ESSA Growth Ammo CLSA Corporate Research
Surya Esa
Rp3,250 - BUY
Snoopin around
Small-caps research
stifanus.sulistyo@clsa.com
+62 21 2554 8819
Energy reform provides growth ammo
ESSA is one of indirect beneficiary of Indonesia energy reform as the
country needs to tackle its energy trade balance issue. ESSA is benefiting
from an upcoming Senoro Toili gas field where it will source the gas for
the ammonia plant, which we expect to fivefold ESSA’s 2013 profit in
2017. Separately, we cut earnings forecast due to 9% lower LPG price
assumption and sequentially cut the TP by only 5%. Post cut, ESSA
growth outlook remains attractive with our TP implies 6x 17CL PE.
Abdullah Hashim
+62 21 2554 8827
LPG price assumption cut, minimal impact to TP
LPG price trades 11% lower than its 10M14 average & 14% lower than 2013,
in-line with oil/energy commodities price weakness. We trimmed our 14-15CL
earnings by 11-13% on 11-9% lower LPG price assumption; earnings impact
relatively mild for a commodity business due to the gas-linked purchase price.
Our model suggests ~7% & ~2% 15CL & 17CL earnings sensitivity for every
5% movements in LPG price.
28 October 2014
Indonesia
Petro/Chems
Reuters
Bloomberg
ESSA.JK
ESSA IJ
Priced on 23 October 2014
Jakarta Comp @ 5,024.3
12M hi/lo
Asia ammonia shortage gives advantages to the Asian producers
Ammonia price (Middle East index) is strong, trades ~19% higher than its
2014ytd avg due to supply disruption; however its mid-longer term outlook is
not that bullish as crops prices are weak that lead to less planting area by the
farmers and eventually less fertilizers. Nevertheless, as a net importer, Asian
ammonia producers have some advantages as the region is a net importer.
This makes the Asian producers as one of the last one to go out of market in
case of further ammonia weakness.
Rp3,550/1,600
12M price target
±% potential
Rp4,050
+25%
Shares in issue
Free float (est.)
1,100.0m
40.9%
Market cap
US$295m
Energy reform derivative – reserve ammo
ESSA is one of the indirect beneficiaries of energy reform in Indonesia; we
can look at ESSA as the derivative of it. Indo energy trade balance is heading
to negative territory if Indo doesn’t fast-track the O&G production. When
Indonesia increases its oil & gas production, petrochemical producers like
ESSA could benefit by getting more resources allocation, more businesses
3M average daily volume
Rp0.5bn
(US$0.0m)
Major shareholders
Trinugraha Akarya Sejahtera
30.0%
Ramaduta Teltaka 20.0%
1M
3M
12M
New TP implies 6x 17CL PE, 25% upside; BUY
Our SOTP valuation model suggests ESSA’s fair value at Rp4050/sh, 5% lower
than previous TP. We continue to like ESSA on the back of its solid execution
track-record, savvy management team and upcoming ammonia project. As a
petrochemical producer, we think there are upside risks in form of more
projects / resources allocation when Indonesia increases its O&G outputs.
Absolute
Relative
(3.0)
(0.9)
47.1
48.9
35.4
23.5
Financials
Abs (US$)
(3.7)
40.6
24.7
Year to 31 December
Stock performance (%)
(Rp)
(% )
150
3,600
100
3,025
12A
13A
14CL
15CL
40
42
37
48
119
Rev forecast change (%)
-
-
(10.7)
(8.6)
(3.8)
Net profit (US$m)
7
13
10
15
25
NP forecast change (%)
-
-
(11.3)
(12.7)
(8.3)
0.76
1.24
0.89
1.38
2.25
-
62.7
(28.4)
55.5
62.7
45.5
25.1
30.7
21.1
13.0
0.0
0.0
0.0
0.0
0.0
15.3
19.4
10.6
14.5
19.8
Net debt/equity (%)
1.9
(17.7)
31.9
149.4
224.7
PB (x)
7.1
3.9
3.1
2.9
2.3
Revenue (US$m)
EPS (US¢)
2,450
50
1,875
EPS growth (% YoY)
PE (x)
1,300
Oct -12 Apr-13 Oct -13 Apr-14
Surya Esa (LHS)
Rel to Co mp (RH S)
Source: Bloomberg
www.clsa.com
0
Dividend yield (%)
ROE (%)
16CL
Source: CLSA
Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com
Company update
Growth ammo
Stifanus Sulistyo
Surya Esa - BUY
Growth ammo
LPG price assumptions cut, minimal impact to TP
At Arab Gulf LPG Propane & Butane price of US$735/mt & US$765/mt, LPG
price trades at 11% lower than its 10M14 average and 14% lower than 2013.
The price weakness is in-line with oil/energy commodities weakness; LPG
price has relatively high degree of correlation (0.95x) with the oil price. We
trimmed our 14-16CL earnings by 8-13% mainly on the back of lower
LPG price assumption.
Our model suggests ~7% 15CL earnings sensitivity for every ~5% LPG price
movements. For 17CL onwards, our model suggests ~2% & ~4% earnings
sensitivity for every 5% & 5% movements in LPG & Ammonia prices.
Figure 1
Figure 2
LPG & Brent prices
LPG Price assumption
(US$/mt)
1,200 (US$/tons)
1,400
CP Aramco Price Average
1,100
y = 7.1275x + 78.78
R² = 0.9082
1,200
1,000
1,000
900850
800
868
800
800
600
805
782
829
854
880
906
933
961
990
1,020
1,050
700
400
600
200
0
0
50
150 (US$/bbl)
100
Source: CLSA, Bloomberg
500
2012 2013 14CL 15CL 16CL 17CL 18CL 19CL 20CL 21CL 22CL 23CL 24CL 25CL
Source: CLSA, Bloomberg
We trimmed our 14-15CL LPG price assumption by 11-9% to US$800782/mt. Note that ESSA gas purchase prices are linked to the each products
ASP; it has floor price + escalation that linked to ASP. With this scheme, ESSA
should be able to maintain LPG segment gross margin at 66-71% when LPG
prices range from US$700-1000/mt.
