We initiate coverage on JAWA with a BUY recommendation. We like the company because of: 1) its distinctive mix of revenues from rubber and palm oil, 2) its extensive unplanted land bank of 33k ha, 3) the good growth potential supported by the company's new plantings strategy and 4) the company's sound financial health. The stock currently trades at 8.3x FY12 P/E, a 34% discount to the industry average. Using a DCF valuation method, we set our Target Price at Rp550, implying FY12-13F P/E of 12.8-10.1x, offering 55% potential upside.
A distinctive revenues mix
JAWA has a unique revenues mix compared to other listed plantation companies. This is because rubber dominates its revenues at 63% of the total, while revenues from palm oil are 35% of the total, with the remaining 2% coming from others (coffee and tea). Profitability wise, rubber had the highest gross and net margins at 53% and 40%, respectively, in 2011. By comparison, the gross and net margins of palm oil were 39% and 30%, respectively. Note that rubber and palm oil have different weather performance characteristics. As such, a combination of these two plantations will lead to more stable performance since the company is not dependent on a single commodity.
Rubber provides the majority of the revenues
JAWA has large immature areas, both for rubber and palm oil. Rubber's immature area is 53% of the total rubber planted area of 9.6k ha. On top of this, there is also huge unplanted landbank of 21k ha. As a result, we expect higher rubber production growth in the coming years. Indeed, JAWA is already targeting new plantings of 14.5k ha up to 2014. In our estimates, rubber production will grow by 3-year CAGR of 13% in 2011-14F.
Palm oil to contribute more
Unlike other plantations companies, palm oil accounts for less than 50% of JAWA's total revenues (35% in 2011 or amounting to Rp 224bn). Notably, the immature portion is very large - 72% of the total area vs. an industry average of just 32%. This offers great potential for growth going forward. In this regard, JAWA targets new plantings of 7,000 ha for oil palm up to 2014. Along with the growth in nucleus production, we expect margins to increase since 49% of its COGS are purchases of raw materials (lumps, logs and FFB).
Sound balance sheet
The company's gearing ratio declined to 0.57x in 2011 from 1.32x in 2010. In regard to the planned expansion, we believe the company will be able to take on external loans since its net gearing is relatively low. JAWA has stated its intention of issuing bonds in September 2012. The financial results are now being audited. This will allow JAWA to get a rating from Pefindo. This year's capex is budgeted at Rp490bn for the new plantings and construction of 4 new plants. Furthermore, JAWA distributed some 20% of its 2011 net income as dividends, translating to Rp 9.6/share and implying a 2.7% gross dividend yield.
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