Oct 30, 2014 SAMPOERNA AGRO - trimegah.com filePT Trimegah Securities Tbk - COMPANY FOCUS 2 SGRO Increasing growth outlook: SGRO short term and mid-long term growth targets are mainly

COMPANY FOCUS PT Trimegah Securities Tbk - www.trimegah.com 1

Target Price The one year target price implies that there are substantial price appreciation ahead and currently SGRO is traded well below its peers. Our recommendation are based on our DCF analysis over a 10 year period using WACC 11.5% and forward P/E and EV/Ha nucleus analysis for robustness. According to our DCF analysis the target price is Rp 3.250 or ~60% increase. This implies 12.2x 2015 PE, slightly lower than historical average of 14.7x PE. When comparing SGRO EV/Ha nucleus to its peers it is being traded well below them. Currently its around ~$6,000 while recent asset purchase by BWPT was around ~$12,000 with young-er tree profile and SSMS plans to buy land for ~$9,000 of 3-4 year old trees. Our target price implies EV/Ha nucleus is $8,770 and PE forward analysis implies 82% upside potential. Since the company is still paying dividends and is under valued in terms of EV/Ha hence, it makes sense for SGRO to buy back it shares since it is cheaper than its CAPEX requirements and focus more on optimization process. Why Buy It is cheap!!!! The EPS growth from 2014 –2020 is expected to be CAGR ~8.4% compared to 14.1% EPS CAGR growth from 2006 – 2012. EPS CAGR from 2013—2020 is ~22% and we strongly believe that growth is not yet incorporated in the current market price. SGRO has been aggressively increasing its nucleus FFB contribution from 40% in 2006 to 57% in 2014 and is expected to increase it to 70% in 2025. On top of that, SGRO only plants its 2nd generation superior seeds since 2007 which produce higher FFB higher yields per ha. The weighted age

profile is 12 years but nucleus trees aged 0-3 years are 16k or 28% of total nucleus mature land bank ha while 4-7 years 25k or 44% of total nucleus mature land bank. The FFB nucleus yield is expected to increase in the coming year do to these baby boomers. The 1H14 CPO extraction rate was 21.5% and currently it has reached to 21.6%. Kalimantan: Growth and mitigating risk

Do to high production volatility, SGRO has been diversifying its production by shifting its focus more to Kalimantan. Kalimantan is the future growth element in SGRO long term growth strategy. Planted area is 36k ha and total land-bank is 115k. Kalimantan FFB yield from 2005 to 2013 is CAGR 19% and the actual yield has increased from 6.4 ton/ha in 2005 to 16.5 ton/ha in 2012. The Kalimantan planted nucleus area has increased CAGR 15% from 2007—2013. Kalimantan estates serves as a diversified production element as the production volatility is the highest among all the CPO companies in Indonesia which translates into high business risk and we expect that volatility to decrease to do Kalimantan.

Conclusions

Currently SGRO is undervalued and we conclude that investors should invest in SGRO and do so fast. The DCF analysis implies strong buy signal with an upside potential of 43.1% and that is further backed up by our P/E ratio analysis with upside potential of 82% and EV/Ha nucleus upside of 59%. Our basic conclusion is that investors should buy in SGRO as our target price as of 2016 is Rp 3,250. The target price implies a 13.2x 2014 PE, 12.4x PE 2015 and 11.3x PE 2016.

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Share Price Rp2,015

Sector Plantation

Price Target Rp3,250 (60%)

Year end Dec 2012 2013 2014F 2015F 2016F

Sales (Rpbn) 2,969 2,561 3,267 3,686 3,815

Net Profit (Rpbn) 329 119 368 474 495

EPS (Rp) 174 63 195 251 262

EPS Growth (%) -39.1% -63.8% 208,7% 28,8% 4,4%

DPS (Rp) 89.4 46.9 58,4 75,2 78,5

BVPS (Rp) 2.2 2.4 2,7 3,1 3,4

P/E (x) 26.2 17.4 10,4 8,0 7,7

Div Yield (%) 2.0% 4.3% 2,9% 3,7% 3,9%

SAMPOERNA AGRO Company Focus

BUY Rp3.250

Ragnar Benediktsson

([email protected])

Oct 30, 2014

Reuters Code SGRO.JK

Bloomberg Code SGRO.IJ

Issued Shares (m) 1,890

Mkt Cap (Rpbn) 3,808

Average Daily T/O (m) 1.4

52-Wk range Rp2,450 /Rp1,700

Sampoerna Agri Resources Pte 67.0%

Public 33.0%

EPS 14F 15F

Consensus (Rp) 177 214

TRIM vs Cons. (%) (2.8%) (6.5%)

Cheapest in the sector

Company Update

Stock Data

Major Shareholders

Consensus

Stock Price

Companies Data

Sebastian Tobing

([email protected])

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PT Trimegah Securities Tbk - www.trimegah.com COMPANY FOCUS 2

SGRO Increasing growth outlook:

SGRO short term and mid-long term growth targets are mainly set up to 1) minimize Production volatility and 2) increase

operational efficiency. It is our believe that if the company achieves these targets, the target price is well justified.