Figure 3
We assume LPG price in
October to recover by 3%
by the end of the year
LPG price, 2000-10M14
(US$/t)
LPG
1,150
1,050
950
850
750
650
550
450
350
250
150
J-00
J-01
J-02
J-03
J-04
J-05
J-06
J-07
J-08
J-09
J-10
J-11
J-12
J-13
J-14
Source: CLSA, Bloomberg
Commodity companies’ profitability is very sensitive towards the
commodity price movement as the production cost usually constant;
profit will slump deeper than the revenue due to margin compression.
However, ESSA’s linked gas price purchase has allowed less profitability
volatility compared to commodity companies in general.
28 October 2014
stifanus.sulistyo@clsa.com
2
Surya Esa - BUY
Growth ammo
As 4th week of October, ammonia price (Middle East index) trades at ~19%
higher than 2014ytd average price. The strong Ammonia price in the shortterm is attributable to gas supply disruption in Middle East and Ukraine;
Ammonia mid-longer term outlook is not bullish as crops prices are weak that
lead to less planting area by the farmers and eventually less fertilizers.
However, Asian ammonia producers have some advantages:
Figure 4
Figure 5
Ammonia vs Brent oil, 2000-10M14
(US$/bbl)
Brent
Ammonia vs corn price, 2000-10M14
Mid-East Ammonia (RHS)
(US$/mt)
(US$/bbl)
Corn
Ammonia (RHS)
(US$/mt)
160
1000
900
1000
140
900
800
900
800
700
800
120
700
100
600
80
500
400
60
300
40
20
500
400
200
15Y correlation: 0.8
100
100
Source: CLSA, Fertecon, Bloomberg
400
300
200
0
600
500
5Y correlation: 0.5
0
700
600
0
300
5Y correlation: 0.6
200
15Y correlation: 0.8
100
0
Source: CLSA, Fertecon, Bloomberg
Asia the net ammonia importer
Ammonia price has relatively high degree of correlation with oil in the past
~15years, however the correlation gets lower in the past 5 years (some
argue) due to shale gas development and strong crop (corn) prices. Supply
disruption will also affects short-term prices.
For Asian in particular, the region consumes more than it produces; China and
India are the largest consumers in the region. From the projects in the
pipeline, the East of Suez region (East Asia, Australia) is expected to continue
to become net ammonia importers (figure 7) according to Fertecon. The
region will likely to source its shortage from the Black Sea or Trinidad Tobago.
Figure 6
Figure 7
East of Suez net ammonia trade, 2000-25
East of Suez ammonia trade balance
Source: Fertecon
Source: Fertecon
For Trinidad producers, transportation cost will add significant cost; it could
double the cost, figure 10. For the Black Sea producers, they have higher cost
structure due to gas purchase contract; put them as one of the marginal
producers. Asia net import status has put ammonia price in the Far East (East
Asia) region higher than the prices in the other regions, to close the
transportation cost arbitrage.
28 October 2014
stifanus.sulistyo@clsa.com
3
Surya Esa - BUY
Growth ammo
Figure 8
Figure 9
Asia production & consumption
Ammonia costs, 2014F
(mt)
Consumption
(US$/t)
600
Production
Supply cost
Freight cost to Far East
average
105,000
500
100,000
400
95,000
300
200
90,000
100
85,000
0
Indonesia
80,000
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Source: Fertecon
ESSA
Ukr other
Ukr
Middle Venezuela Trinidad Middle Chn nat
Chn
Trinidad Russia via Chn anth
plant
Odessa
East low
low
East high gas based thermal
base
Yuzhnyy
coal
plant
coal
based
based
Source: Fertecon, CLSA
The bottom line, Asian producers will be among the last producers
(except for some high cost producers) to go out of the market if the
Ammonia prices weaken significantly.
Figure 10
Figure 11
Ammonia top exporters, 2013
Ammonia top importers, 2013
Latin America
5%
Europe
8%
marginal cost
producers
Latin America
26%
Russia - C IS
18%
N. America
8%
Oceania
4%
Asia
7%
Europe
26%
N. America
33%
Ukraine - C IS
7%
Africa
6%
Middle East
15%
Other C IS
0%
Oceania
0%
Other
Asia
7%
C IS
1%
India Asia
Korea 10%
- Asia
8%
Africa
6%
Middle East
1%
Taiwan - Asia
3%
Source: Fertecon, CLSA
Source: Fertecon, CLSA
Figure 12
Ammonia key trades flow, 2013 (preliminary)
Source: Fertecon
28 October 2014
stifanus.sulistyo@clsa.com
4
Surya Esa - BUY
Growth ammo
As for ESSA, it has competitive production cost compared to the Black Sea
and Trinidad producers + shielded by geographical (transport cost)
advantages to the Asia market.
On the supply side: the key developments to watch is in the American
region, where US is expected to get more ammonia supply that should lead to
reduced import, which predominantly sourced from Trinidad Tobago. This
situation eventually will force Trinidad producers to look for new market in
other regions, most likely to the Far East where it has the biggest ammonia
deficit. However, the freight rate from Trinidad to the Far East market is
almost half of the production cost alone (2013).
