他的07jun-08jun的年营业额预测是206millions，但对照现在的9month营业额却是70.5millions。
最近不少专家都建议买入航空股，另一个选择是biodiesel，但别忘记UE已削减了2020年biofuel的目标。2020太远了点，我们就看9月份的天气。9月是美国飓风高峰季节。
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16 July 2007
A world-beater at a screaming BUY.
A globally competitive company at Malaysian price. Companies that survive the vagaries of the challenging manufacturing environment are those that have the winning combination of greater range of quality products, excellent customer service and dynamic and savvy management. We see values in Carotech after plunging 30% from its 52-week high, owing to the promising global demand of the phytonutrients and biofuel products, savvy and far-sighted management, decent ROE and undemanding valuations at 11.6x PER08 and 8.1x PER09, supported by superb earnings CAGR of 63.1% for FY07-FY09.
An efficient, profitable and market leader in phytonutrients and oleochemcals. Carotech is a specialty chemicals manufacturer, which produces phytonutrients (tocotrienols, carotenes) and oleochemicals (methyl ester, glycerine), using its patented distillation technology and palm oil as feedstock. Despite record high CPO prices (+73% y-y), Carotech remains profitable, thanks to the ancillary income from phytonutrients and not easily replicable technology by rivals.
We expect earnings to jump 31.8% in FY07, 85.2% in FY08 and 43.3% in FY09 to RM16.3m, RM30.2m and RM43.3m, respectively, driven mainly by the expanded annual capacity from 32,000MT to scheduled 120,000MT in Feb 08. We benchmark Carotech’s 12M target price on FY09’s EPS of 9.5sen, as this would present a more reflective picture of its enlarged capacity. Our price objective implies a target FY09 PER of 11.6x (in line our smallcap 10-12x target PER), which in our view is fair considering its robust projected earnings CAGR of 63.1% over the next 2 years.
Overwhelming demand for tocotrienol. Robust demand growth for Carotech’s products is being driven by: (1) greater tocotrienol adoption by nutraceuticals, food, healthcare and cosmetic industries (2) biodiesel substitution for traditional diesel, due to environmental regulations.
Explosive EPS growth supports for a re-rating. We expect earnings to surge higher amid Carotech’s aggressive expansion plan, as capacity is envisaged to escalate 3.8x from existing 32,000MT pa to 120,000MT by Feb08. We think this will more than compensate for margins erosion arising from the record high CPO prices.
Investors have yet to grasp fully the company’s sound medium-and long-term potential. This is not surprising as the stock was 1) under-researched by analysts, 2) fading biodiesel thematic play due to record high CPO prices, 3) delay in commissioning of the Lumut plant. Now, with the resurgent crude oil price above US$70/barrel and the fully expanded capacity to come on stream in Feb 08, it is only a matter of time before the investment community starts re-rate the stock upwards.
INVESTMENT HIGHLIGHTS
A globally competitive phytonutrients and biodiesel producer. Founder David Ho, owns 55.8% in Carotech through Main Board-listed Hovid. Established in 1945, Hovid is a manufacturer of pharmaceutical and herbal products in Malaysia. Carotech was set up in 1992 (and listed on 15 April 05) by Managing Director David Ho to develop phyto-pharmaceutical and nutraceutical products. Currently, its principal business is the manufacture of phytonutrients from palm oil through a patented process and specialized high vacuum-low temperature distillation technology. The Europe market accounted for >70% of sales. The rest is contributed by other primary markets including US, Australia and Japan.
From the distillation of palm oil, Carotech presently produces three main products and two co-products. The three main products are 1) A fullspectrum tocotrienol complex product branded “Tocomin”, 2) A mixed carotene complex product branded “Caromin” and 3) Phytosterol products. On the other hand, its co-products are biodiesel and crude glycerine, used mainly in the production of down-stream oleochemical products.
Products summary
Tocotrienols: Tocotrienol is a form of vitamin E, increasingly used in mainstream healthcare/cosmetic products. Independent research points to significant health/antioxidant benefits of tocotrienols, relative to the more commonly-used vitamin E type tocopherol.
Carotenes: Carotene is a form of vitamin A, consumed for their antioxidant properties and to deter visual impairment.
Phytosterol products: which take various forms such as concentrated oil suspension, beadlets, water dispersible powders and emulsions.
Methyl esters (biodiesel): Palm fatty acid methyl esters (PFAME, biodiesel) is a by-product of Carotech’s vitamin extraction process. Carotech’s PFAME meets the standards of both the biofuel and oleochemical markets.
Crude glycerine: Glycerine is another by-product from the distillation process. It is used to manufacture personal care/cosmetic/food products.