Volume, short-term

1) Conducive weather especially in South Sumatra

2) Maturing age profile (12 years old average; nucleus 10 yrs vs plasma 16 yrs)

3) Operational efficiency programs:

Best agronomy practices (stricter monitoring, fertilizing and supervison at the field level)

Water management

Volume, mid/long-term:

1) Current immature and young palms making up 41% of total planted (combined), 57% (nucleus)

Commitment to organic growth every year through new plantings (5000 ha)

Commitment to getting more land-bank (achieved 100 years concession of 100k ha rubber plantations)

Emphasis on CPO growth compared to FFB growth (relatively)

Profitability margins:

1) Operational efficiency improvements (ie. Increasing yield & OER)

2) Growing nucleus contribution

3) Highly innovative. Ie. Sriwijaya seeds – expecting more varieties in near-term

All these while diversifying current risk:

1) Geographically, by growing Kalimantan contribution

2) Single commodity, by making insignificant long term investments into sago and rubber as well

Source: TRIM Research

Figure 1: SGRO expected growth numbers

YoY Growth 2013 2014E 2015F 2016F 2017F

Revenue -13,8% 27,6% 12,8% 3,5% 6,7%

Gross Profit -35,8% 84,8% 19,6% 4,2% 8,8%

Operating Profit -49,7% 179,0% 23,5% 3,7% 9,5%

Net Profit -63,8% 189,0% 29,5% 3,0% 8,6%

Planted Area 5,1% 4,9% 4,3% 4,2% 4,0%

FFBn -17,9% 36,6% 19,3% 5,7% 9,0%

FFBt -21,3% 21,5% 9,3% 1,3% 3,9%

CPO Production -22,8% 26,4% 13,0% 1,3% 4,7%

ASP 0.9% 2.7% 5.8% 2% 2%


Positive

In the section here below we will cover some positive and negative aspects of SGRO. After thoroughly analyzing the factors we believe are the most relevant, we strongly believe that the positives outweigh the negatives.

Since listing, the expansion rate is c. 8% per year, Sumatera 5% and Kalimantan 15% while the Nucleus CAGR is roughly 12% vs. Plasma 3%. FFB yield has improved significantly since 2005 in Kalimantan when the yield was 6.4 ton/ha and peaked at 17.5 ton/ha in 2011. The management believes that Kalimantan FFB yield will catch up to the S-Sumatera FFB yield during the next years do to young age profile and expected increase in operational efficiency. CPO extraction rate 1H14 is 21.5% and as of September it is reaching 21.6%. The plasma estates in the same time period were 13.7 ton/ha and peaked at 22.9 ton/ha in 2012. To mitigate social risk SGRO plans to maintain 70/30 Nucleus Plasma ratio.

The company was able to receive 100 years of Rubber concessions located in South-Kalimantan. The land bank is 100k ha and planted area is 4k ha. According to companies spokes person, the expected average rubber planting will be from 2,000 – 2,500 ha per annum. SGRO has positive outlook for rubber price due to recent divest in rubber planta-tions and also the fact that rubber needs little CAPEX. Most of the expected rubber cash flow will not be generated in the valuation period which just adds to the upside potential from our valuation. Additionally SGRO has a 85k land-bank of SAGO with planted area of 10k ha and one factory.

1) Expected FFB Nucleus CAGR ~5%, and Nucleus Planted 4.5% from 2014—2024 2) Expected Average YoY CPO production growth of ~8% from 2014—2019 with CPO extraction rate 21.5% - 22.3% 3) Promising average age profile: Nucleus 10 years and Plasma 16 years and weighted average age 12 years as of 1H14. Sumatera average age 14 years and Kalimantan 8 years. 4) Nucleus contribution will rise in the coming years with higher margins CAGR nucleus ~12% from 2006 — 2012 5) 55.6k ha unplanted land bank or 45% of total planted land bank as of 1H14

6) Planted area 122k ha 102k ha mature and of that young 24% and prime 41% 7) 1H14 YoY 600% NI growth not yet incorporated in current market price. Expected +10% NI growth until 2018 8) Revenues linked to USD 9) Plasma farmers in close proximity to SGRO mills 10) Expected EPS CAGR 2013—2020 is 28.8%. 600% NI growth YoY 1H14 not yet incorporated in current market price.

Negative

The most negative factor is that SGRO is at the bottom of its peer comparison in terms of FFB Yield, oil extraction rate and CPO yield. FFB yield dropped to 13.9 ton/ha in Sumatera, 15.7 ton/ha in Kalimantan in 2013. CPO yield has been low but the company expects to achieve CPO extraction rate of 21.5% - 22% in two years while it dropped to 20% in 2013. We are optimistic and expect the 21.5% target will be maintained in 2014 and will rise to 22% in 2018 in our model. SGRO is priced lower than all of its peers and we believe that the current price is relatively low and will in-crease significantly during the next two years due to increased yield and extraction rate, along with better manage-ment practices. However we are aware of the fact that SGRO has by far the highest production volatility which trans-lates into EBIT variability of 68%. SGRO has the highest internal risk of all the CPO companies that we compare it to from 1Q 2008 – 2Q 2014.

Production volatility is a concern that can not be overlooked but one of SGRO agenda is to minimize that by shifting more of its production to Kalimantan. In S-Sumatera extreme dry weather in 2011 and 2012 caused lower FFB yield and extraction rate in 2013 which is the main source of its production volatility. We believe that the FFB yield and CPO extraction rate will increase in S-Sumatera in 2014 and 2015. Another way that SGRO addresses this concern is to in-crease the ratio of nucleus in Kalimantan compared to S-Sumatera in order to be able to better manage its fields and increase the operational efficiency there.

