Plantation

Sector Outlook

Prepared by: Linda Lauwira

Average Price for CPO in 2012

Positive Drivers for CPO: Emerging Market Demand Biodiesel Mandate

USD 1,050

Palm Oil Role in the 8 Major Vegetable Oil

Global Consumption Composition - Vegetable Oil
Dec 2011/12 Nov 2011/12 2010/11 2009/10 2008/09 2007/08 54.55 54.46 52.29 49.41 47.02 43.87 40% 42.97 43.14 40.98 38.25 36 37.72 22.87 22.88 23.31 22.42 20.13 18.24

Increasing Importance of Palm Oil

Palm oil consumption represents the lion share of about 36 37% from total consumption of 8 major vegetable oil for the last 5 years or since 2007. CAGR for palm oil consumption (2007 2011) is 4.4% while CAGR for soybean oil, the closest substitute for palm oil is only 2.7%. Demand for vegetable oil will continue to expand remembering that GDP per capita in these countries is still far from the level where food necessities becomes secondary.

0% 20% Oil Palm Oil Rapeseed Oil Cottonseed Oil Coconut

60% 80% 100% Oil Soybean Oil Sunflowerseed Oil Peanut Oil Olive

Source: USDA

Palm Oil Consumption Relative to Emerging Market GDP per Capita

GDP per Capita PPP Adj 8,000 6,000 4,000 2,000 1990 1994 1998 2002 2006 2010 CHN GDP PER CAP PPP ADJ. CHINA PALM OIL CONSUMPTION PER CAP GDP per Capita PPP Adj. 5,000 4,000 3,000 2,000 1,000 1990 1994 1998 2002 INDO GDP PER CAP PPP ADJ. 2006 2010

China GDP per Capita & Palm Oil Consumption per Capita

Palm Oil Consumption per Capita 5.00 4.00 3.00 2.00 1.00 -

GDP Per Capita PPP Adj 4,000 3,000 2,000 1,000 1990

India GDP per Capita & Palm Oil Consumption per Capita

Palm Oil Consumption per Capita 4.00 3.00 2.00 1.00 -

1994 1998 2002 INDIA GDP PER CAP PPP ADJ.

2006

2010

INDIA PALM OIL CONSUMPTION PER CAP GDP per Cap PPP Adj. (USD) 8,000 6,000 4,000 2,000 Jan-90 Jan-94 Jan-98 Jan-02 Jan-06 Jan-10 CHN GDP PER CAP PPP ADJ. INDO GDP PER CAP PPP ADJ. INDIA GDP PER CAP PPP ADJ.

Indo GDP per Capita & Palm Oil Consumption per Capita

Palm OIl Consumption per Cap. 25.00 20.00 15.00 10.00 5.00 -

GDP per Capita for China, India & Indonesia

INDO PALM OIL CONSUMPTION PER CAP

Source: USDA, Bloomberg

11 M 10
1.93 17.28 17.58 1.64 8.5%
JAKAGRI, KO1 Comdty

2007

2008

2009

2010

Malaysia Production Trend

Production in Malaysia had reached the same level of output back in the 3rd and 4th quarter of 2008 where subsequently the CPO price in Malaysia and JAKAGRI index in Indonesia hits their lowest point. The difference between 2008 and 2012 will be the continued strong demand from emerging market and bio-diesel mandate from various countries like United States and Argentina that will serves as a price floor for CPO.
Source: Malaysia Palm Oil Board, Bloomberg

Beg. Stocks Production YoY Growth (%) Consumption Ending Stocks Disappearing ratio (%)
Malaysian Palm Oil Production

1.51 15.82 -0.4% 15.65 1.68 9.7%

1.68 17.73 12.1% 17.42 1.99 10.3%

1.99 17.56 -1.0% 17.32 2.24 11.4%

2.24 16.99 3.3% 17.62 1.62 8.4%

1.64 18.65 7.9% 18.22 2.06 10.2%

5,500.00 5,000.00 4,500.00 4,000.00 3,500.00 3,000.00 2,500.00 2,000.00 1,500.00 1,000.00 500.00 -