Carotech and the world’s vitamin demand. We believe Carotech supplies over 80% of the global tocotrienols market. Independent research indicates that alpha-tocotrienols are 40-60 times more potent than alpha-tocopherols, and thus sells at prices 25-30x higher. Carotech’s tocotrienols are selling at approximately USD1,000-1100/kg against (USD40-50/kg) of natural vitamin E.
We expect tocotrienol demand growth to be driven by: (1) on-going research and the discovery of new health/therapeutic applications; (2) increasing consumer awareness and tocopherol substitution, as tocotrienol is adopted for use by major nutraceuticals producers.
Profitable biodiesel manufacturer, despite record breaking CPO prices. Biodiesel demand is being driven by: (1) high crude oil prices; (2) ratification of carbon emission cuts under the Kyoto Protoco; (3) the EU Biofuels Directive. However, we do not expect supply to ramp-up quickly given high feedstock prices. Biodiesel is not an economical substitute for traditional diesel at the current CPO spot price of RM2500/mt, and recent biodiesel plant-ups are unlikely to be profitable, in our view.
Despite record high CPO prices (+73% y-y), Carotech remains profitable and is uniquely positioned to profitably manufacture biodiesel, thanks to ancillary income from phytonutrients and not easily replicable technology by rivals. Aggregate phytonutrient and biodiesel revenues remain above feedstock costs, and we expect Carotech sales volumes to receive a boost from its plant expansion in FY08. We project the PFAME prices to stay at current level at USD700-900/mt in 2007-2009, inline with high crude oil prices, which are projected to hover above USD60/barrel.
High crude oil prices are here to stay. Crude-oil supplies will be tighter in coming years, with a "supply crunch" after 2010 as OPEC's spare production capacity evaporates, the International Energy Agency (IEA) predicted on 9 July. According to IEA, supplies will tighten because economic growth will drive up demand and offset significant increases in oil-refining capacity, implying consumers should expect continued upward pressure on energy costs remain high in the coming years. Slower-than-expected GDP growth may provide a breathing space, but it is abundantly clear that if the path of demand doesn't change on its own, it may well be driven to change by higher prices.
Uniquely positioned to capitalise on rising fuel costs. Surging crude oil prices and strict laws imposed in many western countries have led to an escalating demand for biofuel, thereby supporting for a strengthening PFAME prices. Whilst plans are underway to build biodiesel capacities in Malaysia, Carotech’s big edge over the upcoming biofuel producers is its reliance on tocotrienol (accounts for 25-30% revenue), thus providing an important margin of safety should fuel prices fall. Commercial production of tocotrienol is not easily emulated, despite attempts by some local competitors.
Tocotrienol potentially a “blockbuster”. Potentially a blockbuster in the making, tocotrienol is a form of Vitamin E, found in abundance in palm oil and rice bran. Recent research suggests that it is a “super” antioxidant, and is undergoing continuous and extensive research for its effectiveness reducing risks of heart disease and cancer. Palm oil-derived tocotrienols are said to be 40-60x more potent than other sources of tocotrienols. Hence, further affirmation and confirmation of the positive attributes of tocotrienol will potentially lead to sharper rise in selling prices.
Regulatory environment supports demand for biodiesel. The biofuels market is unlike other markets, as its development is closely linked to its total or partial exemption from the tax on petroleum products. Recent regulatory requirements (which are aimed at reducing dependence on a dwindling global supply of fossil fuels whilst concurrently switching to an environmentally safer alternative) in many countries will support demand for biodiesel Cheaper vs. competing biodiesel sources. Currently, the bulk of biodiesel produced in the world is from rapeseed. This is due to the availability of rapeseed as a domestic crop in Europe. However, the heavy demand for rapeseed oil has put steady upward pressure on prices, as rapeseed biofeul prices are selling around US$1,000-1,100 against PFAME US$700-800.
Small but globally competitive. From FY01 to FY07, the group enjoyed a strong net profit CAGR of 53.2% and we envisage Carotech’s bottomline to jump by another 63.1% in FY07-09, spurred by the promising demand for its phytonutrients and PFAME, aggressive overseas market penetration, expanded capacity (in early 2008) coupled with productivity gains.
Early birds into research on palm oil-based phytonutrients. David Ho began research on palm oil-based phytonutrients in 1992 and discovered a commercially viable extracting process that Carotech patented. Carotech started operating an integrated plant (the first and largest in the world) in Chemor, Perak to produce phytonutrients in 1995. Phytonutrients are essentially substances found in plants that are crucial components of a plant’s defense system. There are five main groups of phytonutrients in the commercial market – Vitamin E (derived from tocopherols and tocotrienols), carotenoids, favonoids, isoflavones and phytosterols.