We kept the ammonia price assumption. Our ammonia price assumption
is quite conservative as we only assume ammonia price of US$505-495/mt in
2018-2020, lower than 2013A-14F price of US$581-545/mt and current price
of close to US$600/mt. ESSA should be able to maintain ammonia business
gross margin at +45% when ammonia prices is above US$400/t.
Figure 13
Figure 14
Ammonia price assumption, relatively conservative
Ammonia & Brent prices
700
(US$/tons)
(US$/mt)
Ammonia Price Average
1,000
643
650
y = 4.6016x + 22.26
R² = 0.795
900
800
595
600
581
545
550
700
585
580
535
505
515
495
570
560
525
495
500
600
500
400
300
200
100
450
2012 2013 14CL 15CL 16CL 17CL 18CL 19CL 20CL 21CL 22CL 23CL 24CL 25CL
Source: CLSA, Fertecon
0
0
20
40
60
80
100
120
140
160 (US$/bbl)
Source: CLSA, Bloomberg
Debottlenecking shifted to 4Q14
ESSA postponed its LPG plant debottlenecking process from 3Q14
(September) to 4Q14 (October-November 2014). This resulted in lower profit
in 14CL as previously we expect ESSA to be able to partially enjoy the
additional LPG capacity and higher margin in 4Q14. ESSA has just proceeded
with the debottlenecking process in late October (4th week of October 2014).
We cut 14CL volume assumption by 1% and gross margins by 3% due to
debottlenecking delay & lower LPG price assumption, while we keep the 1516CL volume assumptions. ESSA plans to finish the debottlenecking in 4-6
weeks and we assume the conservative 6 weeks production shut down.
The debottlenecking will increase the ESSA’s LPG production capacity to 170t
per day from 137 ton per day and increase the LPG segment profitability.
28 October 2014
stifanus.sulistyo@clsa.com
5
Surya Esa - BUY
Growth ammo
Figure 15
LPG segment sales volume revision due to debottlenecking delay
(US$mn)
55
LPG revenue old
LPG revenue new
LPG price old
LPG price new
(US$/mt)
1,000
50
950
45
900
40
850
35
800
30
750
25
700
650
20
14CL
15CL
16CL
17CL
18CL
Source: CLSA
All in all, we cut 14-16CL revenue and earnings by 4-11% and 8-13%,
respectively. The cut is predominantly due to change in LPG price assumption
and slight LPG volume cut for 14CL only. We maintain our forecasts for the
ammonia segment.
Figure 16
Changes summary
Revenue
Gross profit
Operating profit
Net profit
.
GP margin
Opt margin
Net margin
.
LPG price avg
Ammonia price avg
.
LPG volume
Ammonia volume
14CL
41
27
19
11
Old
15CL
53
38
29
17
16CL
124
75
60
27
14CL
37
24
18
10
New
15CL
48
34
26
15
16CL
119
71
57
25
14CL
(11%)
(9%)
(9%)
(11%)
change
15CL
(9%)
(10%)
(10%)
(13%)
16CL
(4%)
(5%)
(5%)
(8%)
65%
47%
27%
72%
54%
33%
60%
49%
22%
66%
48%
26%
71%
54%
31%
59%
48%
21%
1%
1%
0%
(1%)
(1%)
(1%)
(1%)
(1%)
(1%)
900
545
863
595
889
585
800
545
782
595
805
585
(11%)
0%
(9%)
0%
(9%)
0%
40,641
-
55,845
-
55,845
124
40,185
-
55,845
-
55,845
124
(1%)
na
0%
na
0%
0%
Source: CLSA
Energy reform derivative – reserve ammo
ESSA is one of the indirect beneficiaries of energy reform in Indonesia; we
can look at ESSA as the derivative of it. We have been talking about the need
of energy reform in Indo in our Energizers report. Indo energy trade balance
is heading towards negative territory (figure 2) if Indo doesn’t fast-track the
oil & gas production. When Indonesia increases its oil & gas production,
petrochemical producers like ESSA could benefit by getting more resources
allocation, more businesses.
Separately, on the global level, ammonia supply shortage in Asia does not
look sustainable and could lead to either demand destruction from a price
sensitive industrial sector or the stimulation of further new projects in
28 October 2014
stifanus.sulistyo@clsa.com
6
Surya Esa - BUY
Growth ammo
the region – Fertecon. Getting the supply from the Trinidad will incur
expensive transport cost and supply from Black Sea has high cost base.
From ESSA side, we see the company has what it takes to execute any
upcoming opportunities. ESSA has good track record, is run by professionals
and backed by reputable financiers; almost all of the necessary ingredients
for successful business ventures. What it needs is just more opportunities.
Indo energy sector dynamic + Asia’s ammonia shortage bode well for ESSA
longer-term outlook.
Figure 17
Figure 18
Indo Gas export value and volume
Indonesia’s total energy trade balance
Source: ESDM, Bloomberg, CLSA
Source: BP, CLSA. We define energy trade balance as net exports of oil,
gas & coal
From Energizers report:
On the energy production side, Indonesia’s energy sector (oil, gas, coal) is
not in good shape. Indonesia is at a critical point of deceleration, where the
value of net energy exports is falling quickly from 3.5% of GDP in 2010 to
0.2% in 2014. Our sector model predicts Indonesia’s energy trade surplus to
come to an end in 2017 as rising, domestic oil consumption finally outstrips
the value of gas and coal exports.
Aside from global factors affecting the prices of these commodities, there is
also a rising push for consumption from domestic industry, which is only likely
to accelerate as the country develops, as we have already outlined. Combined
with declining oil production from a mismanaged sector, these will accelerate
the fall in energy export value.