Production Output Level similar to 3Q & 4Q 2008

4,000.00 3,500.00 3,000.00 2,500.00 2,000.00 1,500.00 1,000.00 500.00

4Q 2011* - October and November 2011 Inventory and Price Index

1Q 2007 2Q 2007 3Q 2007 4Q 2007 1Q 2008 2Q 2008 3Q 2008 4Q 2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011 3Q 2011 4Q 2011*

CPO Production

JAKAGRI Index

KO1 Commodity

11M 11

Price and Quantity Determinants

Impact on biofuels
Price Quant.
Quant.

Changes caused by:

Increased biofuels mandate 2 Higher energy prices
1. 2.

Impact on Feedstocks 1
Biofuels use Non-bio use Quant. Total Quant. Price

Market assumes one generic market for feedstocks, serving biofuels and nonbiofuel market Biofuel price received by producer

Source: USDA

Ethanol Blending Tax Credit

Feedstock used in biofuel production must satisfy two profitability schemes: profitability for planters and biodiesel producers Among all the crops planted in US, corn is the most profitable for producing ethanol as you can see in graph 1.1 The 45-cents-per-gallon tax credit available to blender of ethanol is expiring at the end of 2011. A possibility of renewal at a slighter credit. Decreased profit from producing corn as feedstock for ethanol might make growers in United States to switch from growing corn to soybean.
Other 1500 1000 500 0
Corn Barley Sugarbeets Soybeans

Graph 1.1 Yield per Acre compared to Production Cost

Yield per acre 30 20 10 0

Production Cost ratio 1.80 1.50 1.20 0.90 0.60 1980 1983 1986 1989 1992

Fuel Yield

Yield per Acre

Graph 1.2 Corn & Soybean Harvested Mn Ha Area

160.00 120.00 80.00 40.00 1995 1998 2001 2004 2007 2010

Corn
Source: USDA

Soybeans

Ratio Corn to Soybean

Oil Universe Correlation

Crude Oil 160 140 120 100 80 60 40 20 0 Jul-02 Oct-03 Jan-05 Apr-06 Jul-07 Oct-08 Jan-10 Apr-11 Crude Light Oil Soybean 1,600.00 1,400.00 1000 1,200.00 1,000.00 400 800.00 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 CPO Jul-11 Soybean 200 800 600 CPO

Crude Oil Vs CPO

CPO

Stock Price Correlation

BWPT 1.00 0.86 1.00 SGRO UNSP GZCO 1.00 0.72 0.83 TBLA 1.00 0.70 0.83 0.84 AALI 1.00 0.96 0.70 0.86 0.83 0.40 0.91 1.00 0.66 0.88 0.93 0.96 0.92 1.00 0.73 0.07 -0.46 0.60 CPO LSIP

1,600.00 1,400.00 1,200.00 1,000.00 800.00 600.00 400.00 200.00

CPO AALI LSIP UNSP TBLA

1.00 0.92 0.91 0.65 0.88 0.79 0.94 0.91

CPO against Soybean

CPO 1400 1200

GZCO BWPT SGRO

There are four stocks in Indonesian plantation that have high correlation with CPO price movement: BWPT (0.94), AALI (0.92), LSIP (0.91), & SGRO (0.91)

Source: USDA, Bloomberg

Growth is My Middle Name

Market Cap (IDR)
BWPT GZCO SGRO LSIP TBLA UNSP Age Profile (2015F) Total Immature Area Total Young Mature Area Total Prime Area Total Older Area 529.74 Mn 144.73 Mn 681.27 Mn 1.77 Bn 329.29 Mn 456.41 Mn BWPT IJ 29.3% 42.5% 23.8% 4.4% GZCO IJ 51.5% 25.4% 18.0% 5.1%

Unplanted Area (Ha)