Products breakdown and capacity. The two product categories, namely phytonutrients and oleochemicals/biodiesel, made up 30-35% and 60-65% of revenue, respectively. Due to rising demand, Carotech is expanding its capacity to Lumut (capex about RM150m) to eliminate capacity constraints. This will raise Lumut’s production capacity sharply in stages to a maximum 230MT/day by Feb08 from existing capacity of 90MT/day in Chemor. Combining both plants, total capacity will soar to 330MT/day.
More than 80% exported. Carotech’s largest export markets are Europe (70%), with the rest is contributed by US (20%), Japan (5-10%) and others (5%). Carotech is currently the largest producer of palm oil-derived tocotrienols in the world. Its closest rival is Eastman Chemical Company of the US, which involves in rice bran tocotrienol production. Extracting tocotrienol from palm oil gives higher yields at a lower cost compared to that of rice bran.
Carotech commands over 80% market share in the global tocotrienols. It is currently the world largest producers of tocotrienols. Selling at approximately US$1,000-1,200/kg, super vitamin E is substantially more expensive than the synthetic and natural versions but studies have shown that tocotrienols offer superior benefits as an anti-oxidant. Among its therapeutic benefits include protection against stroke, anti-aging effects and cholesterol reduction. Demand for such products should accelerate, supported by widening applications in the cosmetics, functional food and beverages and nutraceuticals areas. The combination of its patented technology with the high quality and safety standards enables the group to offer natural full spectrum palm tocotrienol complex and palm mixed carotene complex that are tailored to the precise needs of consumers, helping its customers to enter new markets successfully and giving them a significant competitive advantage. Almost 95% of the tocotrienol is destined for the supplement market, and the remaining 5% is shared between cosmetic and food applications.
Patented Integrated Extraction Process. Carotech owns the patent for an integrated process of extracting palm tocotrienols and palm carotene from CPO. The patent was granted and registered in Malaysia and several other countries such as US, Philippines and Indonesia. This poses a barrier for new entrants into the industry.
Gaining from the demand-supply gap. Increasing awareness of the need to protect the environment is helping to boost demand for such green fuels, especially in Europe. Under the 2003 European Union Bio-fuels Directive, 2% of the energy content of all petrol and diesel for transport must come from renewable sources such as bio-diesel and bio-ethanol. This percentage rises to 5.75% by the end of 2010. Carotech expects strong revenue growth from biodiesel sales, given the growing global demand for green fuel, as nations from Asia to Europe seek ways to reduce dependence on fossil fuels and cut green house gas emission. In fact, Carotech has a headstart in the market as it has been supplying biodiesel to oil traders since 1995, and now it just has to be aggressive in securing new clients.”
The European Union, which is currently the world's largest consumer of biodiesel, has set an ambitious target of 2%, 5.75% and 20% for bio-diesel conversion for transport purposes, on energy content basis, by 2005, 2010 and 2020 respectively. To meet EU's target, 3.3 mil MT of biodiesel would be consumed in 2005 and 11.2 mil MT by 2010. This figures compare starkly with the production reality, which could only fulfill about 70% (likely to reach 8m MT) of EU’s demand. The shortfall was largely due to capacity constraint and high rapeseed prices, the most widely used vegetable oil to produce biodiesel. Given the supply constraint, EU will continue to depend significantly on imports to meet demand.
Barriers to entry to the phytonutrients and bio-diesel industries are high. Technology and large capital outlays to build production facilities are necessary. It took Carotech 6-7 years to develop and commercialize its products, and its process is patented. Although we believe that new players, both domestic and foreign will be attracted to this industry, Carotech has first mover advantage and a proven and effective extraction process.
Global demand is creeping up. In order to meet rising demands, Carotech expanded CPO processing capacity to 90MT/day in Aug 06 from 17MT/day in Sept. 2004. However, it continues to face a huge order backlog and soaring WIP due to the accelerating demand for its phytonutrients and oleochemcals products.
Anticipate net earnings CAGR of 63.1% for FY07-09. We expect Carotech to grow revenue at a CAGR of 74.5% and net profit at 63.1% from FY07-09. Although we expect the price of its key raw material (about 80% to production costs) CPO, to stay high for the next 12 months, the impact will be more than offset by the substantial increase in output and improved efficiency from the enlarged capacity coupled with the cost-plus pricing strategy. Carotech’s effective tax rate is low (estimated around 19-20% in FY08/09) due to taxexempt incentive for the development, testing and production of palm mixed carotenoids, palm tocotrienols, palm fatty acid methyl esters, crude glycerine and palm phytosterols, as well as the capital and reinvestment allowances.
Most importantly, Carotech is uniquely positioned to profitably manufacture biodiesel, given its ancillary income from phytonutrients. Aggregate phytonutrient and biodiesel revenues remain above feedstock costs, and we expect Carotech sales volumes to receive a boost from its plant expansion in FY08. We project the PFAME prices to stay at USD700-800/MT levels in 2007-2009, inline with stubbornly high crude oil prices, which are projected to hover above US$60/barrel.