1) Highest Production Volatility among CPO companies 2) EBIT variability 68% from 2008 (Quarterly data) and is the highest among CPO companies 3) Investor tend to be skeptical when it comes to SGRO due to past performance 4) Plasma will give in during the next years due to age profile. Replanting needed that will affect CPO growth coming from Plasma 5) ROIC and ROE will decrease over the valuation period. 6) Lack of investment opportunities that causes companies to sit on idle cash


Chart


FFB production

From 2006—2014 the nucleus planted rose from 31k ha to 75k ha with CAGR of ~12%. This nucleus portion is still relatively young and not yet in its prime. This will later represent the revenue growth generated in our valuation period along with higher expected margins, due to higher contribution from nucleus. In our valuation, the nucleus planted area from 2014 - 2024 will rise from 75k to 114k Ha or ~4.3% CAGR. We will apply 3,850 Ha per annum nucleus or roughly ~5.6% New Plants/Total Ma-ture Nucleus area over the valuation period on average. We believe that we are fair regarding the planting rate since we as-sume that SGRO will not acquire new land banks and will fully use the 56k they can plant. We expect that SGRO will plant 1,650 ha of Plasma per annum in order to maintain its 70/30 nucleus to plasma ratio. The replanting's will start to kick in in 2015/2016 and we expect that all trees older than 25 years will be replanted hence, the plasma is expected to loose further momentum due to relatively large land banks that we assume must be re-planted in our valuation model. The total FFB CAGR from 2014 – 2024 is expected to be ~2.7%.

As of 1H14 the FFB total is 1020k ton and our model estimates 1740k ton. Historically our estimates are lower than what we believe might actually happen and this works as an upside potential. However, the nucleus part is were our estimate are rather accurate. 1H14 FFBn are 540k ton while we estimate 1000k ton by the end of the year. In our valuation model we expect that the nucleus part of the production, FFB yield will remain steady in Kalimantan but it might reach SSMS FFB yield levels in the coming years. How we see that might happen is due to 2nd generation seeds and close proximity with SSMS land-banks there-fore we see no reason why SGRO might not have similar results as SSMS in the long run.

The company has six mills with capacity of 455 tons/hr (5 Sumatera and 1 Kalimantan). The company had one mill in con-struction in Kalimantan and was fully operational in September 2014 with capacity of 75 tons/hr. Another factory is coming from the drawing board and will be fully operational in late 2015 or early 2016 with similar capacity and it will be based in Kali-mantan (5 Sumatera and 3 Kalimantan 2015).

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FFB Nucleus Volume (LHS) FFB Plasma Volume (LHS)

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Standard FFB Nucleus YLD Curve

Figure 2: Shows FFB breakdown of FFB volume and Nucleus/Total Volume and Land bank


Figure 3, Shows standardized FFB nucleus Yield curve. Upside potential in fixed FFB yield


CPO production and others.

CAGR of total CPO production is expected to be 3.9% from 2014 – 2024 compared to 5.2% from 2006 – 2014. The produc-tion was 242t tons in 2006 and rose to 351t tons in 2012 but decreased to 271t tons in 2013. The Nucleus proportion of CPO production from 2006—2014 has been increasing significantly with a CAGR of 7.4%. We expect that the Nucleus CPO propor-tion will keep on increasing since the company is increasing its Nucleus estates and the expected CAGR from 2014—2024 is 5%. We expect that Plasma will start to give in to nucleus as the plasma plantations are getting older and more focus has been placed on nucleus during the last years. That will only increase SGRO profitability margins which we believe will be rela-tively sustainable.

The 1H14 YTD is 142t tons and the extraction rate was 20.5% according to SGRO data. The CPO extraction rate is currently looming around 21.5% according to company’s spokes person and we expect that the CPO production might be around 355t—365t by the end of the year by using 40/60 historical estimate and 20.8% extraction rate. CPO as of 1H14 was 81% of total revenue and kernel 12%. In our model we estimate the kernel extraction rate of 5% and we keep that fixed over the valuation period. We assume the price of Kernel to be 55% of CPO price and we hold that fixed over the valuation period.

SGRO has been successful in G.seeds production and is one of few government approved oil palm seed producer in Indonesia. The gross margins are steadily between 70-80% and this has great strategic value providing future growth. The strategic values are, secure supply of quality seeds from own expansion, improving efficiency of plantations though high oil seeds and provides additional revenue stream as it sells its seeds to its peers.

1) Nucleus CAGR ‘14-’24 is expected to be ~5% 2) CPO extraction yield as of now is 21.5% and we strongly believe it will rise to ~22% 3) Higher Nucleus contribution as the focus has been shifting more to nucleus and plasma plantations are getting older 4) Kernel price is expected to be 55% out of CPO price. Currently around ~70% so there is additional upside potential 5) SGRO is one of few government approved oil palm seed producer 6) Insignificant additional upside potential since we use insignificant rubber growth.