41,704 90,747 26,336 30,000 49,496 80,000 SGRO IJ 25.6% 31.0% 43.4% 0.0%

Planted Area (Ha)

56,476 33,147 105,411 99,386 51,584 106,257 TBLA IJ 14.0% 13.9% 35.7% 36.3%

Matured Area (Ha)

19,663 21,428 78,518 85,563 39,966 78,630

CPO Prod.
86,031 43,096 271,924 199,447 180,147 235,861

CPO Extraction Rate

22.9% 22.08% 21.6% 23.2% 22.0% 20.0%

Growth is my middle name. Amidst future land scarcity, moratorium law, intense scrutiny from global organizations like WWO, there is a high preference to plantation companies with ample land banks for future new plantings. Supported by our belief that palm oil consumption will continue to amplify from emerging market demand and most importantly from our own domestic demand, plenty land bank begets abundant FFB which then will begets our liquid gold none other than CPO.

Stocks Comparison
Market Cap (IDR)
BWPT GZCO SGRO LSIP TBLA UNSP 529.74 Mn 144.73 Mn 681.27 Mn 1.77 Bn 329.29 Mn 456.41 Mn

Rev 1 Yr Growth
21.92% 11.43% 27.33% 12.28% 6.02% 29.21%

Op. Income 1 Yr Growth

-5.41% -21.48% -15.40% 57.83% 66.23% 35.48%

EPS 1 Yr Growth
19.08% -9.31% 58.28% 43.81% -8.26% 3.29%

ROE
23.95% 14.35% 23.18% 24.70% 23.12% 14.66%

ROA
11.39% 7.87% 17.58% 19.86% 7.66% 6.83%

PBV
3.65 1.06 2.59 2.97 1.79 0.46

100.0%

Stock Performance in FY2011

50.0%

0.0%

-50.0% Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 GZCO IJ Equity UNSP IJ Equity AALI IJ Equity LSIP IJ Equity TBLA IJ Equity BWPT IJ Equity SGRO IJ Equity

Stock performance in the plantation universe pretty much mirrors each other in the FY2011 except for TBLA. The reason being there is a jump in revenue, gross profit, and net margin growth YoYwise and margins improvement all across the board that gave a boost to TBLAs earnings per share making it one of the cheapest relative to peers priceto-earnings wise in 1H 11.

Source: Bloomberg

Financial Highlights
Y/E December Total sales COGS Gross profit SG&A expenses EBITDA Operating Profit Interest income Forex gains (loss) Pretax income Income taxes Net Income Ratios ROA(%) ROE (%) Gross margin Op. margin EBITDA margin Pretax margin Net margin 10.3% 18.5% 62.5% 44.3% 57.8% 42.4% 28.7% 12.4% 21.6% 65.6% 52.1% 66.6% 46.7% 34.2% 13.3% 22.5% 64.9% 51.7% 66.4% 51.7% 34.8% 17.1% 25.4% 66.9% 52.8% 65.8% 51.6% 34.6% 17.3% 24.7% 65.9% 51.2% 64.2% 50.0% 33.6% 2009 584.11 219.09 365.02 106.18 337.65 258.84 3.60 39.83 247.81 80.35 167.47 2010 712.58 244.99 467.59 96.18 474.77 371.40 12.79 7.88 332.98 88.99 243.99 2011F 900.42 315.99 584.43 118.89 598.23 465.54 24.20 465.25 152.14 313.11 2012F 1305.03 431.45 873.57 183.92 858.28 689.65 44.64 672.99 221.00 451.99 2013F 1652.13 562.92 1089.20 243.05 1059.87 846.15 43.52 826.53 270.85 555.68

BW Plantation (BWPT IJ) Buy

Target Price: IDR 1,310 (Upside +12.9%)
IDR

1,600.00 1,200.00 800.00 400.00 Oct-09 Close

BWPT IJ PE Band

May-10 PER 8

Nov-10 PER 10

Jun-11 PER 12

Dec-11 PER 16

200.00% 160.00% 120.00% 80.00% 40.00% 0.00%

BWPT IJ Performance against benchmark

Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 -40.00% BWPT IJ JAKAGRI INDEX JCI INDEX

