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Dharma Satya Nusantara (DSNG IJ.IDR 585 BUY TP: IDR 1,000 )
November 26, 2021 14:29 WIB

Advantage is Structurally Built-in


DSNG 22F production will naturally go back up as the adverse weather effect we forecast a conservative 8.7% yoy, and leading into an IDR1.0tn net income, a new record for the company. Our view on the structural limited CPO supply will result in sustainably high price and also percolate into better reception from EU and other developed country, potentially to reach to equity fund flow. DSNG as the in CPO ESG will be the main beneficiary in terms of flows. While the sustainably high price will also enlarge its FCF to rapidly deleverage and enhance the equity holder will also benefit.


Slow 9M21, sturdy 4Q21 on the horizon. This reflects CPO ASP of IDR9.2k/kg in 3Q21 (+23.1% yoy,-12.1% qoq) coupled with +1.2% yoy CPO sales of 132k tons plus strength in wood product volume, leading to in-line 9M21 sales of IDR5.1tn (+15.3% yoy). ASP still lag by 1-1.5 months, poised to jump again in 4Q21 beyond the IDR10,000/kg level lifted by the jump in local KPB price tailing surging international prices. GPM of 29.2% in 9M21 was also helped by strength in the wood segment, leading to +267.8% yoy EBIT. Net income of IDR208.4bn in 3Q and IDR415.9bn in 9M21 (+154.2%) is below ours and the consensus.


4Q21: price-driven earnings jump expected. As production will be dampened by El-Nino which has been most severe in East Kalimantan, production will not bloom as initially expected. The CPO price, as we previously mentioned, has reached MYR5,000/ton since early Oct21. We expect the current price environment to stay in place till 1Q22 with the KPB Medan CPO reference price reaching IDR14.9mn/ton. This price surge will be reflected in DSNG’s 4Q21 numbers; thus our implied of IDR589bn net income is achievable.


2022 normalizing CPO price, share price may move the opposite. We view MYR3,800/ton is the average for 22F. Share price performance potentially move in opposite direction driven by shortage in vegetable oil, as CPO production growth will be limited due to old plantation age. This will drive a more receptive stance from developed countries on RSPO and ESG compliant oils, potentially reaching to the equity flow too thus enhancing appetite, and DSNG is the main beneficiary, as the ESG is internationally acknowledged, culminating in green loan. Its Well-maintained and young plantation age of 13.8 years, while production will be normal thus growing 8.7% next year and percolating into 22F IDR1tn net income. High FCF from aforementioned factors will also be utilized for debt pay-down and enlarging dividend afterwards. 


Maintain BUY with a TP of IDR1,000. DSNG is the leader in ESG which we believe will be the key beneficiary on ESG compliant fund flow to CPO. Production will naturally still on upward trajectory due its young age and a bounce in its biggest Kalimantan asset as the weather impact normalize. DSNG is hovering near its historical average EV/ha and PBV level, i.e. really cheap.


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United Tractors (UNTR IJ)
November 26, 2021 09:01 WIB

Oct 21: Better operational numbers


United Tractors (UNTR) reported higher monthly operational numbers with strong Komatsu sales of 396 units in Oct 21 (+30.3% mom, +157.1% yoy), bringing Komatsu’s 10M21 sales to 2,590 units. Coal production and coal sales were also higher in Oct 21. The numbers are broadly within expectations. Maintain BUY with a TP of IDR34,000 (DCF with WACC of 12% and long-term growth of 3%).


Strong Komatsu sales in Oct 21.  UNTR reported strong Komatsu sales of 396 units in Oct 21 (+60.6% mom, +210.5% yoy), bringing Komatsu’s 10M21 sales to 2,590 units. The impact from strong commodity prices (coal, nickel and CPO prices) led to higher Komatsu sales to the mining sector (+181.9% yoy) and agribusiness sector (+64.8% yoy). We believe that our Komatsu sales volume target of 3,000 units for 2021 is achievable considering that the 10M21 sales are 86.3% of that number and UNTR only needs to sell 205 units of heavy equipment in the remaining months of 2021.