Figure 4: CPO actual and expected production


Figure 5: Actual and expected revenues over the valuation period


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CPO Nucleus CPO Plasma Kernel Production G. Seeds Rubber


Rp Bn 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E

Revenue 2.561 3.267 3.686 3.815 4.070 4.321 4.365 4.466 4.659 5.087

Total CPO revenue 2.139 2.723 3.106 3.211 3.428 3.641 3.672 3.754 3.913 4.279

-CPO Nucleus 1.503 1.802 1.945 2.180 2.349 2.490 2.722 2.877 3.101

-CPO Plasma 1.220 1.304 1.266 1.248 1.292 1.181 1.032 1.036 1.178

-Kernel revenue 271 337 379 392 416 438 438 445 460 500

-G Seeds revenue 53 69 55 60 66 72 77 79 85 96

-Rubber and others 97 138 145 153 161 169 178 189 200 212

-% Change - 27,6% 12,8% 3,5% 6,7% 6,1% 1,0% 2,3% 4,3% 9,2%

COGS 2.063 2.302 2.524 2.599 2.744 2.934 2.978 2.943 3.056 3.438

Gross profit 498 965 1.163 1.216 1.326 1.387 1.387 1.523 1.603 1.649

-% Sales 19,5% 29,6% 31,5% 31,9% 32,6% 32,1% 31,8% 34,1% 34,4% 32,4%

Administrative 206 240 263 279 299 319 336 355 370 392

Sales and marketing 92 73 82 85 91 96 97 99 104 113

Other 36 33 37 38 41 43 44 45 47 51

EBIT 165 620 781 814 897 928 911 1.024 1.082 1.093

-% Sales 6,5% 19,0% 21,2% 21,3% 22,0% 21,5% 20,9% 22,9% 23,2% 21,5%

Other Income or Expenses -163 -174 -180 -199 -218 -237 -256 -275 -298 -323

EBT 522 680 710 779 797 761 858 901 896 1.001

Income tax -8 -9 -9 -10 -11 -11 -11 -11 -12 -13

Minority Interest -146 -197 -206 -226 -231 -221 -249 -261 -260 -290

Net Income 368 474 495 543 555 530 598 628 624 697

-% Sales 11,3% 12,9% 13,0% 13,3% 12,8% 12,1% 13,4% 13,5% 12,3% 12,8%

Revenues

We expect that the CAGR of revenues from 2014 – 2024 to be 6.35%. Most of that is due to increase in nucleus production

and additionally we expect that plasma will give in due to the age profile and expected replanting. The 2014 CPO price that

we use is 2,400 ringgit per ton and we expect that to increase to 2,450 ringgit in 2015. We use 2,500 ringgit per ton as our

base CPO price as of 2016 and we expect it to increase 2% per annum over the entire valuation period. Since we assume that

the price of CPO per ton will increase 2% per annum or from 2,500 ringgit in 2016 to 2,929 ringgit in 2024 the tax (discount)

we use is 13.83% and 16.1%. In our model, we expect that CPO sales volume will be 99.5% out of production volume.

Historical average price of Kernel are roughly 55% of CPO prices and we use that assumption over the entire valuation period.

In our model, we expect that Kernel sales volume will be 95% out of production volume, which is slightly lower than historical

average. The kernel extraction rate is kept fixed at 5% which is 0.2% lower than 7 year historical average.

The estimated seed yield is based on historical values of 0.5% of total FFB production and we increase the yield of 1% per

year and is estimated to be 0.55% in the end of the valuation period.

SGRO also has 100k ha land-bank of rubber estates with planted area of 4k ha. The company plans to plant around 2k ha rub-

ber yearly and that will diversify its future revenue stream but is not fully captured in our model. Rubbers and others are

based on historical values and we simply use ~5-10%% growth over the valuation period. The high jump from 2013—2014 is

based on 1H14 actual numbers and simply multiplied by 2.



COGS OPEX EBIT AND NI

The gross profit margin was on the rise from 2006—2011 and the average GPM was 33.6% before it plummet in 2012 to 26.1% and again in 2013 when it hit rock bottom 19.5%. The production in 2013 dropped due to extreme weather in 2011 and 2012. The company is mitigating this risk by effectively increasing its Kalimantan nucleus planted area of CAGR 15% since 2007. The overall nucleus part of the production has been increasing 12% CAGR from 2007—2013 and it is our believe that this is a major contributor to the expected increase and relatively stable GPM. The nucleus planted are from 2006—2011 was 43% and 59% respectively. On the same time the age profile at that time was in favor of plasma and with higher FFB yield but lower profit margins for SGRO. We strongly believe that our expected GPM is due to the fact that nucleus is increas-ing significantly in our valuation period and SGRO will reap the benefit of its high YoY increase in nucleus planted area. On top of that, we are not that bullish regarding the GPM as can be seen in figure 6, as it is at similar levels as when the plasma had higher portion of the production. There is a high probability that the GPM could even be higher than expected. Of course do to historical production volatility, we rather want to keep the GMP at historical levels. The drop in GMP in the end of the valuation period is due to increased plasma contribution as the replanted plasma will start to kick in at that time.

How we estimate the expected upkeep cost is to calculate the historical cost per ha nucleus mature area. Than we apply that cost plus the growth of the nucleus mature area plus additional 3% increase and same method is used for harvesting cost. We tie OPEX to revenues but we let salary increase at historical rates.

1) We expect that SGRO will be able to maintain healthy margins due to increased nucleus production

2) GMP will increase steadily until Plasma production will start to further recover due to baby boomers

3) The most risk factor to our assumptions if there will be an significant increase in fertilizer cost and salary cost. We will perform simulations and what if analysis in the DCF section of this report.

4) The 1H14 current gross profit margin is around 30% and we believe that it could increase due to more production in the second half of 2014 and slightly more FFBn contribution.