BW Plantation (BWPT IJ) Good to Great

Aggressive New Plantings
In the midst of moratorium law and maturing palm plantation industry, BWPT is set for the next years to come with approximately 93,000 ha under their belt of which as of December 31st 2010, 52,060 ha is planted. Across the industry, BWPT in the last few years had implemented an aggressive policy of new plantings. A more established plantation with limited extra land bank will want to wait before they regenerate old trees with the new ones and as a result they did not plant new trees on such a big scale like BW Plantation did. Hacking down still producing trees albeit old ones is the same like plugging one of their cash flow, this is one of the main challenges that a more established plantation with limited new land banks have. We believe this will benefit BWPT for the next years to come when other more established plantations are experiencing a declining yield per Ha as a result of their maturing plantation age profile.

Creation of Economies of Scale with the Introduction of New Technology

New technology like the bin system for fresh fruit bunches collection has created a better economies of scale for BWPT that are reflected in the improving gross margin averaging on the 60% level from a previously a mere 29% gross margin for the year 2005. This is where we would like to applaud BWPT for successfully integrating new technology for greater efficiency in their estates. The strategic location of their estates that are located in Kalimantan may have been one of their influencing key point why they can so easily integrate technology to their harvesting process. Human labor are scarcer for Kalimantan compared to Sumatra. Integrating technology to estates in Sumatra is much more difficult as the existing workers are resistant to changes fearing for their job security.

BW Plantation (BWPT IJ) Good to Great - contd

Walking the Talk
With regards to new planting target, FFB production target, and cost efficiencies, BWPT has walked the talk and pretty much met our expectation for the year of 2011. We are seeing more third party buying of FFB at 2H 11 for filling up their idle capacity in their existing mills which is not a bad thing considering that the average price for CPO is relatively high in 2011 compared to 2010 and 2009. Added income from manufacturing fresh fruit bunches to CPO is very much welcome amid relatively higher CPO price ticker.

Our Call
We are seeing a leveling off CPO price for 2012 with price floor of USD 895 net of tax and or USD 1,050. We are recommending a Buy for BWPT in light of their growth profile with target price IDR 1,310 or an upside of 12.9% reflecting a PE 2012 of 12

Financial Highlights
Y/E December Total sales COGS Gross profit SG&A expenses EBITDA Operating Profit Interest income Forex gain (loss) Pretax income Income taxes Net Income Ratios ROA(%) ROE (%) Gross margin Op. margin EBITDA margin Pretax margin Net margin 12.8% 17.0% 33.0% 25.3% 29.7% 22.5% 15.5% 17.6% 23.2% 36.4% 28.4% 33.0% 27.3% 19.5% 23.9% 31.0% 43.7% 33.7% 37.5% 34.3% 23.9% 23.7% 28.8% 52.5% 45.4% 50.1% 46.4% 32.4% 21.1% 24.4% 52.1% 44.7% 49.6% 45.7% 32.0% 2009 1815.56 1216.13 599.43 139.39 538.94 460.04 23.48 (20.28) 409.40 123.13 281.81 2010 2311.75 1469.12 842.63 186.85 762.34 655.79 12.54 1.14 630.49 173.16 451.73 2011F 3159.63 1779.47 1380.17 315.18 1184.39 1064.99 48.30 1083.05 317.18 755.00 2012F 2746.20 1304.95 1441.25 194.65 1377.03 1246.60 55.70 1274.73 371.68 889.11 2013F 2912.20 1395.34 1516.86 214.90 1443.59 1301.96

Sampoerna Agro (SGRO IJ) Buy

Target Price: IDR 3,300 (Upside +10.0%)
5,000.00 4,000.00 3,000.00 2,000.00 1,000.00