28 October 2014
stifanus.sulistyo@clsa.com
7
Surya Esa - BUY
Growth ammo
Figure 19
Indonesian energy: stock universe
Source: CLSA
New TP translate to 6x 17CL PE, 25% upside
Our SOTP valuation model suggests ESSA’s fair value at Rp4050/sh, 5% lower
than previous TP. LPG business valuation is cut by 9% on ~9% lower LPG ASP
assumption.
Figure 20
ESSA's SOTP
Valuation – DCF
LPG business
Ammonia business
SOTP
Equity value (Rpbn)
Share outstanding (bn)
Equity value / share (Rp)
US$m
187
201
387
Target price (Rp), rounding
Rpbn
2,147
2,308
4,455
4,455
1.1
4,050
4,050
Source: CLSA
Our new TP implies 16-6x 16-17CL PE and offers 25% upside.
We continue to like ESSA on the back of its solid execution track-record,
savvy management team and upcoming ammonia project. As a petrochemical
producer, we think there are upside risks in form of more projects / resources
allocation when Indonesia increases its O&G outputs. While supply is pending,
the demand is knocking through Asia ammonia supply shortage.
Figure 21
Changes summary
Old
New
change
TP
4250
4050
(5%)
14CL profit
11
10
(11%)
15CL profit
17
15
(13%)
16CL profit
27
25
(8%)
17CL profit
67
65
(3%)
Source: CLSA
28 October 2014
stifanus.sulistyo@clsa.com
8
Surya Esa - BUY
Growth ammo
We use 12% WACC to value the LPG business and 14% CoE to value the
ammonia business. Our LPG business valuation of Rp2.1tn (US$187mn)
implies 12x 15CL PE; ESSA will still makes its earnings from LPG business
only in 2015.
Figure 22
Figure 23
ESSA’s PE band
ESSA’s PB band
Surya Esa- Price to Earnings Bands
Surya Esa - Price to Book Value Bands
max4.30x
0.4
0.4
25.8x
0.4
0.4
3.60x
0.3
0.3
avg21.4x
avg2.90x
0.3
0.3
17.5x
2.19x
0.2
0.2
min13.5x
0.2
min1.49x
0.2
0.1
Jan12
0.1
May12
Sep12
Jan13
May13
Sep13
Jan14
May14
0.1
Jan12
Sep14
Source: CLSA Evalu@tor
May12
Sep12
Jan13
May13
Sep13
Jan14
May14
Sep14
Source: CLSA Evalu@tor
Source: CLSA
Source: CLSA
Figure 24
Comps
P/E
Surya Esa
PTTGC
Shanghai Petrochem
Indorama
Formosa Chem
Petronas Chemicals
Mitsubishi Chemical HC
Showa Denko
BASF
CF Industries holdings
Potash corp of Sask.
Agrium
Average
Ticker
ESSA IJ
PTTGC TB
600688 CH
IVL TB
1326 TT
PCHEM MK
4188 JP
4004 JP
BAS GR
CF US
POT US
AGU US
Market Cap 2014
297
30
8,212
9
5,199
34
3,507
27
13,113
19
14,596
14
7,135
24
1,870
27
79,798
12
12,701
13
26,987
18
12,414
15
20
2015
19
8
23
19
19
13
16
11
11
12
16
11
15
EV/EBITDA
2014 2015
15
11
7
6
20
9
11
10
16
15
7
7
9
7
8
7
7
7
7
7
10
9
9
7
10
9
GP Margin
2014
66%
9%
na
9%
6%
35%
20%
14%
26%
41%
39%
22%
26%
2015
71%
9%
na
9%
6%
36%
21%
14%
27%
42%
45%
24%
28%
EBIT Margin
2014
48%
7%
1%
4%
3%
28%
3%
4%
11%
41%
35%
8%
16%
Net Margin
2015 2014
54% 26%
7%
6%
2%
2%
4%
1%
3%
6%
28% 21%
4%
1%
4%
1%
12%
7%
40% 27%
38% 24%
10%
7%
17% 11%
2015
31%
6%
2%
1%
6%
21%
1%
1%
7%
27%
24%
7%
11%
Source: CLSA, Bloomberg
28 October 2014
stifanus.sulistyo@clsa.com
9
Surya Esa - BUY
Growth ammo
Summary financials
Year to 31 December
2012A
Summary P&L forecast (US$m)
Revenue
40
Op Ebitda
11
Op Ebit
9
Interest income
0
Interest expense
(1)
Other items
(1)
Profit before tax
7
Taxation
(2)
Minorities/Pref divs
2
Net profit
7
Summary cashflow forecast (US$m)
Operating profit
9
Operating adjustments
Depreciation/amortisation
3
Working capital changes
1
Net interest/taxes/other
(6)
Net operating cashflow
7
Capital expenditure
(7)
Free cashflow
0
Acq/inv/disposals
Int, invt & associate div
0
Net investing cashflow
(6)
Increase in loans
(15)
Dividends
0
Net equity raised/other
15
Net financing cashflow
0
Incr/(decr) in net cash
0
Exch rate movements
Opening cash
21
Closing cash
21
Summary balance sheet forecast (US$m)
Cash & equivalents
21
Debtors
5
Inventories
1
Other current assets
1
Fixed assets
25
Intangible assets
Other term assets
29
Total assets
81
Short-term debt
6
Creditors
3
Other current liabs
3
Long-term debt/CBs
16
Provisions/other LT liabs
1
Minorities/other equity
3
Shareholder funds
49
Total liabs & equity
81
Ratio analysis
Revenue growth (% YoY)
Ebitda growth (% YoY)
Ebitda margin (%)
Net profit margin (%)
Dividend payout (%)
Effective tax rate (%)
Ebitda/net int exp (x)
Net debt/equity (%)
ROE (%)
ROIC (%)
EVA®/IC (%)
29.0
18.9
0.0
27.5
16.2
1.9
15.3
11.5
(3.5)
2013A
2014CL
2015CL
2016CL
42
21
18
0
(1)
1
18
(5)
1
13
37
21
18
1
(4)
0
14
(5)
0
10
48
29
