PT Dharma Satya Nusantara is a producer of palm oil and wood products. In 9M2017, palm oil products contribute to 82% of sales, while wood products contribute 18%.
Major Shareholders (>10%)
- PT Triputra Investindo Arya – 27.56%
- PT Krishna Kapital Investama – 14.63%
- Public – 33.25%
DSNG is the 4th largest wood products manufacturer. DSNG produces panels, engineered floors and doors for export markets around the world. The wood business is currently undergoing consolidation of operations in their Central Java processing plants, which has resulted in a sharp decrease in sales.
Currently, the wood business suffers a net loss, which has been the case since 2013 (in 2012, the wood business experience very minimal or negative profit, depending on the allocation of corporate expenses). However, the amount of loss has worsened since it is undergoing consolidation due to the reduced revenues.
Looking at its history, I believe it would be good for DSNG to get rid of this business. The wood product business would contribute a loss of around Rp70bn after-tax in 2017.
- Total Landbank = 163,600ha
- Plasma Planted Area = 20,920ha (as of Dec’2017)
- Nucleus Planted Area = 69,369ha (as of Dec’2017)
- Mature = 60,527ha
- Average age of plantations = 9.5 years (as of Dec’2017)
- Average age of MATURE plantations = 10.5 years
The odds are in DSNG’s favour, as in the next three years, DSNG will experience great growth in their FFB yield, due to their favourable plantation profile. Note that plantations experience peak yields between the age of 7-13 years. All of DSNG’s planted areas will be mature by 2019. Hence, in 2020, it is predicted that DSNG will have a standard FFB yield will reach 26.5tons/ha, up from a standard yield of 24.9tons/ha in 2017.
In addition, for future growth, DSNG still has a sizable unplanted landbank of around 73,300ha.
- With low FFA (Free Fatty Acids) CPO, at just 2.57%, most of DSNG’s production is classified as ‘Super CPO’
- 2013 – weak profits due to many immature plantations
- 2014 – peak roe at 29% due to 5-year high cpo prices
- 2015 – weak profit due to 5-year low cpo price. Profit would also been lower if not for a Rp128bn insurance claim.
- 2016 – weak profit due to impact on production from El-Nino. Profit also would have been lower if not for a Rp200bn gain on sale of assets.
- 2017 – normal point profits, more plants enter mature age
2017 Annualised Net Profit = Rp550bn
At Rp380/sh, Market Cap = Rp4,028bn
P/BV = 1.35x
Annualised P/E Ratio = 7.32x
Comparison between CPO stocks
- LSIP, AALI – The old age plantations
- average plantation age is above 15 years – resulting in below-average profitability
- current valuation around 1.1-1.4x P/BV
- SSMS – The highest-yielding plantation, favourable plantation age, high ROE
- but it comes with a premium valuation of 15x P/E and 3.6x P/BV (at Rp 1485/sh)
- SGRO – Average plantation age around 12 years
- trades at 1.33x P/BV, 7.54x TTM P/E, 16x Annualised P/E at Rp2550/sh
In DSNG, we have the best of both worlds, where we get a favourable plantation age and a relatively cheap valuation. Assuming CPO prices don’t change much, and as more plantations enter mature & high growth phase, I believe ROE has a very high probability of exceeding 20% in 2018. In addition, DSNG has a very good corporate governance and profitability record, and has a sizable landbank for future growth. Hence, I derive a Target Price for DSNG based on 2.0x 2017 book value, at Rp590/sh.
Key Risk to Target Price:
- Significant change in CPO prices
- I believe many can agree that the CPO price is in a low level compared to history. In the event of a significant increase in CPO price, DSNG will earn much more and hence it would warrant a much higher target price.
- If wood product business can turn profitable – which could add around Rp70bn-100bn in earnings.