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REVENUE COGS Gross Profit Margin

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Figure 6: Revenue and cost structure


Figure 7: Break down of expected cost structure



PROFITABILITY

The profitability from operations should increase slightly in the coming years due to increase FFB nucleus contribution. We are

conservative in our DCF valuation and set the GPM around 30%. In the latter part of our valuations, we see a slight jump in

GPM due to lowering plasma contribution do to replanting earlier of plasma estates. In our valuation we set the replanting at

25 years and no trees older than 25 years old will produce and at that time. Since plasma is getting older and loosing their

high FFB yield so we should see majority of FFB coming from nucleus and that should increase the company margins. That is

an upside potential that is not incorporated in our valuation. On the other hand, SGRO has experienced high production volatili-

ty which is not incorporated in our valuation which is a potential downgrade from our valuation. According to our DuPont analy-

sis, Asset Turnover should decrease and that can be explained by relatively young age profile of the nucleus trees that will not

generate as much FFB yield when they are young mature. According to company spokes person, the gearing (D/E) will be kept

at 80% due to expansion and the Equity multiplier should be around 1.8 over the valuation period. Net income margin is ex-

pected to remain relatively stable over the valuation period. We expect lowering ROE over the valuation period mostly due to

lowering asset turnover. In our valuation we simply expect that fixed assets and book value of planted area will increase at a

higher rate than EBIT hence, lowering our ROE and ROA expectations. ROIC is expected to be over WACC in the valuation

period but it will lower since we assume fixed average FFB yield. We calculate ROIC: EBIT (1-t)/(average mature operating

assets + ave. fixed assets).

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Gross profit margin EBITDA Margin EBIT Margin NI Margin

Figure 8: Profitability Margins, DuPont ROE analysis and ROIC over WACC estimation


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Ex. Margins 2013 2014 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F

Gross 19,5% 29,5% 31,5% 31,9% 32,6% 32,1% 31,8% 34,1% 34,4% 32,4% 32,9% 32,8%

Operating 9,2% 21,0% 23,2% 23,3% 24,0% 23,5% 22,9% 24,9% 25,2% 23,5% 24,2% 24,3%

EBITDA 14,6% 25,8% 27,8% 28,3% 29,2% 28,9% 28,8% 31,4% 32,2% 30,5% 31,4% 31,6%

Net Margin 4,7% 11,3% 12,9% 13,0% 13,3% 12,8% 12,1% 13,4% 13,5% 12,3% 12,8% 12,8%


CAPEX

Currently 80% of SGRO CAPEX comes from CPO related products. Currently SGRO has 5 mills in Sumatera and 2 mills in Kali-mantan. The newest mill came into operation in Kalimantan in September. A new mill is currently on the drawing board for Kalimantan and is expected to be fully operational in late 2015 or 2016. Those three mills in Kalimantan will be able to pro-duce 225 ton per hour and we believe that there will be no further need for a new mill during the next years. The total capaci-ty in 2016 is estimated to be 600 tons per hour.

We estimate that SGRO will plant 5,500 ha per annum over the valuation period or 55,000 ha. We estimate that the propor-tion will be 70% Nucleus or 3,850 ha and 30% plasma or 1,650 ha. This might change and more focus be put on nucleus

which could work as a factor that might increase the valuation.

According to company spokesperson, replanting should start the earliest in 2017. Since our model estimates that SGRO will replant all trees older than 25 year old, replanting has slightly started. We estimate that roughly 40k ha will be replanted over the valuation period. That can be seen in the increase in the latter part of the valuation period, or from 2022—2025.

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CAPEX DEPRECIATION

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Figure 9: Expected CAPEX and Depreciation over the valuation period


Figure 10: Expected new plantings (LHS) and total Nucleus area mature and immature (RHS)


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Cost of Equity and WACC

To calculate the cost of equity we use 6.5 year adjusted beta of 1.08 since it captures more than one economic cycle of CPO

price fluctuations. Additionally we simply get a higher beta when using the 6.5 year movement to the market instead of the

usual 5 year movement which is 0.817. We believe that SGRO intrinsic movement to the market is higher than our 5 year

beta so that’s how we justify the usage of 6.5 year beta. We also believe that a special risk premium, that captures the idio-

syncratic risk of the company, should be added to cost of equity due to production variability which translates into high EBIT

variability. The added risk premium is 1%. We simply believe that SGRO risk profile is higher than for example AALI’s and we

can not justify similar WACC when holding D/E the same between the companies. We assume that the risk free rate is 7.5%

and the market risk premium is 5%. Therefore our estimated cost of equity is 13.9%. The cost of debt is calculated using the

actual paid interest to debt and debt premium of 5%. The long term tax rate used is 29% and The current D/E ratio is 76%

and the calculated WACC is 11.45%.

WACC Calculations

Beta 1.1

Debt premium 5.0%

Risk free rate 8.1%

Cost of Debt 10.9%

Cost of Debt after tax 8.1%

Market Risk 13.1%

TAX 25.0%

D/D+E 45.21%

E/E+D 54.79%

Cost of Equity 14.6%

Long Term Growth 5.0%

WACC 11.45%

We estimate that the terminal growth rate for SGRO is 5%. There are few fundamental reasons why we estimate that.

