changes in the weather. Sudden and significant changes in rainfall and humidity, such as in the case of a strong El Nino event (prolonged dryness), can affect FFB yields. Company Background TSH Resources (TSH) is an upstream planter, owning c.100k ha of plantation land in Sabah and Kalimantan and six palm oil mills, of which around 43k ha is planted. It also has a 50:50 JV refinery with Wilmar International. Non-core businesses include wood flooring, cocoa processing, and palm waste integration. PB Band (x) Source: Company, DBS Bank Page 86

94 TSH Resources Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F CPO price 2,168 2,652 2,760 2,620 2,600 Mature palm oil hectarage 26,093 26,464 29,253 32,186 34,690 CPO sales volume 288, , , , ,103 PK sales volume 62,474 52,128 62,408 67,063 71,458 Average MYR/USD Segmental Breakdown FY Dec 2015A 2016A 2017F 2018F 2019F Revenues (RMm) Oil Palm Plantation ,035 Wood Products Cocoa & others Total ,048 1,077 1,139 EBIT (RMm) Oil Palm Plantation Wood Products (2.1) (0.7) (6.7) (4.5) (4.5) Cocoa & others Total EBIT Margins (%) Oil Palm Plantation Wood Products (4.9) (1.3) (11.7) (7.7) (7.7) Cocoa & others Total Income Statement (RMm) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue ,048 1,077 1,139 Cost of Goods Sold (531) (560) (647) (645) (678) Gross Profit Other Opng (Exp)/Inc (155) (177) (196) (195) (194) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (16.3) (21.4) (35.7) (36.7) (38.0) Exceptional Gain/(Loss) (194) (18.2) Pre-tax Profit (85.8) Tax (19.5) (46.5) (47.4) (54.4) (60.2) Minority Interest (0.3) (9.2) (17.1) (20.2) (22.3) Preference Dividend Net Profit (106) Net Profit before Except EBITDA Growth Revenue Gth (%) (25.4) EBITDA Gth (%) (25.1) Opg Profit Gth (%) (37.0) Net Profit Gth (Pre-ex) (%) (28.1) (14.3) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) (13.2) ROAE (%) (8.1) ROA (%) (3.6) ROCE (%) Div Payout Ratio (%) N/A Net Interest Cover (x) Source: Company, DBS Bank Page 87

95 TSH Resources Quarterly / Interim Income Statement (RMm) FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 Revenue Cost of Goods Sold (138) (138) (197) (166) (152) Gross Profit Other Oper. (Exp)/Inc (43.1) (60.6) (42.1) (45.5) (47.9) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (7.4) (3.3) (9.7) (8.8) (10.5) Exceptional Gain/(Loss) (10.1) (37.6) Pre-tax Profit Tax (8.5) (29.2) (10.1) (10.2) (13.8) Minority Interest (2.8) (3.5) (4.9) (3.7) (8.3) Net Profit 11.1 (23.1) Net profit bef Except EBITDA Growth Revenue Gth (%) (10.5) (0.5) EBITDA Gth (%) (8.2) 29.1 Opg Profit Gth (%) (5.2) 20.2 Net Profit Gth (Pre-ex) (%) (5.3) (31.9) 89.3 (8.2) 15.8 Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) 5.2 (9.5) Balance Sheet (RMm) FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 2,211 2,451 2,505 2,587 2,706 Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets 3,177 3,511 3,684 3,859 4,082 ST Debt Creditor Other Current Liab LT Debt ,026 Other LT Liabilities Shareholder s Equity 1,357 1,507 1,616 1,730 1,852 Minority Interests Total Cap. & Liab. 3,177 3,511 3,684 3,859 4,082 Non-Cash Wkg. Capital Net Cash/(Debt) (1,328) (1,399) (1,371) (1,333) (1,327) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X) Source: Company, DBS Bank Page 88

96 TSH Resources Cash Flow Statement (RMm) FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit (85.8) Dep. & Amort Tax Paid (19.5) (46.5) (47.4) (54.4) (60.2) Assoc. & JV Inc/(loss) (11.4) (18.1) (13.1) (17.2) (11.6) Chg in Wkg.Cap (34.7) (37.9) (4.1) (15.8) Other Operating CF Net Operating CF (22.8) Capital Exp.(net) (211) (220) (113) (141) (180) Other Invts.(net) Invts in Assoc. & JV (31.2) Div from Assoc & JV Other Investing CF Net Investing CF (210) (174) (113) (141) (180) Div Paid (33.6) (26.9) (26.9) (29.5) (35.7) Chg in Gross Debt Capital Issues Other Financing CF (1.8) (70.9) Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (sen) (1.9) Free CFPS (sen) (17.4) (6.6) Source: Company, DBS Bank Target Price & Ratings History Source: DBS Bank Analyst: Regional Research Team Page 89

