Towards Financial Freedom
Kencana Agri - Turned The Corner
We are maintaining our BUY call on Kencana Agri (Kencana), albeit with our FV lowered to SGD0.435 based on 18x CY13 earnings. The company has taken longer than we expected to deliver strong earnings growth but we believe such is still on the horizon. The company has turned the corner with its infrastructure issuesorted out and its tree age profile continues to improve as the year progresses. FFB yield is now on the rise compared to being flat in at mid-year.
Below expectations. Kencana Agri's 9MFY12 earnings continue to be disappointing, coming in at USD7.8m against our expectation of USD19.1m for the full-year. Fresh fruit bunches (FFB) production growth was weaker than expected, rising by 22.3% to 292.3k tonnes for the 9M period against our expectation of 438.9k tonnes for the full-year. Assuming that Kencana's 4Q production drops by 10% q-o-q, full year production will come in at 394.4k tonnes, or 10% below our expectation.
Trimming production forecast. We trim our FY12 nucleus FFB production forecast to 396.6k tonnes from 438.9k tonnes previously and lower our oil extraction rate (OER) assumption to 20.5% from 21.0% previously. Our FY13 nucleus FFB forecast is also reduced to 492.3k tonnes from 536.2k tonnes, with OER maintained at 21.5%.
Profit forecast cut. With the lower production forecast, our FY12 earnings forecast is trimmed to USD12.8m from USD19.1m previously while our FY13 forecast is cut to USD22.2m from USD27.4m earlier.
On stronger footing this year. Despite the profit forecast cut, we continue maintain the opinion that Kencana is on stronger footing this year, with 51% of its mature area in prime age compared to 30% as at end-FY11. This can be seen from the 10.7% improvement in its FFB yield to 12.4 tonnes per ha for 9M12 vs 11.2 tonnes per ha in 9M11. Up to 1H12, its FFB yield was still neck-to-neck against last year's.
Maintain Buy call. Kencana's profit has been weaker than expected, warranting us to lower our forecast. However, the company still has plenty of upside given enough time. Valuation is inexpensive at USD10.2k EV per planted ha.
Source: OSK
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