26
0
(6)
0
20
(5)
0
15
119
72
57
1
(23)
0
35
(9)
(1)
25
18
3
(2)
(5)
14
(19)
(5)
0
(19)
(6)
0
26
19
15
21
36
18
3
0
(8)
13
(138)
(125)
1
(137)
43
0
58
101
(23)
36
13
26
4
(1)
(11)
17
(324)
(307)
0
(324)
305
0
40
345
38
13
51
57
15
(8)
(32)
33
(252)
(220)
1
(252)
203
0
0
203
(16)
51
34
36
6
1
2
42
32
118
6
2
5
14
1
2
88
118
13
5
1
2
176
32
228
1
2
5
62
1
60
97
228
51
6
1
2
497
32
589
1
3
5
367
1
100
113
589
34
16
3
2
734
32
822
1
7
5
570
1
101
137
822
6.9
87.0
50.7
31.4
0.0
30.3
22.4
(17.7)
19.4
20.0
5.0
(12.5)
(2.0)
56.8
26.5
0.0
32.0
6.1
31.9
10.6
8.5
(6.5)
31.1
40.3
60.8
31.4
0.0
25.0
5.0
149.4
14.5
5.3
(9.7)
146.1
145.1
60.6
20.7
0.0
25.0
3.3
224.7
19.8
6.6
(8.4)
Source: CLSA
28 October 2014
stifanus.sulistyo@clsa.com
10
Surya Esa - BUY
Growth ammo
Companies mentioned
Surya Esa (ESSA IJ - RP3,250 - BUY)
Stock price (Rp)
Recommendation history of Surya Esa Perkasa Tbk ESSA IJ
Stifanus Sulistyo
Other analysts
No coverage
BUY
U-PF
N-R
O-PF
SELL
4,000
3,000
2,000
1,000
May 12
Date
09 Sep 2014
Sep 12
Rec
BUY
Jan 13 May 13 Sep 13
Target
4,250.00
Date
Jan 14 May 14
Rec
Sep 14
Target
Source: CLSA
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below 20% but exceeding market return; U-PF: Total expected return positive but below market return; SELL: Total expected return to be
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01/01/2014
28 October 2014
stifanus.sulistyo@clsa.com
11
Rp3,250 - BUY
Snoopin around
Small-caps research
stifanus.sulistyo@clsa.com
+62 21 2554 8819
Energy reform provides growth ammo
ESSA is one of indirect beneficiary of Indonesia energy reform as the
country needs to tackle its energy trade balance issue. ESSA is benefiting
from an upcoming Senoro Toili gas field where it will source the gas for
the ammonia plant, which we expect to fivefold ESSA’s 2013 profit in
2017. Separately, we cut earnings forecast due to 9% lower LPG price
assumption and sequentially cut the TP by only 5%. Post cut, ESSA
growth outlook remains attractive with our TP implies 6x 17CL PE.
Abdullah Hashim
+62 21 2554 8827
LPG price assumption cut, minimal impact to TP
LPG price trades 11% lower than its 10M14 average & 14% lower than 2013,
in-line with oil/energy commodities price weakness. We trimmed our 14-15CL
earnings by 11-13% on 11-9% lower LPG price assumption; earnings impact
relatively mild for a commodity business due to the gas-linked purchase price.
Our model suggests ~7% & ~2% 15CL & 17CL earnings sensitivity for every
5% movements in LPG price.
28 October 2014
Indonesia
Petro/Chems
Reuters
Bloomberg
ESSA.JK
ESSA IJ
Priced on 23 October 2014
Jakarta Comp @ 5,024.3
12M hi/lo
Asia ammonia shortage gives advantages to the Asian producers
Ammonia price (Middle East index) is strong, trades ~19% higher than its
2014ytd avg due to supply disruption; however its mid-longer term outlook is
not that bullish as crops prices are weak that lead to less planting area by the
farmers and eventually less fertilizers. Nevertheless, as a net importer, Asian
ammonia producers have some advantages as the region is a net importer.
This makes the Asian producers as one of the last one to go out of market in
case of further ammonia weakness.
Rp3,550/1,600
12M price target
±% potential
Rp4,050
+25%
Shares in issue
Free float (est.)
1,100.0m
40.9%
Market cap
US$295m
Energy reform derivative – reserve ammo
ESSA is one of the indirect beneficiaries of energy reform in Indonesia; we
can look at ESSA as the derivative of it. Indo energy trade balance is heading
to negative territory if Indo doesn’t fast-track the O&G production. When
Indonesia increases its oil & gas production, petrochemical producers like
ESSA could benefit by getting more resources allocation, more businesses
3M average daily volume
Rp0.5bn
(US$0.0m)
Major shareholders
Trinugraha Akarya Sejahtera
30.0%
Ramaduta Teltaka 20.0%
1M
3M
12M
New TP implies 6x 17CL PE, 25% upside; BUY
Our SOTP valuation model suggests ESSA’s fair value at Rp4050/sh, 5% lower
than previous TP. We continue to like ESSA on the back of its solid execution
track-record, savvy management team and upcoming ammonia project. As a
petrochemical producer, we think there are upside risks in form of more
projects / resources allocation when Indonesia increases its O&G outputs.