1) The company is a growth orientated company actively seeking out for land-banks

2) We might underestimate the CPO nucleus growth since we only use the plant able land bank which SGRO has today in

our model

3) The FFB yield is kept fixed in our valuation. That indicates that the expected efficiency improvements is not fully cap-

tured by our model

4) Kernel yield in our valuation is kept fixed at 5% while the historical average is 5.2%

5) Kernel as a percentage of CPO price is kept 55% while the current level is over 60%

6) SGRO plans to plant 50-60k ha of rubber of a 100k ha Rubber land bank for which SGRO plan is to plant 2k—5k ha per

year. Currently the planted area is 4k ha and is already generating revenue. Rest of the land bank will be used for other

revenue generating activities such as timber.

7) CAPEX for SAGO and Rubber are incorporated in our model but the revenues are only let increase 5~10%% per year

under other revenues and rubber



Free cash flow analysis

In this valuation we are looking at target price as of 2016. According to our assumptions in the DCF analysis of SGRO, there is

still great underlying value in the stock that has yet to be realized. We conclude that each share should be valued at Rp.

2,700. The main reason for the low current market value in our view is that SGRO has high production variability and also that

plasma has been a high part of the FFB production. We believe that free cash flow will increase 118% over the valuation peri-

od. That can be achieved with all the former arguments that we have previously made, such as higher nucleus contribution,

CPO mills are already in place, the land bank has been bought, shifting its focus to Kalimantan that should mitigate production

risk. Another factor is that depreciation will increase at a higher rate that CAPEX which also affects the DCF valuation.

Currently the CPO price is historically low due to low soybean prices, slowing demand from China, lower than expected bio-

diesel demand due to lower crude oil prices. Market participants expect these factors to reverse and with our mild expectation

of price increase over the valuation period and most likely increase in demand due to higher portion of middle income class in

China, India and Indonesia and increase biodiesel usage we strongly believe that our target price of Rp. 2,700 is justified.

Periods 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

EBIT x (1 - tax) 632 694 720 709 791 834 848 940 1016 1092

CAPEX 472 505 526 519 534 588 645 676 714 747

∆NWC (7) (5) (1) 4 (11) (5) 2 (12) (9) -9

Depreciation&Amort. 190 211 236 260 291 323 356 393 433 480

Minority Interest -9 -10 -11 -11 -11 -11 -12 -13 -14 -15

FCFF 348 396 421 435 548 562 544 655 730 818

Discount Factor 0,90 0,81 0,72 0,65 0,58 0,52 0,47 0,42 0,38 0,34

PV of FCFF 312 319 304 282 319 293 255 275 275 277

Terminal Value 11.826

Sum of PV of FCFF 2.910

PV of Terminal Value 4.504

Cash & Marketable Sec 550

Debt -1.845

DCF Value 5.225

Total shares (million) 1,89

Target Price 3.251

Current Price 2.015

Upside 60%

Recommendation BUY

Figure 11: Expected Free Cash Flow to Firm over the valuation period



P/E BAND AND PEER COMPARISON

SGRO P/E band indicates that investors should by now in the company’s stock with its current market price. According to our

assumptions in the one year forward P/E analysis that there is great underlying value in the stock that yet to be realized. We

believe that the 600% YoY NI growth 1H14 is not yet incorporated in the current market price. We believe that investors might

want to see further NI momentum before the jump on to the SGRO appreciation ride. The five year average forward PE is cur-

rently at 14.85 while the estimated forward P/E is 7.81. With implied target price based on PE 14.25 there is an 87% upside

potential.

0

5

10

15

20

25

30

35

40

45

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Fwd PE -2 Stdv -1 Stdv Average PE +1 Stdv +2 Stdv

Figure 12: Forward PE band shows high upside potential.


Peers EV/Ha EV/EBITDA PE14 PE15 PB

Average $13.640 6,4 16,1 12,1 2.6

AALI $12.500 6,9 12,0 11,9 3.1

SMAR $21.881 N/A 20,9 N/A 3.1

SIMP $7.338 5,5 12,8 9.9 0.8

LSIP $8.075 6,3 12.1 11,5 1.9

SSMS $5.500 8,1 13,3 12,9 5.1

SGRO $5.476 5,5 13,1 9,4 1.3

DSNG $13.633 6,1 32,9 11,2 4.4

When comparing SGRO to its peers it is clear that it is rela�vely undervalued. In all cases it is being traded under the aver-

age peer. Interes�ng ma�er is the P/B and its EV/Ha nucleus., which we believe show that SGRO may be under valued com-

pared to its peers. The ROE of SGRO was the second highest in 2Q14 and if SGRO is able to sustain that ROE we believe that

the P/B value will increase due to its future expected growth. EV/Ha nucleus is nearly traded at cost of produc�on, meaning

that if investors wish to enter the CPO market, SGRO is the company you want to enter at cost.

Figure 13: Peer Comparison concensus data



EV/Ha Nucleus

Historical EV/Ha Nucleus is around $8,800 from 2008. As can be seen in the graph below there is an upside potential not yet

been realized. This further strengthen our DCF analysis. To put things into perspective for example the expected asset pur-

chase made by SSMS with 3-4 year old nucleus trees is roughly $9,000 and BWPT just bought land fro $12,000 and our target

EV/Ha nucleus is around $7,770 using our DCF analysis, which is still trading under SGRO average value of $8,700 we can

conclusively justify that SGRO is traded well below its peers. The upside potential of EV/Ha nucleus using the DCF estimate is

46.7% while the upside using the historical average is ~46%.