Promising industry outlook
**Health Supplement and Nutrition Industry.
*The continuous growth in the global retail nutrition industry, in particular the expected growth of nutraceuticals market in Japan to US$54bn by 2012, will also provide positive demand for palm Vitamin E or tocotrienols (Tocomin?) and mixed carotene concentrates (Caromin?), which are known for their antioxidant properties.
*Recent published research and studies showed that tocotrienols, in particular palm tocotrienols exhibits the following additional health and therapeutic properties:-
*Biochemical and Biophysical Research Communication, 2006 in Japan showed that tocotrienols act as potent anti-cancer agents by inhibiting the angiogenic activity of the cancer cell.The positive health effects from the above research and studies augur well for the Group nutrient products, in particular Tocomin? to further penetrate the growing nutraceutical market.
*The publication in the prestigious journal “Stroke” (in collaboration with the Ohio State University Medical Center and funded by the United States’ National Institute of Health) showed that tocotrienols elevate blood levels sufficiently to protect against a wide range of diseases such as cancer and stroke. The study showed that taking Tocomin? orally is an effective way to elevate blood plasma levels to concentrations that could help protect against neurological damages resulting from stroke.
*In an article posted in the Journal of Neurochemistry, USA, tocotrienols was shown to exhibit nerve-protecting properties that help to protect cardiovascular system against damage, and help maintained the health of nervous system.
**Renewable Energy Industry – Biodiesel. Over the past years, the use of fossil energy has grown tremendously. By year 2030, with the world population expected to reach 8 billion people, demand for energy is forecast to grow by 50%, of which 80% of the growth will be in developing countries.
*The recent ratification of Kyoto Protocol Treaty’s greenhouse gas emission standards by the developed countries like Germany, United Kingdom, France, Japan and Korea has played a decisive role in government fuel policies throughout the world in the usage of renewable energy fuel, and in particular vegetable oil fuels such as Fatty Acid Methyl Ester (“FAME”) or biodiesel. Under the framework, major industrialized countries are mandated to reduce greenhouse gas emissions by at least 5% below 1990 levels between year 2008 and 2012
*Likewise, other countries in Asia such as Japan, China, Malaysia, Singapore and Indonesia have initiated respective national fuel policy to encourage the use of biodiesel for its environmental friendly reasons. In relation to this, further progress of biodiesel market today would depend on government’s energy policy supports through legislations and requirements to use bio-diesel, and the investment incentives available.
Ringgit appreciation is not a significant issue.
As Carotech derives >80% of its revenue from exports, the stronger Ringgit could have some negative effect on CB. But with 80% of its cost (i.e. CPO) also denominated in US$, the net effect on the group is not expected to be significant. The recent and planned increase in selling prices should help cushion Carotech’s margins against any potential the appreciation of the Ringgit.
Risks to our recommendation and target price include: (i) sharper-thanexpected increase in CPO prices, which may pressure margins; (ii) a sharp fall in the price of oil, which makes processing bio-diesel less viable; (iii) overcapacity in the industry (iv) a renew and strong hate campaign by the US and Europe NGOs to undermine palm oil products, claiming unsustainable practices could cause further destruction of tropical forests and natural habitants
VALUATION
Break new grounds, scale record heights, and time for a re-rating.
With the wealth of experiences gathered over 10 years, a track record of successful execution of its multinational customers, expanding capacity and an efficient cost structure, Carotech is well positioned to compete in the global market place by running its latest facility and technology at optimum efficiency.
We opine that investors have yet to grasp fully the company’s sound mediumand long-term potential. This is not surprising as the stock was 1) underresearched by analysts,2) fading biodiesel thematic play due to record high CPO prices, 3) delay in commissioning of the Lumut plant. Now, with the peaking CPO prices, revival of crude oil prices and imminent commissioning of Lumut plant, it is only a matter of time before the investment community starts re-rate the stock upwards. We see values in Carotech after plunging 30% from its 52-week high, owing to the promising global demand of the phytonutrients and biofuel products, savvy and far-sighted management, decent ROE and undemanding valuations at 11.6x PER08 and 8.1x PER09, supported by superb earnings CAGR of 63.1% for FY07-FY09.
Buy with a 12M target price of RM1.10. We benchmark Carotech’s 12M target price on FY09’s EPS of 9.5sen, as this would present a more reflective picture of its fully expanded capacity of 120,000MT pa. Our price objective implies a target FY09 PER of 11.6x (in line our smallcap 10-12x target PER), which in our view is fair considering its robust projected earnings growth of 63.1% CAGR over the next 2 years. Inclusive of the 1.3% dividend yield, it provides a handsome return of 44.1%.
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