Sinarmas Sekuritas Investment Research
PT SMART Tbk
PT SMART Tbk (SMART) is one of the largest, publicly-listed and
vertically-integrated palm-oil based companies in Indonesia. It
engages in upstream operations, such as cultivating and harvesting of
palm trees and processing of fresh fruit bunches (FFB) into crude palm
oil (CPO), Palm Kernel (PK) and other relevant products, and
downstream operations that include refineries of CPO and PK into
value-added products and palm derivatives which command
significantly higher value and longer shelf-life. SMART is subsidiary of
the second largest palm-based companies by plantation acreage in the
world, Golden Agri-Resources Ltd (GAR) which is listed in Singapore
Exchange (SGX). This affiliation proves to be highly beneficial for
SMART as this ensures constant supply of raw materials for its
downstream operations, transfer of knowledge, research and
development and SMART is able to leverage on GAR’s extensive
international networks to market its products in the highly competitive
global markets.
SMART plans to issue its first IDR bond amounting to IDR 3tn within
these 2 years for its capacity expansion in the refining operations and
supporting facilities which will cost around USD250-300 mn, expansion
in the plantation acreage and replanting program to ensure future
sustainability of its business. SMART is highly committed to
environmental sustainability and plans to have its existing plantation
(as of 30 June 2010) to be Roundtable on Sustainable Palm Oil
(RSPO) certified by the end of 2015 in collaboration with The Forest
Trust (TFT).
1
Sovereign
: Indonesia
Sovereign Rating:
S&P
: BB+/Positive
Moody’s
: Baa3/stable
Fitch
: BBB-/Stable
PT SMART Tbk
Sector
: Plantation
Fitch
: AA(idn)
Pefindo
: id(AA-)
Penawaran Umum Obligasi
Berkelanjutan (PUB)
Issuance Size
: up to IDR 3tn
Phase 1
: up to IDR 1tn
Tenor
: 5 or 7 years
Quarterly Coupon Payment
Wibowo Ng
Research Analyst
Wibowo.ng@sinarmassekuritas.co.id
+62-21 392 5550
This is not classified as an objective report.
Please refer to the Disclosure at page 24.
PT SMART Tbk
Credit Research
Diversified Products offerings
SMART is the third-largest palm-oil based company by plantation acreage in Indonesia. It has diversified and
fully-integrated processing that offers products from the superior seedlings, CPO, PK and other value-added
products such as branded products, oil, fats and other specialty fats for both domestic consumption and
exports. Its key clients include internationally renowned brands such as Unilever, Nestlé and other
international brands.
Significant growth in 2011
SMART recorded significant revenue growth of 56% in 2011 on the backdrop of high production volume and
elevating CPO prices. However, this trend is unlikely to last as reversal of the biological up-cycle of the palm
oil plants which will be more significantly felt in 2012 will hamper the production volume growth of harvested
FFB, leading to higher CPO prices. Furthermore, the uncertainty in the global markets and rising crude oil
prices which clouded the sentiments of consumers, both domestic and international, will be key risks to the
revenue growth of the company. As such, we estimate revenue to grow only slightly at 2011-2016 CAGR of
5.7%. Higher growth is expected upon completion of expansion in the existing facilities. SMART plans to
expand each of its each existing refining capacity by approximately 1000-2000 tons per day for the next 2-3
years.
Export Tax favoring Downstream operations
The Indonesian government marginal export tax rate on CPO and PK is highly advantages for downstream
operator as it imposes hefty export tax (of up to 18% on CPO and PK on the base price of USD 1,076/ton
and USD 1,333/ton, respectively, while export tax on refined products ranges from 10.5% to 2%). This trend
is expected to continue as Indonesian government wants to shift its focus to become the main exporter of
value-added products instead of that of raw materials. Further expansion into downstream operation will
prove to be highly prospective for future profitability.
Margin Compression is expected to continue
As the company shifts its focus to downstream operation, margin is expected to fall as downstream operator
often has lower margin as compared to that of pure-play upstream operator. Furthermore, considering the
logistical issue such as proximity of plantation to refineries, transportation costs and durations, the company
engages in trading of CPO (selling CPO that is further away from refineries and purchase CPO from
plantations as close as possible to refineries to reduce logistical cost) which tends to compress the overall
margin despite efficient control on cost structure. We estimate 2012/2013 EBIT margins at 7.5%/9.6%. Due
to intense competition among palm oil and fats refineries, there is limited room for the company to increase
its Average Selling Price (ASP) significantly without sacrificing its market share. We estimate that the ASP
will only increase by 14% and 13% for cooking oil and margarine, respectively, in 2012 which is in line with
the price increase of foods and consumables in Indonesia.
Fixed Assets Appreciation
Over the years, SMART has almost 139,000 ha of planted lands which, in our opinion, has increased in
values as land scarcity in Kalimantan and Sumatera sets in. While we believe that SMART has no intention to
sell these assets, in the worst case scenarios, SMART has ample assets to support its debt obligation.
Key Risks include: (1) uncertain weather conditions which will affect the production of FFB; (2) commodity
prices risk; (3) substitution risks from other oilseeds; (4) rising costs of raw materials that include fertilizers;
and (5) intervention from external organization such as Greenpeace and disruption in the supply chain of the
production.
2
Credit Resarch
PT SMART Tbk
Investment Thesis
PT SMART Tbk (SMART) is one of the largest, publicly-listed and vertically-integrated palm-oil based
companies in Indonesia. It engages in both upstream operations, such as cultivating and harvesting of palm
trees and processing of fresh fruit bunches (FFB) into crude palm oil (CPO), Palm Kernel (PK) and other
relevant products, and downstream operations that include refineries of CPO and PK into value-added
products and palm derivatives which command significantly higher value and longer storage time. SMART is
subsidiary of the second largest palm-based companies by plantation acreage in the world, Golden AgriResources Ltd (GAR), which is listed in Singapore Exchange (SGX). This affiliation proves to be highly
beneficial to SMART as this ensures constant supply of raw materials for its downstream operations, transfer
of knowledge, research and development and SMART is able to leverage on GAR’s extensive international
networks to market its products in the highly competitive global markets.
SMART plans to issue its first IDR bond amounting to IDR 3tn within these 2 years for its capacity expansion
in the refining operations and supporting facilities which will cost around USD250-300 mn, expansion in
plantation acreage and replanting to ensure future sustainability of its business. SMART’s focus into
downstream operation in line with expectation by the government to position Indonesia as the exporter of
value-added products through export tax structure that highly disadvantage pure-play upstream operator.
Despite having lower gross margin, expansion in the refining operations will ensure sustainability of business
operation.
Furthermore, the current upbeat in the Crude Palm Oil industry due to declining Malaysian CPO inventory and
steep decline in global soybean production caused by recent severe drought in South America which
exacerbated the global production in the edible oils. This will provide temporary support for SMART and we
feel now, with the low yield environment, is the best time for SMART to leverage up and expand by tapping
on the cheap cost of debt.
Indonesia is one of the biggest producers of Crude Palm Oil (CPO), accounting for 44.1% of global exports
and Indonesia produced 23.9 mn tons of CPO in 2011. Having post significant volume growth in both FFB
harvested and CPO produced in 2011, we expect a milder growth in 2012 due to the reversal of the biological
yield up-cycle of the palm oil plants which will be more significant in the second half of the year and lack of
new plantings in the last 2 years which lower the amount of FFB produced and harvested. These will provide
key supports for rising CPO prices in the global markets in 2012.
SMART’s operations and financial positions are:





3
Research driven – its in-house research house, SMART Research Institute (SMARTRI), and its
collaboration with CIRAD (Centre de Cooperation Internationale en Recherche Agronomique pour le
Dévelopment) ensures the most efficient utilization of fertilizer (main costs component of upstream
operations contributing to around 30-35% of cash cost).
Emphasis on environmental factors: recycles wastes into fertilizers and ensures that the company
obliges to the standards and regulations outlined by ISPO, RSPO and Greenpeace.
Technology-driven: SMART employs SAP, GIS and Google Earth to monitor the performance of its
plantation by block of 30 Ha and SAP’s Enterprise Resource Program to ensure its inventory is tightly
maintained.
Vertically-integrated to ensure continuous demand for CPO and PK produced from its own plantation
and affiliates. SMART also sources CPO from party which is nearer to its refinery to ensure costefficiency of transport and logistic.
Efficient and lean cost structure. While not presented, our discussion with the management teams
show that the gross margin to produce CPO is around 60% (which is in line with other pure-play
upstream operator) and gross margins to produce cooking oil and margarine is around 10% and 15%,
respectively.

SMART has one of the highest yield of FFB and CPO per Ha, making it one of the most-efficient run
plantation in the industry.

Stable financial position—The Altman’s Z-score and Altman’s double prime Z-score are consistently in
the safe zone for the past 5 years and we estimate SMART to maintain its scores in this region. Safe
zone indicates that bankruptcy risk is remote.
Indonesia registered one of the fastest growth rates in the Asia Pacific region with nominal GDP growing at
2007-2011 CAGR of 14.0%. We expect this trend to continue as Indonesia enters into the second year of its
Master Plan program (MP3EI) with rising investment in the infrastructure supporting the growth of the economy. Consumer Confidence (CCI) and expectation (CCE) remains relatively resilient despite period of uncertainty in the global markets. Consumer’ expectation of 6-month income and economic condition remain robust despite slight deterioration in consumer’s appraisal of current condition for durable goods. Nominal GDP
per Capita has increased with 2006-10 CAGR of 12.6% with private consumption growing at 10.0% annually
from 2007-11. We expect this trend to remain robust as real GDP is expected to grow 5.5-6.5% in 2012.
Chart 1: Consumers’ Confidence remain Resilience
Chart 2: Consumers’ Appraisal of Present Situation
Source: Bloomberg
Source: Bloomberg
Chart 3: Consumers’ 6-month Expectations
Chart 4: Inflation
Source: Bloomberg
Source: Bloomberg
Chart 5: Rising GDP per Capita (USD)
Chart 6: Private Consumption per Capita (USD)
Source: Bloomberg
Source: Economic Intelligence Unit (EIU)
PT SMART Tbk
Credit Research
General Macroeconomic Indicators
4
Credit Research
Key Catalysts

Average Selling Price (ASP) increase. We estimate a price increase in cooking oil and margarine
due to rising raw materials and production costs. While this industry is highly concentrated with top 5
players controlling 89% market share of domestic branded oil & fats products. Out of the 5, Unilever is
the most sensitive to movement of raw materials and we expect Unilever to increase its ASP of its oil &
fats products which other companies will follow suit. We estimate ASP of cooking oil and margarine to
rise by 14% and 13%, respectively in 2012. Furthermore, the rise in income and purchasing power,
after the recent increase in salary of the blue-collar workers, will cushion the price increase in cooking
oils and margarine and inflationary pressure.

Expansion in the refineries providing stable future cash flow. Full integration minimizes commodity price risks at the expense of high margins from pure-play upstream operators. Post completion
of refinery facilities in 2013, we expect volume of value added products to increase at 2015-2016
CAGR of 15% and at maximum capacity, the growth is expected to be higher.
PT SMART Tbk
Key risks
5

Adverse economic conditions. The declining purchasing power, as a result of high inflationary pressure and economic slowdown, will affect our revenue growth assumptions. SMART’s revenue is highly
dependent on global macroeconomic conditions as the company exports significant of its products
overseas. Despite this, we believe that since palm oil is considered one of the cheapest edible oil, it
has the potential to substitute more expensive oil and thus there will be continuous demand for it.