$-

$5,000

$10,000

$15,000

$20,000

$25,000

1/3/2008 1/3/2009 1/3/2010 1/3/2011 1/3/2012 1/3/2013 1/3/2014

Ev/Ha Nucleus Average EV/Ha Nucleus

Figure 14: EV/Ha Nucleus shows upside potential



As can be seen in the efficiency comparison, SGRO is at the bo�om. However, their CPO oil extrac�on rate is already 21.5% in

1H14 . In our valua�on we set the CPO rate at 22% over the valua�on period. The FFB yield dropped significantly in 2013 due

to extreme weather condi�on in 2011 and 2012. We see no reason why the FFB yield can not go to former hights in the coming

years. Addi�onally since SGRO has been shi8ing its produc�on more to Kalimantan to mi�gate this risk, we do not expect such

a dras�c change in produc�on as happened in 2013. However since it happen before it could happen again.

These number might explain the price of SGRO today. However, we do not fully see why the EV/Ha should be so low at the

moment only due to this. WE strongly belive that SGRO will deliver value to its shareholders since it can grow with is large land

bank and also that nucleus por�on will only increase in the future, giving SGRO higher margins which should only benefit its

owners.

Source: Company

Figure 15: FY13 and 1H14 FFB Yield (MT/Ha) (LHS) and CPO Oil Extraction Rate (RHS)

Source: Company

Figure 16: FY13 and 1H14 CPO Yield (MT/Ha)

0

5

10

15

20

25

30

0

5

10

15

20

25

30

SS

MS

DS

NG

AA

LI

GA

R

FIR

ST r

es

SIM

P

LS

IP

BW

PT

SG

RO

FFB YIELD (MT/Ha) FY13 FFB YIELD (MT/Ha) 6M14

FFB YIELD (MT/Ha) SECTOR FFB YIELD (MT/Ha) SECTOR

18.0%

19.0%

20.0%

21.0%

22.0%

23.0%

24.0%

25.0%

18.0%

19.0%

20.0%

21.0%

22.0%

23.0%

24.0%

25.0%

SS

MS

DS

NG

AA

LI

GA

R

FIR

ST r

es

SIM

P

LS

IP

BW

PT

SG

RO

Oil Extraction Rate 6M14 Oil Extraction Rate SECTOR

5.1

6.4

4.6 4.74.3

3.6 3.8 3.7

2.62.9 3

2.3 2.51.8 1.8 2

1.3 1.4

0

1

2

3

4

5

6

7

SSMS DSNG AALI GAR FIRST res SIMP LSIP BWPT SGRO

CPO Yield (MT/Ha) FY13 CPO Yield (MT/Ha) 6M14

CPO Yield (MT/Ha) SECTOR '13 4,3 CPO Yield (MT/Ha) SECTOR '14 2,2


Risk Factors

SGRO has a Risk Management Committee which main goal is to supervising the implementation of risk management policies

and processes in relation to the SGRO’s operations. The company is exposed to operating and financial risk. SGRO has the

highest operational risk as we measure as EBIT variability, which is non financial risk. We conducted a 6.5 year study on EBIT

risk for SGRO and we measure it as 61.8% while the second highest company is SIMP with 50% variability. AALI and LSIP have

the lowest of roughly 38%. We measure EBIT variability as standard deviation of EBIT/Mean EBIT. The higher the number, the

higher the operational risk.

The company categories Operational risk into Climate conditions and Senior Management Personal. We have covered the cli-

mate conditions that directly affects the operations of the company. SGRO has to some extent mitigated that risk since it has

more of its FFB production coming from Kalimantan and is expected to increase significantly in the near future. SGRO recogniz-

es the risk of loosing its top managers. The Company understands that the continuing growth and success of its business great-

ly depends upon its ability to retain skilled competent and experience professionals.

The other risk is Financial Risk. The groups principal financial assets comprise cash and equivalents, trade receivables, other

receivables and other non current assets. SGRO has various other financial liabilities such as interest bearing debt and borrow-

ings and payables. The main risk associated with the groups financial instruments are interest rate risk, FX risk, credit risk,

liquidity risk and commodity price risk. The company has set of protocols for managing these risk. Financial risk can be to some

extent mitigated by lowering the operational risk. The main risk associated with its financial are interest rate risk, which mainly

arises from loans for WC and CAPEX. Loans at variable rates expose the company to fair value interest rate risk. FX risk, the

financial reporting's are reported in IDR and since sales and cost of certain purchases are either denominated in FX, mainly

USD, the company uses forward currency contracts to eliminate FX exposures for which payment is anticipated approximately

one month after SGRO has entered into a commitment for a sale. Credit risk exposes SGRO to risk of grant credit to its cus-

tomers. To mitigate this risk, there are policies in place to ensure that sales of products are made only to creditworthy custom-

ers which proven track record of good credit history.