SGRO IJ PE Band

55.16
-

1332.21 387.38 931.24

150% 100% 50% 0% -50% -100%

Jun-07 Close

Mar-08 Dec-08 PER 6

Sep-09

Jun-10 PER 12

Mar-11 Dec-11 PER 16

PER 8

SGRO IJ Performance against benchmark

Jun-07

Mar-08 SGRO IJ

Dec-08

Sep-09

Jun-10

Mar-11 JCI Index

Dec-11

JAKAGRI Index

Sampoerna Agro Plantation (SGRO IJ) Slow but Steady Wins the Race
Stabilizing FFB Production
SGRO used to be known with erratic productions that made quite challenging to nail a forecast for their FFB productions; not the case lately. Their usual propensity of very sharp drop in FFB production in the first quarter of the year had been curtailed to 20% drop from a previously 41 69% plunge. 2011 has never been a better year for SGRO where both of their nucleus and plasma production stabilized and improved in the midst of escalating CPO prices. Double multiplier at works for their top line. Especially seen in 1Q 2011 where their gross margin was a whooping 44% compared to the usual 36 38% gross margin they recorded the previous year.

Strong Cash Position

SGRO has strong cash position which is only getting stronger by the year, in fact they had been in the position of net cash instead of net debt since the year of 2007 onward. New planting will boost production in future years but the company has to have a strong cash flow for the next seven years as production will be nil for the first four years and the next three initial productive years will not be as profitable and productive relative to a more mature trees. SGRO fulfilled the two conditions important for new plantings ample land banks and strong cash flow to maintain the new planting areas. One of the main cost component of palm plantation is the fertilizer cost which is essential during the immature phase.

Sampoerna Agro Plantation (SGRO IJ) Slow but Steady Wins the Race contd
Building Block of Improving Plasma Production Good Socialization
Plasma production had been the wild card in palm plantation industry for 80% of the time. But SGRO proved otherwise with their plasma productions. While others have problem on socializing the importance of fertilizer for the realized output later on, SGRO doesnt. The fact of the matter is their Sumatras mature plasma plantation area making up about 63.9% of their total mature area has been recording better than ever FFB output. This is no trivial undertaking where you have to convince farmers with limited education to forgo their immediate needs for future revenues.

Our Call
Stabilizing production, net cash position, and good estate management made SGRO a buy in our estimation. We are recommending a buy for SGRO with target price of IDR 3,300 (upside of 10%) reflecting a 2012 PE of 7.01; a bargain in terms of peer comparison and their historical valuation.

Financial Highlights
Y/E December Total sales COGS Gross profit SG&A expenses EBITDA Operating Profit Interest income Forex gain (loss) Pretax income Income taxes Net Income Ratios ROA(%) ROE (%) Gross margin Op. margin EBITDA margin Pretax margin Net margin 4.9% 15.5% 16.1% 10.1% 14.0% 7.5% 5.0% 7.7% 23.1% 21.7% 11.8% 16.1% 11.0% 8.4% 12.9% 34.2% 30.0% 20.5% 24.8% 18.5% 12.5% 7.8% 19.0% 25.9% 16.3% 22.1% 13.4% 9.5% 9.1% 21.2% 27.9% 18.5% 24.8% 16.0% 11.4% 2009 2783.57 2336.34 447.24 165.77 389.80 281.47 9.04 20.33 208.35 69.35 138.24 2010 2951.11 2310.10 641.01 291.41 474.15 349.60 2.06 57.96 324.38 76.24 246.66 2011F 3977.82 2784.48 1193.35 378.16 987.02 815.18 20.87 734.20 233.64 498.13 2012F 3545.52 2628.63 916.89 340.24 781.93 576.65 37.48 474.88 135.70 337.28 2013F 3780.86 2724.85 1056.00 355.93 937.95 700.07 34.08 -

Tunas Baru Lampung (TBLA IJ) Buy

Target Price: IDR 680 (Upside +13.3%)
IDR 900.00 800.00 700.00 600.00 500.00 400.00 300.00 200.00 100.00 Oct-06 Close