Regulatory issues. Changes in export tax and highly bureaucratic process of obtaining land permit to
increase plantation acreage will be keys issue that will hinder the expansion progress by the company.

Commodity prices risks. While its refinery operations can act as hedging to volatility of CPO prices,
SMART is still not self-sufficient to depend solely CPO produced from its own plantation and it has to
buy CPO from affiliates and third parties at relevant market price.

Competition. The competitive landscape of the downstream industry is very intense as the company
faces competition from domestic producers, substitution products from other oil seeds and shift of consumer preference for healthy foods which uses less oil, reducing oil & fats consumption per capita.

Execution risks. The sustainability of SMART’s cash flows depends on its ability to expand its production capacity for the downstream operation and maintain its cost structure for the upstream operation.
Its expansion could be slower than expected and failure to maintain tight cost structure might affect
the sustainability of its cash flows.

Efficiency issues. SMART has many plantations and refineries located in different regions. Miscommunication arises among plantations/refineries might introduce inefficiencies, leading to slower-thanexpected growth in revenue.

Weather risks. Palm oil plants are highly sensitive to weather conditions. Drought decreases the FFB
yield while extreme wet condition decreases the efficacy of fertilizer application leading to declining
volume of FFB harvested in the next 1-2 years.
PT SMART Tbk
Credit Research
Risks Analysis
Adverse Economic conditions.
The strength of demands for oil & fats products in general depends on economic condition, specifically the
purchasing power of the consumers. The global economic slowdown, particularly the rising risk of Chinese
hard landing and the instability of the Eurozone economies, will be detrimental to sales volume of SMART and
thus its revenue streams.
Regulatory risks
Further increase in export tax on raw materials and palm derivatives will have significant impact on the EBIT
margin of the company. In 2011, export tax occupied 82% of SG&A and 13% of revenue. Currently, the
export tax structure favors the downstream operations and as such the company embarks on capacity
expansion in its refining abilities. Adverse changes in the tax structure might position the company in highly
disadvantage position, potentially leading to loss of competitive advantage of the company. Regulatory
issues such as the implementation of 2-year moratorium on new concession will hinder new planting and
thus future production and profitability of the firm.
Table 1: Export Tax Structure
Export Tax Rate
Reference Price
CPO
RBDO
< USD700
0.0%
0.0%
>USD700 - USD750
0.0%
0.0%
>USD750 - USD800
7.5%
2.0%
>USD800 - USD850
9.0%
3.0%
>USD850 - USD900
10.5%
4.0%
>USD900 - USD950
12.0%
5.0%
>USD950 -USD1,000
13.5%
6.0%
>USD1,000 - USD1,050
15.0%
7.0%
>USD1,050 - USD1,100
16.5%
8.0%
>USD1,100 - USD1,150
18.0%
9.0%
>USD1,150 - USD1,200
19.5%
10.0%
>USD1,200 - USD1,250
21.0%
11.5%
>USD1,250
22.5%
13.0%
RBDS
0.0%
0.0%
0.0%
0.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
Source: Ministry of Trade No. 26/M-DAG/PER/9/2011
Commodity price risks
Besides its own production, SMART engages in trading activities of CPO and also buys CPO and PK from affiliates and third parties for its refinery production. Its production is currently not sufficient to cover the requirements in the refineries (by rough calculation, refineries have capacities of 1.2mn tons assuming 90%
capacity utilization and 300 working days while SMART only produced around 700k tons of CPO), positioning
SMART as net buyer of CPO and PK. Historically, palm derivatives products tend to have high correlation with
CPO but movement of prices of cooking oil and margarine for domestic consumption tend to move by supply
and demand of the products themselves and this decoupling effect will result in margin compression if
SMART does not increase its ASP on rising raw materials. Despite this, we feel that the exposure is small and
SMART has the pricing power to determine the most competitive prices in the market. Our sensitivity analysis indicates that for ±10%, 2012EPS will change by ±8.8%.
6
Credit Research
Intense Competition
The plantation landscape is highly fragmented with many small privately owned plantations and large publicly-listed companies such as Salim Group, Sinar Mas Group, Asian Agri Group, Sime Darby Group, Astra Agro
Lestari Group, Bakrie Group and state-owned enterprise plantations. CPO is a globally traded commodities
and its prices are determined by supply and demand of the commodity itself. SMART is always able to sell its
products (mainly CPO and PK) to the market at the prevailing market price. The fragmented industry allows
SMART’s refineries to source for raw materials at the best price from many suppliers to ensure that its refineries are running at the maximum capacity and SMART is able to maintain its market share in the oil & fats
industry.
PT SMART Tbk
For the oil & fats division, the industry is highly concentrated with top 5 producers commanding 88% of the
domestic branded oil & fats industry. Rising competition from both local manufacturers and importers, oil
substitutions that include healthier olive oil to cater to health conscious consumers, canola oil, sunflower oil,
grape seeds oil and butter, shift of consumer taste to less oily food will limit SMART’s ability to increase prices without leading to a loss in market share.
Execution risks. SMART needs to maintain lean cost structure to ensure its high margins in the upstream operations and at the same time increase its land acreage and replant old sub-par performing plants to maintain future sustainability of growth in volume of FFB and CPO produced by its own plantation. We expect,
from our discussion with management team, that SMART will increase its plantation acreage by 5,000 Ha per
year. Delay in expansion and replanting will affect future volume as it takes at least 2-3 years for the plants
to bear fruits. For the downstream operations, SMART plans to increase its refining capacity to 10,600 tons
of CPO per day by 2015 from the current 4,600 tons of CPO per day. The company also plans to increase its
products offerings by diversifying into specialty fats and cocoa butter substitute (CBS) and cocoa butter extender (CBE). The risks could arise from delays in this expansion, which could limit volume growth and market share of SMART products and potential cost overrun due to under-utilize capacity which could negatively
impact its cash flow.
Efficiency Risks
SMART has 15 FFB processing factories, 4 refineries and 4 kernel crushing facilities. While fertilizers accounts