97 Malaysia Company Guide KL Kepong Version 9 Bloomberg: KLK MK Reuters: KLKK.KL Refer to important disclosures at the end of this report DBS Group Research. Equity 27 Nov 2017 HOLD Last Traded Price ( 24 Nov 2017): RM24.50 (KLCI : 1,717.23) Price Target 12-mth: RM24.75 (1% upside Analyst Regional Research Team Price Relative equityresearch@dbs.com Forecasts and Valuation FY Sep (RM m) 2016A 2017A 2018F 2019F Revenue 16,506 21,004 21,616 22,160 EBITDA 1,855 2,184 2,321 2,370 Pre-tax Profit 1,712 1,450 1,696 1,738 Net Profit 1,592 1,005 1,263 1,290 Net Pft (Pre Ex.) 1,186 1,147 1,263 1,290 Net Pft Gth (Pre-ex) (%) 36.4 (3.3) EPS (sen) EPS Pre Ex. (sen) EPS Gth Pre Ex (%) 36 (3) 10 2 Diluted EPS (sen) Net DPS (sen) BV Per Share (sen) 978 1,041 1,106 1,168 PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (sen): Other Broker Recs: B: 3 S: 3 H: 17 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P Holding firm Steady, though mild growth. KLK s core earnings are set for a bump-up in FY17F on the back of volume recovery and improved CPO prices. We expect a more moderate clip of growth thereafter given mild internal FFB growth and tepid CPO pricing. The group may pursue inorganic growth, besides its ongoing replanting scheme. We impute new CY17/18/19F CPO price forecasts of RM2,760/2,620/2,600 (from RM3,040/3,030/2,970); which lowered our FY17-19F earnings by 7-12%. However, our TP is raised to RM24.75 after rolling forward to FY18F base, maintain HOLD. Where we differ. Divergence in price assumptions. Our core earnings forecasts are close to consensus, though based on CPO price forecasts which are slightly above. As such, our volume growth and implied cost estimates are more conservative than street expectations. Potential catalyst. Inorganic kicker. Given the mild organic prospects, KLK could look for inorganic paths of growth, which is facilitated by its relatively low gearing. The group has demonstrated the willingness to undertake acquisitions given its attempt to purchase MP Evans in Valuation: Our DCF-based TP of RM24.75 takes into account our CY17/18/19F CPO price forecasts of RM2,760/2,620/2,600 per MT. Maintain HOLD. Key Risks to Our View: A strong change in CPO prices or productivity will affect KLK s profitability and thus its share price performance. As KLK is a KLCI Index component, changes in its weightings would also make it vulnerable to significant price swings. At A Glance Issued Capital (m shrs) 1,065 Mkt. Cap (RMm/US$m) 26,092 / 6,343 Major Shareholders (%) Batu Kawan Bhd 46.6 Employees Provident Fund 11.3 Skim Amanah Saham 6.7 Free Float (%) m Avg. Daily Val (US$m) 7.7 ICB Industry : Consumer Goods / Food Producers ed: CK / sa:bc, PY, CS

