Budi Acid Jaya (TP Rp305)

Eyeing recovery in 4Q11

What’s New
􀂃 Budi Acid Jaya expects sales volume and gross margin to improve in 4Q11 as its factory capacity utilisation rate returns to normal at about 60% (from 30‐40% in 3Q11), thereby lowering the cost of production.
􀂃 Management also said that three new biogas power plants, each with a capacity of 1MW, will be constructed. This is in addition to the two existing factories in Lampung and one in Solo. A tapioca starch factory with a capacity of 30,000tpa will also be built next year.

Our View
􀂃 Sales volume growth in 3Q11 was dampened by the long Eid ul‐Fitr holiday and the corresponding decline in activities for the cassava crop (raw material). As a result, production utilisation rate only reached 30‐40% as opposed to the normal rate of 60%
􀂃 Management forecasts gross margin to recover to 14% in 4Q11 from 11.4% in 3Q11. We trim our FY11 gross margin assumption to 13.7% as we do not think the company will achieve our full‐year target of 14.7%. We also cut our net profit assumption by 20% to Rp112b. Our gross margin and net profit estimates for FY12 are, however, intact.
􀂃 The additional three biogas power plants are expected to reduce the company’s energy costs, while the new tapioca starch factory will increase total capacity to 825,000tpa.

Action & Recommendation
􀂃 In line with the lower gross margin and net profit assumptions for FY11, our TP falls slightly to Rp305 (from Rp310), pegged at 6.5x FY12F PER. Reiterate BUY.

Year End Dec 31 >2008 >2009 >2010 >2011F >2012F
Sales (Rp b) 1,552 >1,782 >2,124 >2,450 >2,686
Pre‐tax (Rp b) 36 >178 >72 >151 >238
Net profit (Rp b) 33 >146 >46 >112 >177
EPS (Rp) 9 >39 >12 >30 >47
EPS growth (%) (28.6) >344.1 >(68.5) >143.6 > 57.8
PER (x) 24.0 >5.4 >17.2 >7.1 >4.5
EV/EBITDA (x) 8.3 >4.1 >6.4 >5.0 >3.6
Yield (%) 4.2 >2.8 >4.5 >2.3 >5.7

3Q11 sales and gross margin fell short of expectation
Budi Acid Jaya recorded an 8% q/q decline in 3Q11 sales to Rp616b, with gross margin sliding to 11.4% (from 14.3% in 2Q11) as tapioca starch price fell. Based on Bloomberg data, tapioca starch price contracted by 18% q/q in 3Q11 to US$456/mt on average while raw material (cassava) price was relatively stable at a high of Rp817/kg. In fact, the company recorded lower
tapioca starch sales volume in 3Q11 due to the long Eid ul‐Fitr holiday and the corresponding decline in activities for the cassava crop (raw material). As a result, its production utilisation rate only reached 30‐40% as opposed to the normal rate of 60%.
We have earlier cut our full‐year gross margin assumption for the tapioca starch product from 14% to 12.5% in anticipation of a lower gross margin in 3Q11. As a result, our full‐year gross margin assumption falls to 14.7% from 15.7% previously. However, the actual 9M11 gross margin was worse than expected. While management expects gross margin to recover to 14% in
4Q11 (from 11.4% in 3Q11), we do not think our full‐year target of 14.7% can be met. Our calculations, which assume sales of Rp2.45t in FY11 and gross margin of 14% in 4Q11, show that gross profit will come in at Rp78b in 4Q11 and Rp337b in FY11, whereas gross margin for the full year will only be 13.8%, which is below our expectation. During October and November, the tapioca starch price was stable at US$448/mt on average after sliding by 18% q/q to Rp456/mt in 3Q11. Management said that cassava price has remained high at an average of Rp817/kg from October until early this month (3Q11 average: Rp817/kg). In view of the price trends, we do not think there will be a significant rebound in gross margin in 4Q11. We therefore trim our FY11 gross margin assumption to 13.7% (from 14.7%), and cut net profit assumption by 20% to
Rp112b. Our gross margin and net profit assumptions for FY12 are, however, intact.

source: KIMENG dated 7 December 2011