Equity Research FLASH NOTE
BISI International We are the seed makers
BUY
German drugs and chemical group Bayer AG has offered to buy Monsanto, the world largest seeds producers, for USD62 bn in cash, implying an acquisition multiple of 26x P/E 2016F. Monsanto eventually declined the offer, saying that the company deserves higher price. The offer made by Bayer reminds us on Chinese SOE ChinaChem buying on Syngenta earlier this year, also with valuation of 26x P/E 2016F.
Seeds producers always get valuation higher than commodity stocks
Current price Price target Upside
Rp1,660 Rp2,400 44.5 %
26 May 2016
Theoretically, all seeds producers have to bear volatility in earnings and cash-flow from its correlation with commodity price. However, market have not value them at low-teens P/E multiples (like commodity companies), considering 1) more ability to maintain margins as they do not act as price taker, and 2) sustainable value-creation to shareholders driven by product innovation. We think a valuation above 20x P/E is reasonable, given consistency in delivering solid earnings, free cash-flow, and mid-teen ROIC during past decade.
INDONESIA Agriculture Stock Data
Valuation reach 26x P/E despite of tepid growth outlook The acquisition multiple for Monsanto and Syngenta stood at 26x P/E 2016F, a 20-30% premium compared to its historical 5-year average. It is interesting to note that both companies are in mature stage and currently face similar issues: tepid long term growth outlook due to declining global planted area, and short term headwind from low softcommodity price.
Bloomberg Ticker Outs. Share (bn) Mkt Cap (USD bn) 52 Week Range (Rp) 6M Avg Val (Rp bn) YTD Returns (%) Beta (x)
BISI IJ Equity 3.00 0.37 830-1,835 1.4 23.2 1.2
The logic behind its mind-boggling valuation could be: food security issue become increasingly important given very limited arable land, fresh water resources, and unstoppable population growth. Thus, ChinaChem buying on Syngenta simply reflects China’s rising food security concerns. Share Price Performance
Key investment metrics
2015
Jan-16
Mar-16
2017F
2018F
1,156
1,438
1,762
1,938
2,150
Net profit (Rp bn)
165
264
361
441
515
EPS growth
29.9%
60.0%
36.7%
22.3%
16.7%
Net profit margin
14.3%
18.4%
20.5%
22.8%
23.9%
ROE
10.3%
14.5%
17.3%
18.3%
18.4%
Inav Haria Chandra
ROA
8.8%
12.3%
14.8%
15.7%
15.9%
ROIC
9.4%
13.8%
17.1%
20.4%
21.9%
[email protected] +62 21 8067 3133
P/E (x)
29.5
18.5
13.5
11.0
9.5
3.0
2.7
2.3
2.0
1.7
EV/EBITDA (x)
21.1
13.3
9.3
7.3
6.0
Dividend yield
0.7%
1.3%
1.9%
2.3%
2.6%
May-16
Nov-15
Jul-15
Sep-15
May-15
Jan-15 Mar-15
Nov-14
Jul-14
2016F
Revenue (Rp bn)
P/BV (x)
2014
Sep-14
Combined with low balance sheet risk, improving FCF and higher return on capital from the company, we believe the 40% discount on the multiple is too much, and our DCF based target price of Rp2,400 (implying 20x PE 2016F) is justifiable. Maintain Buy.
2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 May-14
BISI is currently trading at 13-14x P/E 2016F, implying 40% discount compared to average multiple of global seeds producer. Unlike major global seeds producer, long term growth outlook for BISI remains strong given the upside from increasing harvested area, rising hybrid adoption and favorable domestic selling price for corn.