for the largest proportion of upstream operations (approximately 30-35% of cash cost) and raw materials
account for more than 85% of manufacturing costs, SMART’s ability to streamline its production belt and fertilizer application through research-based program will lead to slight margin expansion. Extreme wet weather
conditions decreases the efficiency of fertilizer application, leading to declining volume of FFB harvested.
SMART, in collaboration with CIRAD, performed cost-benefit analysis to determine the most economical way
of fertilizer application.
Weather Risks
Plantations are highly sensitive to changes in weather conditions. La Niña which results in extreme wet conditions decreases the efficacy of fertilizer application while El Niño which causes draught decreases the FFB
yield. However, decrease in production will usually be offset by rising CPO prices, assuming demand remains
the same there is no over-supply of other oilseeds.
Table 2: El Niño Impact on CPO prices
Year
Strength Impact
Changes
1994/1995 Medium Positive 54.8%
1997/1998 Strong
Positive 56.8%
2002/2003 Weak
Positive 62.5%
2006/2007 Weak
Positive 44.9%
Source: MPOB, Australian Bureau of Meteorology
7
Average CPO prices (MYR)
1,378
1,868
1,454
2,021
PT SMART Tbk
Credit Research
Chart 7: El Niño-Southern Oscillation (ENSO) and yoy CPO price change
Source: Bloomberg. La Niña is characterized by ENSO reading above +10 in at least 4 consecutive months while El Niño is
characterized by ENSO reading below –10 in at least 4 consecutive months. La Niña tends to bring heavy rainfall which
decreases the efficacy of fertilizer application while El Niño tends to result in drought reducing volume of FFB harvested.
8
Credit Research
Upstream Operation
PT SMART Tbk
Industry Analysis—Supply and Demand Dynamics
Chart 8: Palm Oil Consumptions Year 2010
100% = 46.1 mn tons
9
CPO is one of the major oils & fats that are being consumed globally. According to Oil World 2011, Palm Oil
commands 27% market share of global oil & fats production and consumptions and in 2010, around 80% of
palm oil consumed as foods. Its versatility is highly attractive to manufacturers and consumers around the
world and we estimate that palm oil will still be able to maintain its market share of around 27% for global
oils & fats consumptions.
As global population increases, we estimate that demands for palm oils and its derivatives will increase.
Based Oil World, consumption of oils & fats per capita per year for heavily populated countries such as China,
India and Indonesia is still below that of developed countries and we expect as GDP per capita increases,
consumption of oils & fats will increase and we believe that there is still significant growth potential that will
drive the demand for oils & fats, specifically palm oil.
Chart 9: Oil & Fats Consumption per capita per annum (kg)
Source: Oil World Annual Report 2010
Source: Oil World Annual Report 2010
Chart 10: Indonesian Production & Demand Statistics
Chart 11: Indonesian Demand & Supply Statistics
Source: USDA, Bloomberg
Source: USDA, Bloomberg
PT SMART Tbk
Credit Research
Chart 12: Global Oils & Fats Consumptions.
Source: Oil World Annual Report 2010
Chart 13: Global Oils & Fats Productions.
Source: Oil World Annual Report 2010
Chart 14: Indonesian Surplus/Deficit of CPO
Source: USDA, Bloomberg
10
Chart 16: Global Imports Statistics—China, EU and
India are the main importers for CPO.
Source: USDA, Bloomberg
Source: USDA, Bloomberg
Chart 17: Global Exports Statistics— Indonesia & Malaysia dominates the market
Chart 18: Domestic Consumption by Countries
Source: USDA, Bloomberg
Source: USDA, Bloomberg
PT SMART Tbk
Credit Research
Chart 15: Global Production Statistics—Indonesia &
Malaysia dominates the market
From the supply side, constraints, leading to price rise, are clearly shown by: (a) the moderation of
growth in global palm oil supply from 4.2 mn tons in 2011E to 2.0 mn tons in 2012F due to reversal of
the biological yield up-cycle after significant yield last year, lack of replanting in Indonesia during 20092010 period and wet La Niña conditions in 2010 affecting efficacy of fertilizer application which will only
be felt in the next 18-36 months; (b) the low growth of soybean production due to severe drought in
South America which will adversely affect the soybean yield and the survey on the American farmers
that favor corn planting over soybean will lower soybean oil stock-to-usage ratio to 5-year low.
Chart 19: Palm Oil Production Increase (yoy, mn tons)
Source: Oil World Annual Report 2010, Sinarmas Sekuritas Research
11
Credit Research
PT SMART Tbk
12
Currently, CPO is traded at USD67 discount to soy-oil which is relatively low as compared to its 4-year average of USD151. The low discount is expected to last as long as constraints in palm oil persist.
Chart 20: CPO prices and Soybean oil
Chart 21: CPO discount to soybean oil
Source: Bloomberg. Based on active contracts, rolled
over traded in MPOB for CPO and CBOT for Soybean
oil. Converted to USD at prevailing MYRUSD spot rate.
Source: Bloomberg. Based on active contracts, rolled
over traded in MPOB for CPO and CBOT for Soybean
oil. Converted to USD at prevailing MYRUSD spot rate.
Credit Research
Downstream Operation
Domestic oils and fats consumption is dominated by palm oil, corn oil, soy oil, sunflower oil, olive oil, butter and
margarine and vegetable oils are considered basic necessities in Indonesia. Significant proportion of cooking oil
(around 75% based on research carried out by Corinthian Infopharma Corpora) sold in Indonesia is unbranded
and this is usually sold in traditional market catering to low income segment of the society. However, the trend
is expected to change as consumers now favor branded cooking oil due to its stable prices, better quality and
extensive distributions channels. Based on Euromonitor International, retails sales of vegetables oils reached
IDR 6.2bn in 2010 with 2005-2010 CAGR of 12% while in volume terms, sales reached 512 thousand tons in
2010 with 2005-2010 CAGR Of 6.6%. Sales of branded margarine and spreadable oils & fats reached IDR
2.89bn in 2010 with 2005-2010 CAGR of 11.6%, while in volume terms, the growth rate is only 4.5%.
Chart 23: Volume Sales of Branded Oils & Fats in Indonesia (k tons)
PT SMART Tbk
Chart 22: Sales of Branded Oils & Fats in Indonesia (IDR mn)
13
Source: Euromonitor International
Source: Euromonitor International
Chart 24: Palm oil and Soy oil Market Share
Chart 25: Palm Oil has the highest 2000-2010 CAGR
Source: Oil World Annual Report
Source: Oil World Annual Report
Credit Research
Competitive Analysis
PT SMART Tbk
Chart 26: Competitive Analysis Framework: Porter’s 5 Forces
Source: Michael Porter, Sinarmas Sekuritas Research
Competitive Advantages
14