Absolute
Relative
(3.0)
(0.9)
47.1
48.9
35.4
23.5
Financials
Abs (US$)
(3.7)
40.6
24.7
Year to 31 December
Stock performance (%)
(Rp)
(% )
150
3,600
100
3,025
12A
13A
14CL
15CL
40
42
37
48
119
Rev forecast change (%)
-
-
(10.7)
(8.6)
(3.8)
Net profit (US$m)
7
13
10
15
25
NP forecast change (%)
-
-
(11.3)
(12.7)
(8.3)
0.76
1.24
0.89
1.38
2.25
-
62.7
(28.4)
55.5
62.7
45.5
25.1
30.7
21.1
13.0
0.0
0.0
0.0
0.0
0.0
15.3
19.4
10.6
14.5
19.8
Net debt/equity (%)
1.9
(17.7)
31.9
149.4
224.7
PB (x)
7.1
3.9
3.1
2.9
2.3
Revenue (US$m)
EPS (US¢)
2,450
50
1,875
EPS growth (% YoY)
PE (x)
1,300
Oct -12 Apr-13 Oct -13 Apr-14
Surya Esa (LHS)
Rel to Co mp (RH S)
Source: Bloomberg
www.clsa.com
0
Dividend yield (%)
ROE (%)
16CL
Source: CLSA
Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com
Company update
Growth ammo
Stifanus Sulistyo
Surya Esa - BUY
Growth ammo
LPG price assumptions cut, minimal impact to TP
At Arab Gulf LPG Propane & Butane price of US$735/mt & US$765/mt, LPG
price trades at 11% lower than its 10M14 average and 14% lower than 2013.
The price weakness is in-line with oil/energy commodities weakness; LPG
price has relatively high degree of correlation (0.95x) with the oil price. We
trimmed our 14-16CL earnings by 8-13% mainly on the back of lower
LPG price assumption.
Our model suggests ~7% 15CL earnings sensitivity for every ~5% LPG price
movements. For 17CL onwards, our model suggests ~2% & ~4% earnings
sensitivity for every 5% & 5% movements in LPG & Ammonia prices.
Figure 1
Figure 2
LPG & Brent prices
LPG Price assumption
(US$/mt)
1,200 (US$/tons)
1,400
CP Aramco Price Average
1,100
y = 7.1275x + 78.78
R² = 0.9082
1,200
1,000
1,000
900850
800
868
800
800
600
805
782
829
854
880
906
933
961
990
1,020
1,050
700
400
600
200
0
0
50
150 (US$/bbl)
100
Source: CLSA, Bloomberg
500
2012 2013 14CL 15CL 16CL 17CL 18CL 19CL 20CL 21CL 22CL 23CL 24CL 25CL
Source: CLSA, Bloomberg
We trimmed our 14-15CL LPG price assumption by 11-9% to US$800782/mt. Note that ESSA gas purchase prices are linked to the each products
ASP; it has floor price + escalation that linked to ASP. With this scheme, ESSA
should be able to maintain LPG segment gross margin at 66-71% when LPG
prices range from US$700-1000/mt.
Figure 3
We assume LPG price in
October to recover by 3%
by the end of the year
LPG price, 2000-10M14
(US$/t)
LPG
1,150
1,050
950
850
750
650
550
450
350
250
150
J-00
J-01
J-02
J-03
J-04
J-05
J-06
J-07
J-08
J-09
J-10
J-11
J-12
J-13
J-14
Source: CLSA, Bloomberg
Commodity companies’ profitability is very sensitive towards the
commodity price movement as the production cost usually constant;
profit will slump deeper than the revenue due to margin compression.
However, ESSA’s linked gas price purchase has allowed less profitability
volatility compared to commodity companies in general.
28 October 2014
stifanus.sulistyo@clsa.com
2
Surya Esa - BUY
Growth ammo
As 4th week of October, ammonia price (Middle East index) trades at ~19%
higher than 2014ytd average price. The strong Ammonia price in the shortterm is attributable to gas supply disruption in Middle East and Ukraine;
Ammonia mid-longer term outlook is not bullish as crops prices are weak that
lead to less planting area by the farmers and eventually less fertilizers.
However, Asian ammonia producers have some advantages:
Figure 4
Figure 5
Ammonia vs Brent oil, 2000-10M14
(US$/bbl)
Brent
Ammonia vs corn price, 2000-10M14
Mid-East Ammonia (RHS)
(US$/mt)
(US$/bbl)
Corn
Ammonia (RHS)
(US$/mt)
160
1000
900
1000
140
900
800
900
800
700
800
120
700
100
600
80
500
400
60
300
40
20
500
400
200
15Y correlation: 0.8
100
100
Source: CLSA, Fertecon, Bloomberg
400
300
200
0
600
500
5Y correlation: 0.5
0
700
600
0
300
5Y correlation: 0.6
200
15Y correlation: 0.8
100
0
Source: CLSA, Fertecon, Bloomberg
Asia the net ammonia importer
Ammonia price has relatively high degree of correlation with oil in the past
~15years, however the correlation gets lower in the past 5 years (some
argue) due to shale gas development and strong crop (corn) prices. Supply
disruption will also affects short-term prices.
For Asian in particular, the region consumes more than it produces; China and
India are the largest consumers in the region. From the projects in the
pipeline, the East of Suez region (East Asia, Australia) is expected to continue
to become net ammonia importers (figure 7) according to Fertecon. The
region will likely to source its shortage from the Black Sea or Trinidad Tobago.
Figure 6
Figure 7
East of Suez net ammonia trade, 2000-25
East of Suez ammonia trade balance
Source: Fertecon
Source: Fertecon
For Trinidad producers, transportation cost will add significant cost; it could
double the cost, figure 10. For the Black Sea producers, they have higher cost
structure due to gas purchase contract; put them as one of the marginal
producers. Asia net import status has put ammonia price in the Far East (East
Asia) region higher than the prices in the other regions, to close the
transportation cost arbitrage.
