Market capitalization:RM4,606 million
Analyst:Linda Koh
Recommendation:Buy
Issued capital (mil):756.2
52-week price range (RM):4.80-9.40
Major shareholders (%) : Genting 55% , EPF 7.4%
Higher CPO price and FFB growth support earnings
Leverage on strong balance sheet for expansion
Decent valuations – 2008 P/E of 9.8 times
Key stock statistics
----------2007-2008E
EPS (sen) 45.6 62.2
P/E (x) 13.4 9.8
DPS (sen) 14.0 17.0
NTA/share (RM) 2.71 3.21
Share Price Chart
Recent Developments
Asiatic Development is working on acquiring more plantation land bank to sustain growth momentum over the longer-term.
The company recently formed a second joint venture to acquire some 45,000 ha of land bank in Kalimantan, Indonesia. Asiatic paid US$9 million as initial investment for a 60% equity stake in the venture. Its shareholding is expected to increase gradually to about 77% with total investment estimated at some US$47 million over the next two years. The company has secured location permit for a land area of about 12,500 ha and hopes to start planting up before the end of this year.
Meanwhile, progress on the first joint venture, to acquire 98,300 ha of land under a 70:30 venture with Indonesian-based Sepanjang group, has been slower than expected. Planting up on the first 14,261 ha is delayed due to some issues with the local indigenous people. About 3,000 ha have been planted at end-May. Asiatic targets to complete planting on 7,500 ha by end- 2008 and the remaining area by 2009.
On the other hand, its biotechnology venture, Asiatic Centre for Genome Technology (ACGT), is progressing ahead of schedule. The company, a joint venture with US-based Synthetic Genomics Inc, recently completed the first draft assembly and annotation of the oil palm genome.
ACGT expects that its research will culminate in the commercial screening of feedstocks by 2012-2013. The identification of molecular markers and genes that control factors such as yield, height and oil quality will enhance future oil palm breeding programmes.
The company is also undertaking an in-depth genomic, physiological and biochemical analysis of Jatropha. The plant produces oil-rich seeds and is very hardy – it thrives on almost all kinds of soil, including those unsuited for field crops such as wasteland. Jatropha oil can be processed into high quality biodiesel and has higher oil yields than soybean, corn and rapeseed.
Outlook and Recommendation
We expect Asiatic to report better earnings in 2Q08 compared to the previous quarter on the back of slightly higher average crude palm oil (CPO) prices. Asiatic’s selling prices averaged at about RM3,400 per tonne in 1Q08. For 1H08, CPO prices averaged at around RM3,500 per tonne.
The CPO market has been buffeted by a bout of volatility in the past week. The benchmark futures contracts traded on Bursa Derivatives fell below RM3,300 per tonne mirroring the sharp decline in crude oil prices. That triggered a sell off on plantation stocks on the local bourse.
Crude oil tumbled some 12% from record high prices in a single week on concerns that the slowing global economy will soon dent demand. The jury is still out on whether this latest price retreat is sustainable. Global spare production capacity is limited, which leaves prices vulnerable to supply disruptions in key oil producing countries.
Lower crude oil prices generally mean less incentive to produce biofuel, in which traditional food crops like corn and soybean are used as feedstock. Having said that, biofuel targets in the US and European Union are mandatory and subsidised. Thus, production is not dependent on crude oil prices. For instance, the EU has set a target of at least 5.75% of biofuel used in vehicles by 2010 and 10% by 2020.
Additionally, global demand for edible oils is rising. Stock levels for oilseeds are still fairly tight while the risks of more weather-related supply disruptions remain high. Hence, we believe the underlying fundamentals supporting CPO prices are still pretty much intact.
We estimate Asiatic’s 2008 net profit at roughly RM470 million or 62.2 sen per share. This is assuming an average CPO selling price of RM3,300 per tonne and 5% growth in fresh fruit bunch (FFB) production. FFB growth should remain around similar levels in the next few years. Contributions from the Indonesian ventures will only materialize over the longer-term.
Going forward, we are assuming more conservative CPO prices of RM2,800 per tonne, which translates into lower earnings of RM375 million and RM384 million, respectively for 2009-2010.
Nevertheless, these numbers are still very robust by historical standards. The stronger cash flow and balance sheet will support the company’s expansion for sustained longer-term growth.
Its cash pile increased from RM261.4 million at end-2006 to RM495.1 million at end-2007 and RM524.3 million at end-1Q08. This is expected to increase further in the foreseeable future.
Asiatic is on the lookout to acquire more land bank and targets to eventually plant up 6,000-10,000 ha annually in total. It is also planning to spend about RM50 million annually in ACGT for continued research and development. Although the biotechnology venture has no returns in the short term, future gains for producing high-yielding oil crops could be vast, especially with the growing demand for food and energy even as land becomes increasingly scarce.
In short, Asiatic has in place strategies that will promote the company’s growth over the longer-term. We maintain our BUY recommendation. Its shares are trading at fairly decent valuations – P/E for 2008-2009 is estimated at roughly 9.8 and 12.3 times, respectively.
Net dividends are expected to increase in the current year, in line with the higher earnings. We estimate dividends at 17 sen per share, giving shareholders a net yield of 2.1%.
Profit & Loss Analysis / Per Share Data
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