SMART is one of the largest vertically-integrated palm oil based company with significant market share in
branded oil & fats consumer products. Brands under its umbrella include Filma®, Kunci Mas®, Menara®,
Mitra®, Palmboom®, Palmvita®, GoodFry®, Pusaka®, SMARTBaker®, i-SOC®, Delicoa38®, Red Rose®,
Masku®, and Delicio®. SMART is able to leverage on its extensive distribution channels and points of
sales through its connection with GAR. This connection will aid SMART in maintaining its brand awareness
in the domestic market and as well as international markets.

Research and technology driven ensuring lean cost structure, efficient control of plantation and manufacturing process. SMART engages international research institutes to come out with the most efficient application of fertilizers, the pollination method to produce breeds with short time to maturity and high FFB
yield and methods to minimize environmental pollution through monitoring of CO2 in the atmosphere and
recycling of wastes as fertilizers. SMART is one of the few well-managed plantations with highest FFB and
CPO yield per Ha with low cash cost per Ha in the industry.

Current Low leverage and strong balance sheet paving way for major expansion. The low net-debt-toequity ratio at 0.59× and strong EBITDA/interest expense ratio of 10.1× in 2011 allows SMART to leverage up its balance sheet to ensure future sustainability and growth. Dividend payout ratio is assumed to
remain at 35% throughout our projection period.