28 October 2014
stifanus.sulistyo@clsa.com
3
Surya Esa - BUY
Growth ammo
Figure 8
Figure 9
Asia production & consumption
Ammonia costs, 2014F
(mt)
Consumption
(US$/t)
600
Production
Supply cost
Freight cost to Far East
average
105,000
500
100,000
400
95,000
300
200
90,000
100
85,000
0
Indonesia
80,000
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Source: Fertecon
ESSA
Ukr other
Ukr
Middle Venezuela Trinidad Middle Chn nat
Chn
Trinidad Russia via Chn anth
plant
Odessa
East low
low
East high gas based thermal
base
Yuzhnyy
coal
plant
coal
based
based
Source: Fertecon, CLSA
The bottom line, Asian producers will be among the last producers
(except for some high cost producers) to go out of the market if the
Ammonia prices weaken significantly.
Figure 10
Figure 11
Ammonia top exporters, 2013
Ammonia top importers, 2013
Latin America
5%
Europe
8%
marginal cost
producers
Latin America
26%
Russia - C IS
18%
N. America
8%
Oceania
4%
Asia
7%
Europe
26%
N. America
33%
Ukraine - C IS
7%
Africa
6%
Middle East
15%
Other C IS
0%
Oceania
0%
Other
Asia
7%
C IS
1%
India Asia
Korea 10%
- Asia
8%
Africa
6%
Middle East
1%
Taiwan - Asia
3%
Source: Fertecon, CLSA
Source: Fertecon, CLSA
Figure 12
Ammonia key trades flow, 2013 (preliminary)
Source: Fertecon
28 October 2014
stifanus.sulistyo@clsa.com
4
Surya Esa - BUY
Growth ammo
As for ESSA, it has competitive production cost compared to the Black Sea
and Trinidad producers + shielded by geographical (transport cost)
advantages to the Asia market.
On the supply side: the key developments to watch is in the American
region, where US is expected to get more ammonia supply that should lead to
reduced import, which predominantly sourced from Trinidad Tobago. This
situation eventually will force Trinidad producers to look for new market in
other regions, most likely to the Far East where it has the biggest ammonia
deficit. However, the freight rate from Trinidad to the Far East market is
almost half of the production cost alone (2013).
We kept the ammonia price assumption. Our ammonia price assumption
is quite conservative as we only assume ammonia price of US$505-495/mt in
2018-2020, lower than 2013A-14F price of US$581-545/mt and current price
of close to US$600/mt. ESSA should be able to maintain ammonia business
gross margin at +45% when ammonia prices is above US$400/t.
Figure 13
Figure 14
Ammonia price assumption, relatively conservative
Ammonia & Brent prices
700
(US$/tons)
(US$/mt)
Ammonia Price Average
1,000
643
650
y = 4.6016x + 22.26
R² = 0.795
900
800
595
600
581
545
550
700
585
580
535
505
515
495
570
560
525
495
500
600
500
400
300
200
100
450
2012 2013 14CL 15CL 16CL 17CL 18CL 19CL 20CL 21CL 22CL 23CL 24CL 25CL
Source: CLSA, Fertecon
0
0
20
40
60
80
100
120
140
160 (US$/bbl)
Source: CLSA, Bloomberg
Debottlenecking shifted to 4Q14
ESSA postponed its LPG plant debottlenecking process from 3Q14
(September) to 4Q14 (October-November 2014). This resulted in lower profit
in 14CL as previously we expect ESSA to be able to partially enjoy the
additional LPG capacity and higher margin in 4Q14. ESSA has just proceeded
with the debottlenecking process in late October (4th week of October 2014).
We cut 14CL volume assumption by 1% and gross margins by 3% due to
debottlenecking delay & lower LPG price assumption, while we keep the 1516CL volume assumptions. ESSA plans to finish the debottlenecking in 4-6
weeks and we assume the conservative 6 weeks production shut down.
The debottlenecking will increase the ESSA’s LPG production capacity to 170t
per day from 137 ton per day and increase the LPG segment profitability.
28 October 2014
stifanus.sulistyo@clsa.com
5
Surya Esa - BUY
Growth ammo
Figure 15
LPG segment sales volume revision due to debottlenecking delay
(US$mn)
55
LPG revenue old
LPG revenue new
LPG price old
LPG price new
(US$/mt)
1,000
50
950
45
900
40
850
35
800
30
750
25
700
650
20
14CL
15CL
16CL
17CL
18CL
Source: CLSA
All in all, we cut 14-16CL revenue and earnings by 4-11% and 8-13%,
respectively. The cut is predominantly due to change in LPG price assumption
and slight LPG volume cut for 14CL only. We maintain our forecasts for the
ammonia segment.
Figure 16
Changes summary
Revenue
Gross profit
Operating profit
Net profit
.
GP margin
Opt margin
Net margin
.
LPG price avg
Ammonia price avg
.
LPG volume
Ammonia volume
14CL
41
27
19
11
Old
15CL
53
38
29
17
16CL
124
75
60
27
14CL
37
24
18
10
New
15CL
48
34
26
15
16CL
119
71
57
25
14CL
(11%)
(9%)
(9%)
(11%)
change
15CL
(9%)
(10%)
(10%)
(13%)
16CL
(4%)
(5%)
(5%)
(8%)
65%
47%
27%
72%
54%
33%
60%
49%
22%
66%
48%
26%
71%
54%
31%
59%
48%
21%
1%
1%
0%
(1%)
(1%)
(1%)
(1%)
(1%)
(1%)
900
545
863
595
889
585
800
545
782
595
805
585
(11%)
0%
(9%)
0%
(9%)
0%
40,641
-
55,845
-
55,845
124
40,185
-
55,845
-
55,845
124
(1%)
na
0%
na
0%
0%
Source: CLSA
Energy reform derivative – reserve ammo
ESSA is one of the indirect beneficiaries of energy reform in Indonesia; we
can look at ESSA as the derivative of it. We have been talking about the need
of energy reform in Indo in our Energizers report. Indo energy trade balance
is heading towards negative territory (figure 2) if Indo doesn’t fast-track the
oil & gas production. When Indonesia increases its oil & gas production,
petrochemical producers like ESSA could benefit by getting more resources
allocation, more businesses.
