Chain Reaction Research: 2017 Indonesian Palm Oil Sector Benchmark – Revenue at Risk vs. Palm Oil NDPE Sourcing
This report analyzes the financial risks for the 10 largest Indonesian listed palm oil companies. The report builds upon the outcomes of the Chain Reaction Research report 2016 Sustainability Benchmark: Indonesian Palm Oil Growers, published in December 2016. It adds a financial risk assessment of each company’s revenues calculating revenue at risk in consideration of its No Deforestation, No Peat, No Exploitation (NDPE) compliance. Analysis shows that an improved sustainability performance might lead to better share price returns and lower valuation risks versus a non-NDPE compliant peer.
- Companies with higher sustainability scores, such as Sinar Mas Agro Resources and Technology, Astra Agro Lestari and Dharma Satya Nusantara, generally have a more diversified buyer base but have a weak total return performance over the last two years of -12 percent in USD vs. Jakarta Stock Exchange Agricultural Index (JAKAGRI) -14 percent return over the same period.
- As shown in Figure 1 (below), companies with higher sustainability scores appear to have lower revenue at risk. Average valuation is lower and the net debt/EBITDA ratio is safer. These companies may face less volatile revenue movements because their supply chains are more NDPE-compliant. Further, any revenue impacts they may experience could have a below-average impact on profits due to increased cost structure flexibility. Thus, lower valuation plus lower risk, may signal higher upside potential, i.e. better returns than for the companies with lower sustainability scores.
- Companies with lower sustainability scores appear to have mixed financial performance. Tunas Baru Lampung and Sampoerna Agro showed above-average share price performances compared to the JAKAGRI with a stable buyer-base. They however experienced mixed impact on profits due to revenue impacts and NDPE. Other companies with low scores performed poorly like Bakrie Sumatera Plantations, Eagle High Plantations and Sawit Sumbermas Sarana. The last two were confronted with major loss of customers due to NDPE incompliance. The average USD total return of the group was -17 percent.
- Companies with lower sustainability scores appear to exhibit higher quarterly revenue at risk. The potential impact from this risk on net profits is unclear. Considering that these equities may be valued at a premium (higher PE ratios), while also having higher net debt/EBITDA ratios, the companies may be facing a valuation risk if the market continues to pursue NDPE-compliance.
- The companies with a high sustainability score such as Sinar Mas Agro Resources and Technology, Astra Agro Lestari and Dharma Satya Nusantara have a diversified buyer base but end up but a weak total return performance over the last two years. They have clearly not been rewarded for their changes. Austindo Nusantara Jaya and Salim Ivomas Pratama have a score above average, and they have performed better than average. The average total return of the top five in the sustainability score was -12 percent in USD, above the -14 percent of the JAKAGRI.
- The companies with a below-average sustainability score show a mixed performance. Tunas Baru Lampung and Sampoerna Agro showed above-average share price performances with stable buyer-base and mixed impacts on profitability. Other lower sustainability scoring companies performed weak, like Bakrie Sumatera Plantations, Eagle High Plantations and Sawit Sumbermas Sarana, of which the last two were confronted with major loss of customers. The average total return of this small group excluding the two extreme ones was -17 percent.
- The companies with a high sustainability score tend to have substantially lower revenue-at-risk percentages. Their valuation multiples are lower and also their net debt/EBITDA ratios are lower. As these companies should be less hurt by volatile revenue movements in the future following increasing NDPE compliance in the chain, the potential impact on profits is below average. In total, the current lower valuation multiples offer probably better returns than the group with a low sustainability score.
- The companies with a low sustainability score, exhibit higher revenue-at-risk percentages. These companies net profit results are mixed. Taking into account that these stocks have a higher valuation and higher net debt/EBITDA ratios, there are higher valuation risks if these companies face pressure regarding NDPE compliance.
For more information, please contact Tim Steinweg.