Despite significant capex in the next 3 years, we estimate that SMART will generate positive free cash flow
of IDR 4.4tn from 2012 to 2016.
PT SMART Tbk
Credit Research
Chart 27: Debt to Equity ratio and EBITDA coverage ratio
Source: Company Data, Sinarmas Sekuritas Research
Chart 28: High Capex For Capacity Expansion in 2012-2014
Source: Company Data, Sinarmas Sekuritas Research
Chart 29: Estimated Capex Breakdown and Capex/Sales
Source: Company Data, Sinarmas Sekuritas Research
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PT SMART Tbk
Credit Research
Financial Analysis
Table 3: P&L (IDR bn)
P&L (IDR bn)
Revenues
Cost of Goods Sold
Gross Profit
SG&A
EBIT
Non-Operating Income
Interest Income, net
Profit Before Tax
Income Tax Expense
Profit After Tax
Minorities Interests
Net Profit
2009
14,201
(12,485)
1,717
(606)
1,110
169
(286)
993
(245)
748
(1)
748
2010
20,265
(17,128)
3,137
(1,470)
1,667
239
(252)
1,655
(394)
1,260
(0)
1,260
2011
31,676
(24,155)
7,522
(5,050)
2,472
180
(265)
2,387
(601)
1,786
1
1,785
2012F
34,355
(26,282)
8,074
(5,493)
2,580
1
(525)
2,056
(514)
1,542
1
1,541
2013F
34,074
(26,203)
7,871
(4,590)
3,281
1
(677)
2,605
(651)
1,954
1
1,953
2014F
36,861
(28,383)
8,478
(4,661)
3,816
1
(717)
3,100
(775)
2,325
1
2,324
2015F
39,339
(30,645)
8,694
(4,655)
4,039
1
(654)
3,386
(847)
2,540
1
2,539
2016F
41,808
(32,569)
9,240
(4,776)
4,463
1
(471)
3,993
(998)
2,995
1
2,994
Gross Margin
EBITDA Margin
EBIT Margin
NOPAT Margin
Net Margin
12.1%
10.3%
7.8%
5.3%
5.3%
15.5%
10.6%
8.2%
6.2%
6.2%
23.7%
9.4%
7.8%
5.6%
5.6%
23.5%
8.6%
7.5%
4.5%
4.5%
23.1%
11.0%
9.6%
5.7%
5.7%
23.0%
11.8%
10.4%
6.3%
6.3%
22.1%
11.8%
10.3%
6.5%
6.5%
22.1%
12.2%
10.7%
7.2%
7.2%
Revenue Growth
EBITDA growth
EBIT growth
Net Profit Growth
-11.8%
-39.4%
-48.1%
-29.1%
42.7%
46.5%
50.2%
68.4%
56.3%
37.7%
48.2%
41.6%
8.5%
0.0%
4.4%
-13.6%
-0.8%
26.4%
27.2%
26.7%
8.2%
16.4%
16.3%
19.0%
6.7%
6.3%
5.8%
9.2%
6.3%
10.0%
10.5%
17.9%
Source: Company Data, Sinarmas Sekuritas Research
Revenue is projected to grow slightly at 8.5% in 2012F on the backdrop of high CPO prices despite expected
lower growth in volume of FFB harvested. Net Income is estimated to fall slightly due to margin compression
in the downstream operations on the rising prices of raw materials, higher export tax on the upstream
operation and higher interest expense arising from coupon payment. As the firm expands its downstream
operation, gross margin will continue to compress while EBIT margin will expand due to lower export tax
subjected to refined and value-added products. On the revenue breakdown, export will still dominate and
SMART will continue to export CPO and its derivatives to tap into bigger demand from global markets.
Furthermore, SMART only export CPO produced by plantation far away from refineries as it is more costefficient to do so. SMART will then buy CPO from its affiliates or third parties whose plantations are closer to
that of SMART’s refineries to ensure shorter shipping time and fresher CPO and PK. CPO and PK that are not
immediately processed will yield more fatty acid (PFAD) which is not desirable as it will lower yield of
Refined, Bleached and Deodorized Olein (RBDO) and Refined, Bleached and Deodorized Stearin (RBDS) and
increase cost of extraction.
16
Chart 30: Revenue Breakdown by destinations
Chart 31: Volume Breakdown by Products
Source: Company Data, Sinarmas Sekuritas Research
Source: Company Data, Sinarmas Sekuritas Research
Chart 33: Margin Comparisons
Source: Company Data, Sinarmas Sekuritas Research
Source: Company Data, Sinarmas Sekuritas Research
PT SMART Tbk
Credit Research
Chart 32: Revenue Breakdown by Products
17
PT SMART Tbk
Credit Research
Balance Sheet
We expect the net fixed assets to grow at 2011-2016 CAGR of 16% as it expands its refining capacities to 10,600
tons of CPO per day from the current 4,600 tons of CPO per day and diversified its products offerings to include
specialty fats such as cocoa butter substitute or is equivalents to cater to the confectionary, food and beverage
industry. This expansion will also increase its market share in branded oil & fats products in both domestic and
international markets.
Table 5: Balance Sheet (IDR bn)
Balance Sheet
Net Tangible Assets
Plantations Assets, net
Net Intangible Assets (ex
Plantations)
Other LT Assets
Net Working Capital (ex.
Cash)
Net Debt (cash)
Other Liabilities
Shareholders' Equities
Minorities Interests
2009
3,390
1,429
2010
3,924
1,441
2011
4,542
1,437
2012F
6,035
1,496
2013F
8,433
1,569
2014F
9,792
1,660
2015F
9,730
1,754
2016F
9,636
1,864
31
811
25
848
25
756
24
771
24
739
24
786
23
838
23
870
1,380
1,854
1,335
4,796
4
2,072
2,891
1,568
5,830
4
3,486
2,441
2,383
7,331
5
3,869
3,277
2,476
8,334
5
3,798
4,134
2,530
9,604
5
4,512
4,327
2,773
11,116
5
4,961
2,765
2,970
12,767
5
5,367
748
3,207
14,714
5
Source: Company Data, Sinarmas Sekuritas Research
Table 6: Working Capital Calculation
2009
2010
2011
2012F
2013F
2014F
2015F
2016F
Current Assets
Accounts & Notes Receivables
Inventories
Other Current Assets (ex. Cash)
Account Payables
Other Current Liabilities
Working Capital (ex. Cash)
1,065
2,139
847
1,173
1,499
1,380
1,915
2,703
1,326
1,176
2,696
2,072
3,259
2,839
1,378
1,365
2,625
3,486
4,375
3,345
1,263
2,139
2,976
3,869
3,935
2,714
1,353
1,475
2,728
3,798
4,738
3,811
1,508
2,440
3,106
4,512
4,519
3,850
1,627
1,877
3,159
4,961
5,319
4,292
1,818
2,711
3,351
5,367
Increase in WC
(115)
692
1,414
383
(71)
713
449
407
22
51
27
46
38
52
25
65
47
42
19