TBLA IJ PE Band

Aug-07 PER 6

Jul-08

May-09 Apr-10 PER 8 PER 10

Feb-11

Jan-12 PER 12

606.00 172.39 430.89

1200.0% 1000.0% 800.0% 600.0% 400.0% 200.0% 0.0% Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 -200.0% TBLA IJ JAKAGRI Index JCI Index

TBLA IJ Performance against benchmark

Tunas Baru Lampung (TBLA IJ) Margin Little Thing that Makes Big Difference
Margin Improvements
If there is a saying its the little thing that makes a big difference, it certainly is for TBLA. Sterling financial performance might come from elevated CPO price and improved production over the year that has CAGR of 3.9% for the last five years that boosted their revenue figure but margin improvements can be seen throughout 2011. Revenue for TBLA was highest in 9M 2008 recorded at IDR 3.1 billion but the gross margin, operating margin and net margin during the period was only 23%, 11%, and 9% respectively. Compared to 9M 2011 revenue at IDR 2.9 billion or 5.4% less than revenue recorded at 9M 2008, margins are very much improved across the board. 35%, 17%, and 12% for gross, operating and net income margins respectively. Most of the improvements were due to decreased third party purchase of FFB that only can be achieved by increased nucleus production.

Full Integrated Operation From Upstream to Downstream

In the tax friendly climate for CPO downstream products, TBLA is in the sweet spot of margin expansion since about half of the revenue generated comes from products like olein, PFAD, and stearine. In tax bracket graph included in the next page, its easy to see that other than the manufacturing margin, TBLA also enjoyed tax margin from the incentives introduced by the government. Other than that, TBLA has an established distribution channel like 21 marketing sales offices and more than 48,000 outlets throughout Indonesia. With downstream products, brand is going to be a key driver of sales, we believe TBLA had already produced a recognized brand in the market.

Tunas Baru Lampung (TBLA IJ) Margin Little Thing that Makes Big Difference
128-PMK.011-2011
Crude Palm Oil Crude Palm Kernel Oil Crude Palm Stearin Palm Fatty Acid Distillate (PFAD)

> 750 800

7.50 7.50 3.00 3.00

>800 850
9.00 9.00 4.00 4.00

>850 900
10.50 10.50 5.00 5.00

>900 950
12.00 12.00 6.00 6.00

>950 1,000
13.50 13.50 7.00 7.00

>1,000 1,050
15.00 15.00 8.00 8.00

> 1,050 1,100

16.50 16.50 9.00 9.00

>1,100 1,150
18.00 18.00 10.50 10.50

>1,150 1,200
19.50 19.50 12.00 12.00

Our Call
Fully integrated company with proven track record, fattening margins, and profits from tax-friendly environment make TBLA a buy in our view with target price IDR 680 or an upside of 13.8% from current price reflecting PE 2012 of 9.55.

Financial Highlights
Y/E December Total sales COGS Gross profit SG&A expenses EBITDA Operating Profit Pretax income Income taxes Net Income Dividend Paid Ratios ROA(%) ROE (%) Gross margin Op. margin EBITDA margin Pretax margin Net margin Dividend payout Current ratio 10.3% 19.1% 36.0% 29.8% 45.5% 49.8% 50.1% 7.9% 2.85 7.7% 13.7% 42.3% 33.2% 48.7% 41.8% 35.4% 37.3% 1.64 6.9% 11.5% 36.3% 26.0% 42.2% 38.4% 30.8% 33.5% 2.50 7.9% 12.8% 33.9% 27.6% 42.2% 37.2% 31.4% 35.4% 3.21 8.1% 13.0% 31.9% 25.6% 39.7% 34.0% 28.7% 34.4% 3.32 2009 407.90 260.96 146.94 25.46 185.73 121.48 203.13 30.77 204.45 16.25 2010 454.52 262.06 192.47 41.49 221.30 150.97 190.09 28.45 160.80 60.00 2011F 473.80 301.83 171.97 48.83 199.83 123.14 181.75 37.00 145.73 48.77 2012F 565.62 373.70 191.92 35.71 238.94 156.21 210.68 35.34 177.54 62.83 2013F 684.31 466.31 218.00 43.13 271.51 174.86 232.77 39.13 196.08 67.51