Jan-14 Mar-14
BISI: the cheapest seeds producer in the world
Share Performance (%) Month Absolute Relative 3m 10.3 12.5 6m 17.5 17.7 12m 1.2 10.9
SucorInvest
BISI International
26 May 2016
Figure 1: Seeds producer have valued above 20x P/E… Historical P/E - Monsanto
(x)
Historical P/E - Syngenta
(x) 35
40
Acquisition by ChinaChem
Bid from Bayer 30
35 30
26
25
Average 25x P/E
Average 21x P/E
26
25
20
20 15 15 10
10
5
5 0
0 2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Bloomberg
Figure 2:… given its consistency in delivering solid earnings and FCF… USD mn
USD mn
Historical earnings and FCF - Monsanto 3,000
Historical earnings and FCF - Syngenta
2,000 1,800
2,500
1,600 1,400
2,000
1,200 1,500
1,000 800
1,000
600 400
500
200 0
0
2004
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Net income FCF
2005
2006 2007
2008
2009
Net income
2010 2011
2012
2013
2014 2015
FCF
Source: Bloomberg
Figure 3: … and mid teen ROIC %
%
Historical ROIC - Monsanto
25
Historical ROIC - Syngenta
20 18
20
16 14
15
12 10
10
8 6
5
4 2 0
0 2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Bloomberg
2
SucorInvest
BISI International
26 May 2016
Figure 4: At 40% discount compared to average multiple of global seeds company, BISI is a very interesting investment opportunity…
Figure 5: …considering relatively higher revenue growth…
PE 2016F
(x) 30
3-yr forward Revenue CAGR 16%
24.3
25 20.8
20.8
22.2
14%
14%
22.0
12%
20
10% 13.5
15
8% 5%
6% 10
4%
2%
5
3%
3%
4%
0%
0% -
BISI BISI
Monsanto
Dupont
Syngenta
Sakata
Sakata
Average (excl. BISI)
Dupont Syngenta Monsanto Average (excl. BISI)
Source: Bloomberg. Sucorinvest
Source: Bloomberg, Sucorinvest
Figure 6: … higher EPS growth…
Figure 7: …higher FCF yield…
3-yr forward EPS CAGR
9%
FCF yield 8.0%
8%
30% 25%
7%
25%
6%
20%
4.8%
16%
5%
14%
15% 10%
3.8%
7%
3%
2.3%
2% 1%
0% BISI
Sakata
Dupont
0% Syngenta Monsanto Average (excl. BISI)
0% BISI
Dupont
Syngenta
Monsanto
Source: Bloomberg, Sucorinvest
Source: Bloomberg, Sucorinvest
Figure 8: …higher return on capital…
Figure 9: … and net cash balance sheet
ROIC (%) - 2016F 18
3.8%
9%
5%
-5%
4.2%
4%
Average (excl. BISI)
Net debt to equity (x) - 2016F
17.1
16
Sakata
1.00 14.4 12.6
14
0.76
0.80
12.4 11.1
12 10
0.60 0.40
8 4.8
6
0.26
0.28
0.28
0.20
4
0.00
2 -0.20
0 BISI
Dupont
Syngenta Monsanto
Source: Bloomberg, Sucorinvest
Sakata
Average (excl. BISI)
-0.40
-0.15 -0.29 BISI
Sakata
Dupont
Syngenta Monsanto Average (excl. BISI)
Source: Bloomberg, Sucorinvest
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SucorInvest
BISI International
26 May 2016
Financial Summary Profit and loss (Rp bn) Total revenue Cost of Revenue Gross Profit Operating expense Operating profit EBITDA Interest expense Interest income Forex gain (loss) Other income (exp) Pre-tax income Income tax exp (benefit) Minority interest Extraordinary items Net profit
2014 2015 1,156 1,438 752 856 403 582 216 273 203 321 223 343 1 1 7 12 (0) 0 0 209 332 44 68 0 0 165 264
2016F 1,762 971 791 352 438 460 13 451 90 361
2017F 1,938 1,043 896 368 527 551 24 552 110 441
2018F 2,150 1,131 1,019 408 610 634 33 643 129 515
Balance sheet (Rp bn) Cash ST investments Accounts receivable Inventories Others Total Current Assets
2014 2015 174 315 627 722 534 713 194 29 1,530 1,778
2016F 606 766 647 35 2,055
2017F 829 843 695 39 2,406
2018F 1,086 935 754 43 2,818
PP&E - net Others Total Assets
276 66 1,871
293 70 2,142
301 86 2,442
304 95 2,805
307 105 3,230
89 122 211
144 135 279
132 166 298
142 182 324
154 202 356
55 0 1,605 1,871
47 0 1,815 2,141
58 0 2,086 2,442
63 0 2,417 2,805
70 0 2,803 3,230
ST borrowing Accounts payable Other current liabilities Total Current Liabilities Long-term loan Others Minority Interest Shareholders' equity Total Liabilities and Equity
4
SucorInvest