69
41
43
24
59
45
42
25
62
43
42
25
60
43
46
26
63
43
46
26
63
Cash Conversion Cycle
Days of AR
Days of Inventories
Days of AP
Cash Conversion Cycle
Source: Company Data, Sinarmas Sekuritas Research
18
Credit Research
Cash Flow
We estimate SMART will generate free cash flow of around IDR 4.4 tn despite its heavy capex totalling to IDR 6.4
tn. Post heavy expansion, capex maintenance and replanting should only account for IDR 450 bn and we should
expect higher FCF yield. We forecast 35% dividend payout and we estimate that, barring any unforeseen and
unexpected situation, SMART should be able to service its debt obligation and debt refinancing is always available
via loans.
PT SMART Tbk
Table 7: Cash Flows (IDR bn)
EBIT
Depre. & Amor. (incl. Plantation)
Increase in WC
Net Interest income
Income Taxes
Others
Operating Cash Flow
Capex
Expansion in Plantation
Cash from other Investment Activities
CF investing
Debt increase
Dividend Payment
Other financing activities
CF financing
Enterprise FCF
2010
2011
2012F
2013F
2014F
2015F
2016F
1,667
484
692
(252)
394
(1,037)
(224)
797
75
(2)
871
2,472
491
1,414
(265)
601
426
1,109
871
78
(43)
906
2,580
382
383
(525)
514
1,540
1,803
72
1,875
3,281
463
(71)
(677)
651
2,487
2,787
74
2,787
3,816
541
713
(717)
775
2,152
1,823
77
1,823
4,039
595
449
(654)
847
2,684
453
79
453
4,463
634
407
(471)
998
3,221
459
82
459
1,011
484
2,003
1,130
470
151
(215)
100
896
(1,097)
(431)
(65)
(12)
161
(625)
(539)
(684)
(813)
(663)
2,152
Source: Company Data, Sinarmas Sekuritas Research
19
1,378
(335)
590
(375)
(214)
252
(1,945)
(889)
(2,833)
2,681
PT SMART Tbk
Credit Research
Return on Capital
We estimate return on capital employed (ROCE) at 14%-17% due to the fact that any capital investment and
plantation expansion will only be realized 1-2 years down the road. Furthermore, expectation that volume of FFB
harvested and thus CPO produced will only grow slowly, positioning SMART as net buyer of CPO and exposing it
to the volatility of CPO prices in the commodity markets. We estimate that ROIC/WACC will fall to hover around
1 due to its unrealized investments in 2012F and will rise slowly to 1.4 once investment has been realized.
Table 8: Return on Capital Analysis
2009
2010
2011
2012F
2013F
2014F
2015F
2016F
Asset Turnover
EBIT Margin
ROIC
IC as % of Capital Employed
ROCE
1.39
7.8%
11.8%
95%
11.2%
1.62
8.2%
14.1%
100%
15.2%
2.15
7.8%
17.9%
99%
17.7%
1.82
7.5%
14.7%
100%
14.8%
1.66
9.6%
15.7%
99%
15.5%
1.52
10.4%
16.3%
100%
16.3%
1.52
10.3%
15.8%
99%
15.5%
1.53
10.7%
17.5%
98%
17.1%
Du Pont Ratio
EBIT Margin
Interest Burden
Taxes and Minorities Burden
Total Asset Turnover
Financial Levelage
ROE (Du Pont)
7.82%
0.89
0.75
1.39
2.13
15.61%
8.23%
0.99
0.76
1.62
2.14
21.62%
7.80%
0.97
0.75
2.15
2.01
24.35%
7.51%
0.80
0.75
1.82
2.26
18.50%
9.63%
0.79
0.75
1.66
2.14
20.33%
10.35%
0.81
0.75
1.52
2.18
20.91%
10.27%
0.84
0.75
1.52
2.02
19.88%
10.68%
0.89
0.75
1.53
1.85
20.35%
Source: Company Data, Sinarmas Sekuritas Research
Chart 34: ROIC/WACC Comparison.
Source: Company Data, Sinarmas Sekuritas Research
20
PT SMART Tbk
Credit Research
Plantation Profiles
21
We estimate that the average age of the plants will increase from the current 12.5 years to 14.0 years as the
firm will not consider replanting unless the yield of FFB/Ha has fallen to below 18 tons. As the plants getting
older, it is getting more difficult to harvest the fruit which resulted in lower yield of FFB per hectare. However,
the firm has devised a method to harvest fruits from older plants with the help of scissor-attached long metal
rod made of light alloy. This helps the firm to save cost from replanting and at the same time able to maintain
high yield of FFB/Ha despite aging plants. The firm intends to expand the plantation at the rate of 5,000 Ha per
year and cost of expansion will be around IDR 50 mn per Ha per 3 years.
The new planting will be carried out with new DamimasTM seedling which has the capability to produce up to 30
tons of FFB per Ha and it has short time to maturity (around 18 months as compared to the conventional 36
months). This will boost the overall yield of FFB and thus CPO per Ha in the future.
Chart 35: Plantation Profile and Average Age of Plants
Chart 36: Comparison of SMART’s CPO, PK and acreage with
competitors
Source: Company Data, Sinarmas Sekuritas Research
Source: Company Data
Chart 37: Comparison of FFB and CPO yield per Ha
Chart 38: Vegetable Oil Yield per Ha
Source: Company Data
Source: Company Data, Oil World
Credit Research
Altman’s Z-Score and Bankruptcy Risk
Altman’s Z-Score model to predict the probability of bankruptcy of a firm. It is based on the following Formula:
Z =1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5
Where:
X1 = Working capital/Total Assets, measuring the net liquid assets of a firm relative to capitalization
X2 = Retained earnings/Total Assets, measuring the firm’s cumulative profits relative to its size and this ratio
also serves as indicative of the need of external financing to fund its investments and operations.
PT SMART Tbk
X3 = EBIT/Total Assets. This measures the earning power of the firm’s assets without effect of capital structure/
leverage and tax.
X4 = MV of Equity/Total Liabilities. This measures the extent to which the firm’s assets can decline in value
before the book value becomes negative and the firm and insolvency reigns in. This also serves as indicative of
the ability of the firm to fund its operations with equity capital, including cost of equity and the outlook of the