Income Statement (Rpbn)

Year end Dec 2012 2013 2014F 2015F 2016F

Revenue 2,969 2,561 3.267 3.686 3.815

Revenue Growth (%) -5.5% -13.8% 27,6% 12,8% 3,5%

Gross Profit 776 498 965 1.162 1.216

Opr. Profit 470 236 685 854 890

EBITDA 662 446 927 1.116 1.184

EBITDA Growth (%) -25% -33% 108% 20% 6%

Net Int Inc/(Exp) (29) (62) (163) (174) (180)

Gain/(loss) Forex 0 0 0 0 0

Other Inc/(Exp) (29) (62) (163) (174) (180)

Pre-tax Profit 440 174 522 680 710

Tax (121) (53) (146) (197) (206)

Minority Int. (7) (1) (8) (9) (9)

Extra. Items

Reported Net Profit 329 119 368 474 495

Core Net Profit 319 120 376 483 504

growth (%) (0.4) (0.6) 212,2

%

28,5% 4,4%

Dividend per share 89 47 58 75 79

growth (%) -17.3% -47.5% 24,5% 28,8% 4,4%

Dividend payout ratio 31.2% 26.9% 30,0% 30,0% 30,0%

Balance Sheet (Rpbn)

Year end Dec 2012 2013 2014F 2015F 2016F

Cash and equivalents 228 163 188 580 715

Other curr asset 591 566 636 568 586

Net fixed asset 1,339 1,401 1.495 1.684 1.891

Other asset 1,980 2,383 2.754 2.989 3.262

Total asset 4,138 4,513 5.074 5.774 6.403

ST debt 314 306 214 279 304

Other curr liab 486 436 454 601 643

LT debt 627 991 1.341 1.566 1.791

Other LT Liab 105 129 129 135 142

Minority interest 34 33 40 47 52

Total Liabilities 1,471 1,814 2.211 2.618 2.900

Shareholders Equity 2,633 2,666 2.823 3.156 3.502

Net (debt) / cash (37) (647) (1.033) (1.258) (1.091)

Total cap employed 3,338 3,771 4.406 4.894 5.456

Net Working capital (80) (35) (83) (231) (334)

Debt 1,008 1,399 1.636 2.019 2.294

Cash Flow (Rpbn)

Year end Dec 2012 2013 2014F 2015F 2016F

Core Net Profit 329 119 368 474 495

Depr / Amort 127 136 148 163 179

Chg in Working Cap 210 45 (48) (147) (103)

Others 10 (26) 10 (6) (3)

CF's from oprs 381 169 515 743 669

Capex 530 447 454 479 472

Intangible (846) (504) (537) (500) (636)

CF's from investing (846) (504) (537) (500) (636)

Net change in debt 510 356 229 318 250

Others 0 0 28 (28) 0

CF's from financing 345 269 47 149 102

Net cash flow (121) (65) 25 392 135

Cash at BoY 349 228 163 188 580

Cash at EoY 228 163 188 580 715

Key Ratio Analysis

Year end Dec 2012 2013 2014F 2015F 2016F

Profitability

Gross Margin (%) 26.1% 19.5% 29,5% 31,5% 31,9%

Opr Margin (%) 15.8% 9.2% 21,0% 23,2% 23,3%

EBITDA Margin (%) 22.3% 17.4% 28,4% 30,3% 31,0%

Core Net Margin (%) 12.9% 3.6% 10,0% 12,4% 12,2%

ROAE (%) 12.9% 4.5% 13,4% 15,8% 14,9%

ROAA (%) 8.7% 2.8% 7,7% 8,7% 8,1%

Stability

Current ratio (x)

1,11

1,05

1,11

1,25

1,35 Net Debt to Equity (x)

0,36

0,49

0,54

0,58

0,60

Net Debt to EBITDA (x)

1,42

2,91

1,65

1,65

1,77

Interest Coverage (x)

12,78

3,66

3,83

4,09

3,73

Efficiency

A/P (days) 42 45 45 45 45

A/R (days) 14 20 10 10 10

Inventory (days) 60 47 45 45 45

Interim Result (Rpbn)

3Q 13 4Q 13 1Q 14 2Q 14 3Q 14

Sales 432 1.118 650 806 1.027

Gross Profit 69 249 182 266 256

Opr. Profit 21 146 113 202 190

Net profit 3 88 55 130 125

Gross Margins (%) 15,9% 22,3% 28,1% 33,0% 24,9%

Opr Margins (%) 4,9% 13,0% 17,4% 25,1% 18,5%

Net Margins (%) 0,7% 7,9% 8,5% 16,2% 12,2%

Capital History

Date

18-Jun-07 IPO@Rp2,340

PT Trimegah Securities Tbk

Gedung Artha Graha 18th Floor

Jl. Jend. Sudirman Kav. 52-53

Jakarta 12190, Indonesia

t. +62-21 2924 9088

f. +62-21 2924 9150

www.trimegah.com

DISCLAIMER

This report has been prepared by PT Trimegah Securities Tbk on behalf of itself and its affiliated companies and is provided for information

purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. This report has

been produced independently and the forecasts, opinions and expectations contained herein are entirely those of Trimegah Securities.

While all reasonable care has been taken to ensure that information contained herein is not untrue or misleading at the time of publication,

Trimegah Securities makes no representation as to its accuracy or completeness and it should not be relied upon as such. This report is

provided solely for the information of clients of Trimegah Securities who are expected to make their own investment decisions without reliance

on this report. Neither Trimegah Securities nor any officer or employee of Trimegah Securities accept any liability whatsoever for any direct or

consequential loss arising from any use of this report or its contents. Trimegah Securities and/or persons connected with it may have acted

upon or used the information herein contained, or the research or analysis on which it is based, before publication. Trimegah Securities may in

future participate in an offering of the company’s equity securities.

Documents

Oct 30, 2014 SAMPOERNA AGRO - trimegah.com filePT Trimegah Securities Tbk - COMPANY FOCUS 2 SGRO Increasing growth outlook: SGRO short term and mid-long term growth targets are mainly