Better coal sales and production volume in 10M21. With UNTR increasing monthly coal production (+6.5% mom) and coal sales volume (+25.1% mom) in Oct 21, the 10M21 coal production rose by 2.2% yoy to 97mn tons with OB removal of 709.2mn bcm (+1.5% yoy). Even though the company experienced lower coal sales volume since Aug 21 in anticipation of dry weather conditions, the company managed to book 6.6% yoy higher coal sales volume to 8.2mn tons in 10M21. Overall, the operational numbers are within our expectations.


Strong Komatsu sales expected in 2022.  Given the recent solid coal prices and with the company conducting extensive discussions with Komatsu Japan, UNTR targets stronger Komatsu sales volume of 3,700 units (+23.3% yoy) in 2022 with large-size machinery to account for about 21.6% of total sales (2021F: 16%). The company also expects to regain Komatsu’s market share in the heavy equipment market to 25% in 2022 (10M21: 22%) through the launching of more competitively priced models. For mining contracting, UNTR expects a slight increase by around 3 – 4% yoy to 120mn tons for coal production and to 884mn bcm for OB removal in 2022.


Maintain BUY with a TP of IDR34,000 (DCF with WACC of 12.1% and LT growth of 3%). The stock is trading at 7.5x 2022F PE or slightly below -1SD deviation. Our TP implies 11.2x 2022F PE. The key risks include a correction in coal prices.


… Read More 20211126 UNTR

November 26, 2021 09:00 WIB

Set for recovery but uncertainty remains


The 2022 excise tax regulation will determine the future direction of Indonesia’s cigarette industry. The government’s focus on encouraging healthy lifestyles and a preventive approach toward treating illness/disease will translate into a narrowing gap of cigarette excise tariffs within the tier-1 and below tier-1 categories. This will create a more level playing field. We maintain our neutral stance on the sector.


Still awaiting news on 2022 excise. If we go back to see the realization of excise tax revenues in the past 9 years, we learnt that tobacco excise tax revenues only grew by double digits in 2 years: 2015 – when the government changed the payment of cigarette excise tax ribbons to cash and carry (previously H+2 months) and 2019 (zero excise tax increases for all categories). However, the growth in excise tax tariffs for the SKM Tier-1 category was mostly in double digits (except for 2019) in 2016-19. As the tier-1 cigarette players still account for around 70% of total industry volume, double-digit growth for 2022 excise tax tariffs may be possible.


9M21 excise tax realization reached 73.8% of the FY21 target. By the end of September 2021, the realization of tobacco excise tax was IDR128.3tn, +15.14% yoy or reaching 73.8% of the total FY21 target. The growth in 9M21 tobacco excise tax was supported by the growth in cigarette production (+4.3% yoy) and higher excise tax tariffs. Despite the positive growth in 9M21 tobacco production, this is still 5.7% lower compared to 2019 or the pre pandemic level. Customs and tax reported that the 9M21 cigarette production growth was supported by the production growth of the tier 2 category (+18.9% yoy) and the tier-3 category (+15.2% yoy). This data emphasizes the continued trading down undertaken by smokers.


Approach toward health issues may spark hope for tier-1 cigarette players. The government also plans to implement excise tax on sweetened beverages in 2022, targeting IDR6.2tn of excise tax revenues. Despite its small contribution, this shows the government’s commitment toward raising awareness on health matters. Taking this argument further, higher growth in tier-2 excise tax tariffs may be seen in 2022, leading to a more level playing field whilst also reducing the affordability of cigarette products. On a positive note, this will pave the way for volume and price growth in the tier-1 category.


Maintain neutral. In spite of the social mobility restrictions and Covid-19 pandemic, both cigarette players under our coverage still booked positive volume growth in 9M21. While we understand that the direction of the cigarette industry hinges upon the upcoming excise tax regulation, we believe cigarette companies will make the effort to increase prices and pass on higher excise to sustain profitability. As such, with our assumption of 12% yoy growth in SKM and SPM excise tax tariffs in 2022, we expect both companies to pass on higher excise and book positive earnings growth. We maintain our HOLD recommendation on both HMSP and GGRM. However, we expect to see a continued preference for higher impact cigarettes (i.e. SKM High Tar and SKT) ahead as cigarette prices will become more expensive with higher excise. As such, we prefer GGRM given its undemanding valuation and strong portfolio in SKM high tar. We maintain our neutral stance on the sector.


… Read More 20211126 Cigarette