98 KL Kepong CRITICAL DATA POINTS TO WATCH CPO price Critical Factors CPO price. KLK is a vertically integrated producer, processor and merchandiser of palm oil products. More than two-thirds of its EBIT comes from sales of CPO, PK and CPO trading, while around 20% comes from downstream products. Given its plantations segment s dominant contribution, movements in CPO prices would generally affect the group s profits more so than other integrated players. Volume output. KLK s oil palm tree age profile is considered prime. Through consistent replanting in Malaysia and past expansions in Indonesia, KLK should see c.15k ha maturing in FY16 through FY19F representing a c.8% increase. As such we estimate the group s average tree age to be between 13 and 14 years within this period. FFB growth is expected to see CAGR of 5.5% over that period, with a larger increase in FY17F before tapering off. Our assumptions are primarily for replanting in Malaysia (assumed at over 3k ha p.a.), but no new planting in Indonesia given the indications of moratorium. Downstream margins. A significant share of KLK s manufacturing segment s products deal with industrialised oleochemicals, which competes with the now cheaper petrochemicals, given the drop in crude oil prices. This, together with slower Chinese economic growth and prospective oversupply in glycerine (due to Indonesia s B20 programme), may lead to thin margins for KLK s oleochemicals unit. At the same time, Indonesia s export tax levy would result in lower CPO ASP relative to Malaysian counterparts. This means less contribution from the group s Indonesian estates. The levy also works to give Indonesian refiners higher margins, due to the differentiated levies between CPO and its downstream products. Geographic diversity. KLK s consolidated revenue is globally distributed, with Malaysia contributing only 14% in FY16. Europe accounted for 23%, while the rest of Asia contributed a sizeable 56% of revenue. This means demand for KLK s products is driven predominantly by economic growth in the Asian markets, while economic recovery in developed markets such as the US would have a small impact, in our view. We should also note that competing processors such as Wilmar, IOI and Emery are also vying for the same Asian markets which we believe would make competition more challenging, given aggressive capacity expansions in various sectors of oleochemicals. Mature palm oil hectarage CPO sales volume PKO sales volume Average MYR/USD Source: Company, DBS Bank Page 99

99 KL Kepong Appendix 1: KLK price correlation with critical factors Graph 1: Share price vs key benchmarks Indexed: Jan07 = KLK MK FBMKLCI KLPLN Index Spot CPO price (RM/mt) Acquired stake in Liberian plantations Venture with UEM Sunrise for property development in Johor 0 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: Company, Bloomberg L.P., DBS Bank, DBSVI KLK share price vs CPO prices Remarks Indexed: Jan07 = KLK MK Spot CPO price (RM/mt) KLK s share price is principally influenced by the movement of CPO prices, with a long-run correlation coefficient of Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May Source: Company, Bloomberg L.P., DBS Bank KLK share price vs operating margins Remarks Indexed: Mar03 = KLK MK Operating margin (RHS) 25% 20% 15% KLK s share price is influenced by its profitability which can be tracked operating margins. While margins generally eased starting 2011, this was due to Manufacturing becoming a larger proportion of group revenues (near 50% from 40% before) which also brought about steadier earnings % 200 5% 0 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 0% Source: Company, MPOB, Bloomberg L.P., DBS Bank Page 100

100 KL Kepong Balance Sheet: Relatively low gearing. At the end of March 2017, KLK s net debt-to-total equity settled at 25% maintaining below the 30% level which the group has sustained in recent history. Strong free-cash-flow generation. Group capex outlay is expected to be below RM700m p.a. over the coming years, slower than previous years which were generally over RM800m. As such, KLK expects to see strong free cash flow generation over the coming years which will work to organically pare down its leverage levels. Leverage & Asset Turnover (x) Capital Expenditure Share Price Drivers: Inorganic growth opportunities. The group may pursue external growth catalysts, given the difficulty of sizeable new planting on its existing landbank. This is facilitated by its relatively low gearing levels. Key Risks: Volatility in CPO prices and USD exchange rates. Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect the profitability of planters in general. ROE (%) Setback in expansion plans. Our forecasts are based on assumed hectarage for new planting and replanting. Any setback on these plans would negatively affect our valuation due to slower volume growth. Regulatory changes. Any further increase in Indian import duty of palm oil or changes in the structure of Indonesian/Malaysian export taxes would impact the demand for CPO/refined oils. Forward PE Band (x) Market sentiment. Changes in fund flows towards or out of emerging markets would affect the valuations of plantation counters. Weather Changes in rainfall pattern (caused by either El Nino or La Nina) would affect FFB yields with some time lag. Company Background KL Kepong (KLK)'s core business is in plantations, with c.270k ha of landbank comprising palm oil and rubber plantations in Malaysia, Indonesia, and Liberia. Its other businesses are manufacturing (mainly oleochemicals) and property development. PB Band (x) Source: Company, DBS Bank Page 101

