PP London Sumatera Indonesia is a plantation company which sells palm products, accounting for 90% of sales, and other products such as rubber (5% of sales), cocoa, and tea. It is part of the Indofood group through SIMP, and IndoAgri.
Negative Sentiment all around for LSIP
- Exit from LQ45 – some fund managers need to reduce their position in LSIP
- CPO ban by EU – using environmental issues as a reason
- Low CPO Prices – which accounts for 90% of sales
- Rubber prices persistently low (see below)
- Difficulty in getting new land for plantations, due to government regulation – hence need more re-planting for future replacement, which is less efficient
10-year CPO Price Chart
10-year Rubber Price Chart
Rubber prices has also been subdued for the past few years.
5-year CPO Price Chart
1-year CPO Price Chart
- 100% of CPO sales are for domestic
- 60% of CPO production is sold to parent entity, to be used to produce cooking oil (Bimoli – SIMP) and noodles division (ICBP)
- Composition (1H2017)
- 90.7% – CPO
- 6.6% – Rubber
- 1.5% – Seeds
- 1.2% – Others
- Total planted area: 114,419ha (as of Sep’17)
- Oil Palm: 94,829ha
- Rubber: 16,191ha
- Average age: 15 years
Lifespan of an oil palm tree:
- 3 years – start to bear fruit, but yield relatively low at this stage
- 7-13 years – Peak production
- After 14 years – Decreasing yields
Low Risk, High Uncertainty
If we look at LSIP’s income statement for Q42016 and Q12017, where the CPO price reached USD850/mt, we see an earnings of around Rp350bn a quarter. Hence, in good times, we can expect LSIP to earn at least Rp1,400bn (although CPO price can reach even higher heights). Assuming a P/E ratio of 10x, we can expect LSIP’s stock price to reach at least Rp2050/sh, if the CPO price recovers.
I believe LSIP is a low risk, high uncertainty bet:
- Low Risk: Trading at near its book value, downside risk should be limited because LSIP has plantation assets which has tangible value which exceeds the book value. In addition, LSIP is in a net cash position with zero debt.
- High Uncertainty: There is high uncertainty over the direction of CPO prices, which heavily impacts earnings, as prices can be subdued for longer than expected.
With the current potential upside of more than 53% (at the price of Rp1,300/sh) in the case of a CPO price recovery, I believe LSIP is a stock worth accumulating over time. However, I would also like to buy more at a cheaper price, which I think is possible with the current negative sentiments, and expectation of weak earnings. As a result, LSIP will not be part of the model portfolio for now, until a further update.