BISI International
26 May 2016
Cashflow (Rp bn) EBIT D&A Others Change in working capital Interest & taxes Operating cash flow
2014 203 20 (8) (51) (38) 126
2015 321 22 (4) (40) (57) 242
2016F 438 22 34 (78) 417
2017F 527 23 (102) (86) 363
2018F 610 24 (123) (96) 416
Capital expenditures Disposal of fixed asset Change in ST investment Dividend received Others Investing cash flow
(48) 3 (45)
(39) 1 (38)
(30) (16) (46)
(26) (9) (35)
(27) (10) (37)
80
204
371
328
378
Change in Equity Net change in LT borrowings Net change in ST borrowings Cash Dividends Paid Others Financing cash flow
(1) (36) 0 (37)
(63) (0) (63)
(90) 11 (80)
(110) 6 (105)
(129) 7 (122)
Beginning cash Change in cash Other adjustment Ending cash
131 44 174
174 141 (1) 315
315 291
606 223
829 257
606
829
1,086
2016F 44.9% 24.9% 20.5% 17.3% 14.8% 17.1% 13.5 2.3 4,268 9.3 1.9% 7.6% (606) (0.3)
2017F 46.2% 27.2% 22.8% 18.3% 15.7% 20.4% 11.0 2.0 4,044 7.3 2.3% 6.7% (829) (0.3)
2018F 47.4% 28.4% 23.9% 18.4% 15.9% 21.9% 9.5 1.7 3,788 6.0 2.6% 7.8% (1,086) (0.4)
Free cashflow
Key ratios Gross profit margin Operating profit margin Net Profit margin ROE ROA ROIC PE (x) PBV (x) EV (Rp bn) EV/EBITDA (x) Dividend yield Free cash flow yield Net debt (Rp bn) Net debt/EBITDA Net debt/equity
2014 34.9% 17.6% 14.3% 10.3% 8.8% 9.4% 29.5 3.0 4,709 21.1 0.7% 1.6% (174) (0.8) (0.1)
2015 40.5% 22.3% 18.4% 14.5% 12.3% 13.8% 18.5 2.7 4,559 13.3 1.3% 4.2% (315) (0.9) (0.2)
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SucorInvest
BISI International
26 May 2016
Sucorinvest rating definition, analysts certification, and important disclosure
Ratings for Sectors Overweight Neutral months. Underweight
: We expect the industry to perform better than the primary market index (JCI) over the next 12 months. : We expect the industry to perform in line with the primary m arket index (JCI) over the next 12 : We expect the industry to underperform the primary market index (JCI) over the next 12 months.
Ratings for Stocks Buy Hold Sell
: We expect this stock to give return (excluding dividend) of above 10% over the next 12 months. : We expect this stock to give return of between -10% and 10% over the next 12 months. : We expect this stock to give return of -10% or lower over the next 12 months.
Analyst Certification The research analyst(s) primarily responsible for the preparation of this research report hereby certify that all of the views expressed in this research report accurately reflect their personal views about any and all of the subject securities or issuers. The research analyst(s) also certify that no part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.
Disclaimers This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not make any representations as to its accuracy or completeness. PT Sucorinvest Central Gani accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or any solicitations of an offer to buy or sell any securities. PT Sucorinvest Central Gani and its directors, officials and/or employees may have positions in, and may affect transactions in securities mentioned herein from time to time in the open market or otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies. PT Sucorinvest Central Gani may also seek investment banking business with companies covered in its research reports. As a result investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
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SucorInvest
BISI International
26 May 2016
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Research 1. Inav Haria Chandra 2. Adityo M. Yogiswara 3. Alexander Budiman 4. Sharon Anastasia Tjahjadi 5. Felicia Putri 6. Sandy Ham 7. Emily Bonosusatya 8. Ahmad Hapiz
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