101 KL Kepong Key Assumptions FY Sep 2015A 2016A 2017A 2018F 2019F CPO price 2,106 2,270 2,465 2,327 2,297 Mature palm oil hectarage 173, , , , ,257 CPO sales volume 780, , , , ,422 PKO sales volume 104,763 93, , , ,342 Average MYR/USD Segmental Breakdown FY Sep 2015A 2016A 2017A 2018F 2019F Revenues (RMm) Plantation 7,086 8,455 9,743 9,688 9,915 Manufacturing 6,241 7,739 11,120 11,601 11,909 Retailing Property Others Total 13,650 16,506 21,004 21,616 22,160 EBIT (RMm) Plantation ,314 1,247 1,253 Manufacturing Retailing Property Others Total 1,241 1,459 1,790 1,847 1,887 EBIT Margins (%) Plantation Manufacturing Retailing N/A N/A N/A N/A N/A Property Others Total Income Statement (RMm) FY Sep 2015A 2016A 2017A 2018F 2019F Revenue 13,650 16,506 21,004 21,616 22,160 Cost of Goods Sold (11,684) (14,397) (18,032) (18,540) (19,048) Gross Profit 1,966 2,109 2,973 3,076 3,112 Other Opng (Exp)/Inc (768) (706) (1,281) (1,276) (1,293) Operating Profit 1,198 1,403 1,692 1,800 1,819 Other Non Opg (Exp)/Inc Associates & JV Inc (2.4) 5.00 (4.3) Net Interest (Exp)/Inc (61.2) (101) (95.4) (110) (86.1) Exceptional Gain/(Loss) (142) Pre-tax Profit 1,135 1,712 1,450 1,696 1,738 Tax (251) (29.1) (383) (382) (395) Minority Interest (14.1) (91.0) (61.8) (50.9) (52.1) Preference Dividend Net Profit 870 1,592 1,005 1,263 1,290 Net Profit before Except ,186 1,147 1,263 1,290 EBITDA 1,595 1,855 2,184 2,321 2,370 Growth Revenue Gth (%) EBITDA Gth (%) (5.7) Opg Profit Gth (%) (11.7) Net Profit Gth (Pre-ex) (%) (11.8) 36.4 (3.3) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Source: Company, DBS Bank Page 102

102 KL Kepong Quarterly / Interim Income Statement (RMm) FY Sep 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017 Revenue 4,543 5,496 5,471 4,873 5,164 Cost of Goods Sold (4,191) (4,967) (5,080) (4,529) (4,737) Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc (1.0) 0.0 (1.4) (2.2) (0.8) Net Interest (Exp)/Inc (27.9) (28.2) (23.3) (23.4) (20.5) Exceptional Gain/(Loss) (79.1) (29.0) 29.4 (117) (24.6) Pre-tax Profit Tax 158 (96.3) (92.5) (79.6) (115) Minority Interest (26.8) (15.4) (13.5) (9.1) (23.7) Net Profit Net profit bef Except EBITDA Growth Revenue Gth (%) (0.5) (10.9) 6.0 EBITDA Gth (%) (26.5) (12.1) 24.4 Opg Profit Gth (%) (26.2) (11.9) 23.8 Net Profit Gth (Pre-ex) (%) 89.5 (14.2) (33.2) (11.5) 15.9 Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (RMm) FY Sep 2015A 2016A 2017A 2018F 2019F Net Fixed Assets 7,210 7,615 7,755 7,837 7,884 Invts in Associates & JVs Other LT Assets 2,958 4,041 3,953 3,866 3,782 Cash & ST Invts 2,083 2,000 1,429 2,117 2,726 Inventory 1,614 1,898 2,255 2,261 2,323 Debtors 2,651 2,166 3,135 3,154 3,233 Other Current Assets Total Assets 17,260 18,337 19,148 19,862 20,580 ST Debt 1,913 1,572 1,533 1,495 1,457 Creditor 1,418 1,342 1,772 1,777 1,826 Other Current Liab LT Debt 2,681 2,968 2,968 2,968 2,968 Other LT Liabilities Shareholder s Equity 9,666 10,445 11,114 11,810 12,465 Minority Interests Total Cap. & Liab. 17,260 18,337 19,148 19,862 20,580 Non-Cash Wkg. Capital 2,899 2,729 3,922 3,943 4,035 Net Cash/(Debt) (2,511) (2,540) (3,072) (2,346) (1,700) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X) Source: Company, DBS Bank Page 103