Gozco Plantations (GZCO IJ) Hold

Target Price: IDR 335 (Upside +26.4%)
IDR 500.00 400.00 300.00 200.00 100.00 May-08 Close Nov-08 Jun-09 Dec-09 PER 6 Jul-10 PER 8 Jan-11 PER 10 PER 4

GZCO IJ PE Band

150.0% 100.0% 50.0% 0.0% -50.0% -100.0%

GZCO IJ Performance against benchmark

May-08

Feb-09 GZCO IJ

Nov-09

Aug-10

May-11 JCI Index

JAKAGRI Index

Gozco Plantations (GZCO IJ) A Prospective Growth Company

Land Banks Under the Belt
Left and right we are seeing plantations scrambling to acquire land to add on to their current land banks. In the midst of moratorium law and intense scrutiny from organization like WWO will escalate the fight for lands. Current land banks for GZCO relative to other much more established company is plenty enough to avoid any road bumps in the future resulting from the scarcer and scarcer lands and or difficult land clearing regulations that will hinder new plantings for future production growth.

Bottom Line Booster

Gains from associate company or in this case Indotruba had pretty much improved the bottom line for GZCO for the last consecutive quarters. The other booster comes from utilization of idle capacity from the new mill. Even if margin from manufacturing third party FFB instead of own nucleus FFB is smaller nevertheless its a relevant strategy adopted by GZCO to boost their bottom line.

Cost Efficiency will Fatten Up Margins

Gains from associate company and manufacturing margin from third party purchases is not enough to make GZCO looks attractive in the income statement. However we believe if GZCO can introduce cost efficiencies to any of their operating costs, it makes a big difference. With cost efficiencies, comes fatter margins, with fatter margins give off decent net income.

Our Call
GZCO is still a Hold with target price IDR 335 or 26.4% upside in our view from a growth stock perspective. Ample land banks for future new plantings in a land-rarity environment, inorganic growth from associate company namely Indotruba and manufacturing profit that nonetheless is still yielding out profits to be enjoyed by GZCO.

Financial Highlights
Y/E December Total sales Gross profit Operating profit EBITDA Net Income Margins Gross Margin Operating Margin EBITDA Margin Net Margin Total Assets Cash & equiv. Plantations & FA Other assets Debt Other Liabilities Equity 29% 20% 26% 11% 5,072 194 2,219 2,659 1,744 658 2,670 43% 28% 38% 27% 18,502 935 10,549 7,018 8,227 1,957 8,318 265% 382% 375% 164% 372% 198% 212% 41% 30% 40% 11% 15,063 976 6,399 7,688 5,623 1,490 7,950 37% 25% 30% 21% 18,686 580 10,584 7,522 7,977 1,841 8,867 2009 2,325 672 470 598 253 2010 3,004 1,292 850 1,153 806 YoY 29% 92% 81% 93% 218% 9M 10 1,896 783 568 754 215 9M 11 3,343 1,236 828 1,016 713

Bakrie Sumatera Plantation (UNSP - IJ)

YoY 76% 58% 46% 35% 232%
IDR 3,000.00 2,500.00 2,000.00 1,500.00 1,000.00 500.00 Feb-05 Close Jul-06 PER 6 Nov-07 PER 12 Mar-09 PER 18 Aug-10 PER 24

Under Review UNSP IJ PE Band

24% -41% 65% -2% 49% 24% 12%

UNSP IJ Performance against 1200.0% benchmark

1000.0% 800.0% 600.0% 400.0% 200.0% 0.0% Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 UNSP IJ JAKAGRI Index JCI Index