firm by the market.
X5 = Sales/Total Assets. Assets turnover ratio measures the sales generating capability of the firm relative to
its assets.
Z score above 2.99 indicates ‘Safe Zone’ while Z-score between 1.81 and 2.99 is ‘Grey Zone’ and Z-score less
than 1.81 is ‘Distress Zone’.
For Altman’s Double Prime Z-Score, the formula is as follow:
Z” =6.56X1 + 3.26X2 + 6.72X3 + 1.05X4”
X1, X2 and X3 are identical to those in Altman’s Z-score. X4” is Total shareholder’s equity/Total Liabilities.
For Altman’s Double Prime Z-Score, the cut-off is as follow:
Z” > 2.6 is ‘Safe Zone’
1.1< Z”<2.6 is ‘Grey Zone’
Z”<1.1 is ‘Distress Zone’
In the past 5 years, SMART has consistently maintained its Z-score and Z”-score at safe region, indicating that
bankruptcy is remote. However, any event such as deep economic recessions which depress the price of CPO
traded in the future and dampen consumers’ sentiment and purchasing power, another backlash from
Greenpeace and unexpected weather changes might lower the Z and Z” score, lowering it to ‘Grey Zone’ or
even ‘Distress Zone’.
Chart 39: Altman’s Z-Score
Chart 40: Altman’s Z”-score
Source: Company Data, Bloomberg, Sinarmas Sekuritas Research Source: Company Data, Bloomberg, Sinarmas Sekuritas Research
22
Credit Research
PT SMART Tbk
Fiscal Year End
Income Statement (IDR bn)
Sales Revenue
Gross Profit
Operating Income
Depreciation & Amortization
EBITDA
Other non-operating income
Net Interest Income (expense)
Equity net income
Profit before tax
Tax expenses
Profit after tax
Minority Interests
Net Profit
Cash Flow (IDR bn)
Operating Cash Flow
Capex
Plantation
Free Cash Flow
Dividends Received from Investments
Dividends Paid
Debt Issuance (redemption)
Net debt (cash)
Balance Sheet (IDR bn)
Cash & cash equivalents
Account Receivables
Inventories
Other Current assets
Net fixed assets
Plantations, net
Total Assets
Short term Liabilities
Long term Liabilities
Total Liabilities
Shareholders’ Equity
Minority Interest
Total Equity & Liabilities
Key Ratio
Revenue Growth (%)
EPS Growth (%)
EBITDA Margin (%)
Payout Ratio (%)
ROE (%)
Quick Ratio (×)
Debt/Equity (%)
2010*
2012F
2013F
2014F
2015F
2016F
20,265
3,137
1,667
484
2,151
239
-252
31,676
7,522
2,472
491
2,963
180
-265
34,355
8,074
2,580
382
2,962
1
-525
34,074
7,871
3,281
463
3,744
1
-677
36,861
8,478
3,816
541
4,358
1
-717
39,339
8,694
4,039
595
4,634
1
-654
41,808
9,240
4,463
634
5,097
1
-471
1,655
394
1,260
0
1,260
2,387
601
1,786
1
1,785
2,056
514
1,542
1
1,541
2,605
651
1,954
1
1,953
3,100
775
2,325
1
2,324
3,386
847
2,540
1
2,539
3,993
998
2,995
1
2,994
-224
797
75
-1,097
1,109
871
78
161
1,540
1,803
72
-335
2,487
2,787
74
-375
2,152
1,823
77
252
2,684
453
79
2,152
3,221
459
82
2,681
-215
1,011
3,996
-431
484
4,310
-625
2,003
5,270
-539
1,130
6,110
-684
470
6,465
-813
151
5,047
-889
-1,945
3,173
315
1,915
2,703
1,304
3,924
1,441
12,476
4,106
2,394
6,500
5,830
4
12,476
486
3,259
2,839
1,378
4,542
1,437
14,722
4,271
3,115
7,386
7,331
4
14,722
1,529
4,375
3,345
1,263
6,035
1,496
18,839
5,774
4,726
10,500
8,334
5
18,839
1,819
3,935
2,714
1,353
8,433
1,569
20,586
4,748
6,230
10,977
9,604
5
20,586
1,934
4,738
3,811
1,508
9,792
1,660
24,253
6,659
6,473
13,132
11,116
5
24,253
3,502
4,519
3,850
1,627
9,730
1,754
25,843
6,359
6,670
13,029
12,767
5
25,801
3,432
5,319
4,292
1,818
9,636
1,864
27,253
7,731
4,707
12,439
14,714
5
27,158
43%
68%
11%
34%
22%
0.86
74%
56%
42%
9%
35%
24%
1.20
65%
8%
-14%
9%
35%
18%
1.24
82%
-1%
27%
11%
35%
20%
1.50
83%
8%
19%
12%
35%
21%
1.23
76%
7%
9%
12%
35%
20%
1.52
67%
6%
18%
12%
35%
20%
1.37
45%
Source: Company data, Sinarmas Sekuritas Research
*: Data from pre-reclassified financial statement
23
2011*
PT SMART Tbk
Credit Research
Disclosure
24
Sinarmas Sekuritas and PT SMART Tbk are affiliated to Sinar Mas Group.
Sinarmas Sekuritas will act, or have acted, as co-manager in a public offering of equity and/or debt securities
for PT SMART Tbk.
Sinarmas Sekuritas currently has PT SMART Tbk as its investment banking clients and will seek compensation
for investment banking-related services from PT SMART Tbk within the next 3 months.
PT SMART Tbk
Credit Research
Disclaimer
This report has been prepared by PT Sinarmas Sekuritas, an affiliate of Sinarmas Group.
This material is: (i) created based on information that we consider reliable, but we do not represent that it is
accurate or complete, and it should not be relied upon as such; (ii) for your private information, and we are
not soliciting any action based upon it; (iii) not to be construed as an offer to sell or a solicitation of an offer
to buy any security.
Opinions expressed are current opinions as of original publication date appearing on this material and the information, including the opinions contained herein, is subjected to change without notice. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different
results. The analyst(s) responsible for the preparation of this publication may interact with trading desk personnel, sales personnel and other constituencies for the purpose of gathering, integrating and interpreting
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25
Credit Research
Contact Persons:
Fixed Income Sales
Harta Setiawan
Email: Harta.Setiawan@sinarmassekuritas.co.id
Phone: (62-21) 392-5550 ext 156
Eman Suherman
Email: Eman.Suherman@sinarmassekuritas.co.id
PT SMART Tbk
Phone: (62-21) 392-5550 ext 157
26
Sri Maryati
Email: Sri.Maryati@sinarmassekuritas.co.id
Phone: (62-21) 392-5550 ext 151