103 KL Kepong Cash Flow Statement (RMm) FY Sep 2015A 2016A 2017A 2018F 2019F Pre-Tax Profit 1,135 1,712 1,610 1,696 1,738 Dep. & Amort Tax Paid (251) (29.1) (359) (382) (395) Assoc. & JV Inc/(loss) 2.37 (5.0) (5.1) (5.2) (5.3) Chg in Wkg.Cap. (813) 126 (896) (20.8) (92.6) Other Operating CF (3.2) (959) (297) Net Operating CF 466 1, ,809 1,796 Capital Exp.(net) (940) (887) (625) (596) (591) Other Invts.(net) (984) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF 1,186 (445) Net Investing CF (738) (1,213) (544) (517) (513) Div Paid (586) (479) (534) (566) (636) Chg in Gross Debt 1,684 (54.0) (39.3) (38.3) (37.4) Capital Issues 1,539 (262) Other Financing CF (1,574) Net Financing CF 1,063 (180) (573) (605) (673) Currency Adjustments Chg in Cash 791 (96.6) (571) Opg CFPS (sen) Free CFPS (sen) (44.4) 38.3 (7.4) Source: Company, DBS Bank Target Price & Ratings History Source: DBS Bank Analyst: Regional Research Team Page 104

104 Malaysia Company Guide Sime Darby Version 10 Bloomberg: SIME MK Reuters: SIME.KL Refer to important disclosures at the end of this report DBS Group Research. Equity 27 Nov 2017 HOLD Last Traded Price ( 24 Nov 2017): RM8.94 (KLCI : 1,717.23) Price Target 12-mth: RM9.05 (1% upside) Analyst Regional Research Team Price Relative equityresearch@dbs.com Forecasts and Valuation FY Jun (RM m) 2016A 2017A 2018F 2019F Revenue 44,492 48,045 51,005 52,986 EBITDA 4,853 5,587 5,834 6,110 Pre-tax Profit 2,853 3,476 3,641 3,776 Net Profit 2,422 2,438 2,628 2,730 Net Pft (Pre Ex.) 2,422 2,438 2,628 2,730 Net Pft Gth (Pre-ex) (%) (0.3) EPS (sen) EPS Pre Ex. (sen) EPS Gth Pre Ex (%) (2) (4) 8 4 Diluted EPS (sen) Net DPS (sen) BV Per Share (sen) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (sen): N/A Other Broker Recs: B: 9 S: 0 H: 12 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P Transformation in progress Closing in on demerger. SIME is on track for an end-2017 demerger and separate listing of its major business units. The underlying fundamentals are varied: Plantations is seeing an ongoing rebound in prices and volume; Property faces weaker domestic sentiment; and Industrial, Motors & Others are showing signs of stabilising. Overall, we think the units aggregated performance is well priced in at current levels, factoring in execution risks post-demerger. Updating our CY17/18/19F forecasts for spot CPO prices of RM2,760/2,620/2,600 (from RM3,040/3,030/2,970) and other housekeeping adjustments, our core earnings forecasts are lowered by 6-18%. However, as we lift the PE valuations for its non-plantation segments, our TP rises to RM9.05. Maintain HOLD. Where we differ. More conservative near-term view. We are more conservative on the immediate upside from the potential conversion of its plantation land for developments. Our earnings estimates are close to the streets, though premised on CPO price forecasts that are lower than peers. Potential catalyst. Value unlocking of landbank. The group currently has oil palm planted land that could see its value being unlocked by key development projects, notably that of the Malaysia Vision Valley in Negeri Sembilan and Pulau Carey. That said, the materialisation and earnings contribution of these projects is likely take place in the medium to long term. Valuation: Sime s SOP-based TP is RM9.05 (raised from RM7.40), after factoring in our earnings revision as well as raising Property s valuation to 15x PE (from 11x) and Motors to 13x from 10x, to match the higher-end of listed peers, given the more favourable long-term development pipeline. Key Risks to Our View: Sharp changes in commodity prices would cause Sime s earnings to come in above or below our estimates. As Sime is a KLCI component, changes in its weightings would also make it vulnerable to significant price swings. At A Glance Issued Capital (m shrs) 6,801 Mkt. Cap (RMm/US$m) 60,800 / 14,780 Major Shareholders (%) Skim Amanah Saham Bumiputera 42.5 Employees Provident Fund 11.8 Yayasan Pelaburan 6.2 Free Float (%) m Avg. Daily Val (US$m) 15.4 ICB Industry : Industrials / General Industrials ed: CK / sa:bc, PY, CS