Bakrie Sumatra Plantation (UNSP IJ) at a glance

A Fully Integrated Plantation Company
Bakrie Sumatera Plantations (UNSP.JK) currently managing more than 125,000Ha planted area and operates 12 factories with combined capacity of 715,000MT per annum producing a combination of upstream and downstream products namely crude palm oil, palm kernel, rubber, and oleo chemicals. With the current export tax environment for Oil Palm products in Indonesia that is more conducive toward the downstream players, we believe that UNSP will be one of the beneficiaries trough its full integrated Oil Palm business. On top of it, UNSP has the opportunity to capture strategic synergy from the upstream production to the value-added manufacturing of downstream derivatives.

9m 11 Improving Operational Performance

For 9M 11 UNSP recorded 34% and 31% increased respectively for CPO and PK productions. The developments can be traced back to better fertilizer applications and advancement in UNSPs age profile resulting in higher FFB yield per ha reaching 16t/Ha (annualized). We believe this positive trend to continue next year and expect FFB yield to gradually narrow the gap with industry average.

Growing Product Portfolio Oleo chemicals added to the mix

We believe Asian demand for oleo products will continue to grow approximately at 5%-7% per annum. Oleochemicals industry gives an estimated 40% value-added boost to the value of CPO and PKO. On top of the 15% gross manufacturing margin, Oleochemicals can also boost up earnings by saving on the tax incentives. CPO and PKO are under progressive tax policy with benchmark price above US$1250 taxed at the 22.5% tax bracket while refinery products with benchmark price above US$1250 is taxed between 10%-15% and no tax for Fatty Alcohol products.

Bakrie Sumatra Plantation (UNSP IJ) at a glance - continued

The Largest Rubber-Exposed Listed Plantation
UNSP currently is Indonesian listed company with the largest rubber planted area of 18,477 ha. Rubber production by UNSP in FY2010 is significantly higher or roughly about 62% higher than another company with rubber exposure in the industry. Rubber sales contributed about 26.7% of total sales for UNSP; second key revenue generator after palm oil in their sales breakdown. By being the largest rubber-exposed listed plantation in terms of planted area and production, UNSP does not miss the boat like some others do. Please note that average selling price for 9M 11 of rubber is USD 4,727/MT or a 61% increase from USD 2,932/MT.

UNSP Offers Attractive Valuations

UNSP is valued at a discount compared to peers currently in terms of revenue growth, price-tobook, and price to earnings ratio. The compounded annual rate growth for Bakrie Sumatera Plantation for the last five years is 20.5% and its one-year revenue growth according to Bloomberg is 29.21% beating the industry average of 16.01% by quite a significant margin of 13.20%. Earning is under pressure because of the high gearing as they incurred additional debts in the process of acquiring smaller plantations and Oleochemicals assets in particular. Remembering that land banks are getting few and far in recent years and the growing demands of oleo chemical products in future years, recent acquisitions of debt-ridden plantations and Oleochemicals may present a positive surprise for UNSP in the future. Considering that UNSPs price-to-book ratio is valued at 0.44 compared to the 2.28 industrys average PB ratio, we believe that UNSP is somewhat attractive even with the highest gearing across the plantation industry.

Indonesian Plantation Rundown

Upside Chance in Indonesian Palm Oil: Relative cheaper valuation than Malaysian palm oil Tax incentives for downstream products giving Indonesia an edge over Malaysias downstream product Bio-diesel mandate that will put a brake on declining vegetable oil demand from slowing Europe and US economy. Emerging market demand for vegetable oil Downside Risk in Indonesian Palm Oil: Global economy slow down spreading to otherwise resilient BRIC countries Resulting in lower consumption of vegetable oil A pause in bio-diesel tax incentives or mandates by more developed countries Stock selection continue to be the lines of approach in Indonesian plantation sector. Growth and cheap valuation relative to peers and relative to their historical trading valuation will be the distinguishing factor in 2012.

Prepared by: Linda Lauwira