Share Price S$0.755
Target Price S$1.00
Key Takeaways From Non Deal Roadshow
Halcyon Agri Corp will reach its optimal midstream capacity by 2015 upon completion of its asset enhancements and recent M&As. It has taken its first step towards upstream expansion as part of its long-term story. Excellent execution of risk management model; encouraging CSR initiatives. Maintain BUY and target price of S$1.00.
• Takeaways from marketing roadshow. We recently hosted management on a roadshow in Singapore and Malaysia. This report highlights the key takeaways.
• Background on Halcyon Agri Corp. Halcyon Agri Corp (HACL) operates in the midstream segment of the natural rubber (NR) supply chain. This involves: a) procuring raw NR, b) processing raw NR into technically specified rubber (TSR), and c) selling to vehicle tyre manufacturers. It owns and operates two processing facilities in Palembang, Sumatra, and is in the process of acquiring another two in Ipoh, Malaysia. These factories are capable of producing two variants of TSR - Standard Indonesian Rubber (SIR) and Standard Malaysian Rubber (SMR) - in various grades.
• Midstream asset enhancements and M&As to triple capacity by 2015. HACL has a current production capacity of 103,000 tonnes. It is set to add about 270,000 tonnes within 2013-15 through a mix of internal enhancements and acquisitions. Management has announced two potential acquisitions targeted to be completed in 4Q13. Two Malaysian processing facilities will mark its midstream presence in Malaysia while another factory in Indonesia will help HACL achieve its optimal production capacity in the country. Utilisation of these factories is targeted to ramp up to 50% in 2014.
• Margin and NR price volatility protection under robust risk model. In a typical delivery cycle, HACL locks in its selling price for processed NR based on the 1-month average historical NR price. Working backwards, it then calculates its optimal purchase price for NR and goes to the market at this level, securing its target gross material profit (GMP) of at least US$350/tonne and simultaneously fixing the US dollar/rupiah conversion rate. Excellent execution of this model is attested by its healthy GMP of US$395/tonne in 1H13. Management is confident they will be able to maintain this GMP level at least until 3Q13.
• Sound credit profile from a blue-chip customer base. HACL supplies only to companies with good payment track records. Currently, for its existing Indonesian factories alone, it is a qualified supplier to 7 of the top 20 global tyre vendors. Payment terms are kept within two weeks while long-term contracts of 3-12 months provide demand visibility. Over 70% of HACL’s sales are from long-term contracts. Management is working to add to its list of reputable customers and to become a qualified supplier to other top tyre vendors.
• First step into long-term upstream expansion. Management has entered into a term sheet to acquire a 99-year leasehold commencing 1 Dec 11 of 9,845ha (66% cultivable) of Sultanate land in Kelantan, Malaysia, for a purchase price of RM131m (US$40m). HACL intends to develop a natural rubber plantation on the cultivable land, expanding its earnings and margin potential in the long term. Product diversity is another potential benefit with the group gaining control of the quality of its raw material and the production of premium/specialty grades of rubber.
• Corporate social responsibility (CSR) initiatives. Management believes a good business should include good sustainability practices. This year, HACL issued its first-ever Sustainability Report for 2012, which outlined the key material issues faced by the group and how it reaches out to its stakeholders. As a sign of commitment, management intends to report on their sustainability performance annually through various forms of media. A 3,200ha eco-park is also intended to be developed on its land in Kelantan, Malaysia. A sanctuary for key tropical rainforest species, the haven will also support research endeavours.
• Anticipate a stronger 2H13 for HACL to achieve our full-year forecast of US$11.9m in earnings. Besides the 43,960 tonnes committed for 2H13, HACL also has options to deliver 5,776 tonnes more, which would bring the group to achieve an optimal utilisation of close to 85% of its annual capacity. We have only factored in HACL’s potential acquisition of two factories in Malaysia. We conservatively project a 3-year (2012-15) earnings CAGR of 44%.
• Key risks. In our view, the key risks facing the group include: a) customer concentration risk, b) extreme volatility in NR price and foreign exchange rates, c) downturn in tyre manufacturing, d) regulatory and country-related risks, and e) key personnel risk.
• Maintain BUY with target price of S$1.00, based on a peer-average PE of 10x applied to our 2014F EPS estimate of 9.9 S cents. The group was in a net cash position as of end-Jun 13 (1.1 S cent/share) but is expected to revert to a net debt of 15% in 2014 due to higher working capital and capex needs. Any dilution from a potential equity fund-raising exercise in the near term will be offset by the completion of its two midstream acquisitions in 4Q13, which could begin contributing as early as end-13 or 1Q14.
Publish date: 03/10/13