Separately, on the global level, ammonia supply shortage in Asia does not
look sustainable and could lead to either demand destruction from a price
sensitive industrial sector or the stimulation of further new projects in
28 October 2014
stifanus.sulistyo@clsa.com
6
Surya Esa - BUY
Growth ammo
the region – Fertecon. Getting the supply from the Trinidad will incur
expensive transport cost and supply from Black Sea has high cost base.
From ESSA side, we see the company has what it takes to execute any
upcoming opportunities. ESSA has good track record, is run by professionals
and backed by reputable financiers; almost all of the necessary ingredients
for successful business ventures. What it needs is just more opportunities.
Indo energy sector dynamic + Asia’s ammonia shortage bode well for ESSA
longer-term outlook.
Figure 17
Figure 18
Indo Gas export value and volume
Indonesia’s total energy trade balance
Source: ESDM, Bloomberg, CLSA
Source: BP, CLSA. We define energy trade balance as net exports of oil,
gas & coal
From Energizers report:
On the energy production side, Indonesia’s energy sector (oil, gas, coal) is
not in good shape. Indonesia is at a critical point of deceleration, where the
value of net energy exports is falling quickly from 3.5% of GDP in 2010 to
0.2% in 2014. Our sector model predicts Indonesia’s energy trade surplus to
come to an end in 2017 as rising, domestic oil consumption finally outstrips
the value of gas and coal exports.
Aside from global factors affecting the prices of these commodities, there is
also a rising push for consumption from domestic industry, which is only likely
to accelerate as the country develops, as we have already outlined. Combined
with declining oil production from a mismanaged sector, these will accelerate
the fall in energy export value.
28 October 2014
stifanus.sulistyo@clsa.com
7
Surya Esa - BUY
Growth ammo
Figure 19
Indonesian energy: stock universe
Source: CLSA
New TP translate to 6x 17CL PE, 25% upside
Our SOTP valuation model suggests ESSA’s fair value at Rp4050/sh, 5% lower
than previous TP. LPG business valuation is cut by 9% on ~9% lower LPG ASP
assumption.
Figure 20
ESSA's SOTP
Valuation – DCF
LPG business
Ammonia business
SOTP
Equity value (Rpbn)
Share outstanding (bn)
Equity value / share (Rp)
US$m
187
201
387
Target price (Rp), rounding
Rpbn
2,147
2,308
4,455
4,455
1.1
4,050
4,050
Source: CLSA
Our new TP implies 16-6x 16-17CL PE and offers 25% upside.
We continue to like ESSA on the back of its solid execution track-record,
savvy management team and upcoming ammonia project. As a petrochemical
producer, we think there are upside risks in form of more projects / resources
allocation when Indonesia increases its O&G outputs. While supply is pending,
the demand is knocking through Asia ammonia supply shortage.
Figure 21
Changes summary
Old
New
change
TP
4250
4050
(5%)
14CL profit
11
10
(11%)
15CL profit
17
15
(13%)
16CL profit
27
25
(8%)
17CL profit
67
65
(3%)
Source: CLSA
28 October 2014
stifanus.sulistyo@clsa.com
8
Surya Esa - BUY
Growth ammo
We use 12% WACC to value the LPG business and 14% CoE to value the
ammonia business. Our LPG business valuation of Rp2.1tn (US$187mn)
implies 12x 15CL PE; ESSA will still makes its earnings from LPG business
only in 2015.
Figure 22
Figure 23
ESSA’s PE band
ESSA’s PB band
Surya Esa- Price to Earnings Bands
Surya Esa - Price to Book Value Bands
max4.30x
0.4
0.4
25.8x
0.4
0.4
3.60x
0.3
0.3
avg21.4x
avg2.90x
0.3
0.3
17.5x
2.19x
0.2
0.2
min13.5x
0.2
min1.49x
0.2
0.1
Jan12
0.1
May12
Sep12
Jan13
May13
Sep13
Jan14
May14
0.1
Jan12
Sep14
Source: CLSA Evalu@tor
May12
Sep12
Jan13
May13
Sep13
Jan14
May14
Sep14
Source: CLSA Evalu@tor
Source: CLSA
Source: CLSA
Figure 24
Comps
P/E
Surya Esa
PTTGC
Shanghai Petrochem
Indorama
Formosa Chem
Petronas Chemicals
Mitsubishi Chemical HC
Showa Denko
BASF
CF Industries holdings
Potash corp of Sask.
Agrium
Average
Ticker
ESSA IJ
PTTGC TB
600688 CH
IVL TB
1326 TT
PCHEM MK
4188 JP
4004 JP
BAS GR
CF US
POT US
AGU US
Market Cap 2014
297
30
8,212
9
5,199
34
3,507
27
13,113
19
14,596
14
7,135
24
1,870
27
79,798
12
12,701
13
26,987
18
12,414
15
20
2015
19
8
23
19
19
13
16
11
11
12
16
11
15
EV/EBITDA
2014 2015
15
11
7
6
20
9
11
10
16
15
7
7
9
7
8
7
7
7
7
7
10
9
9
7
10
9
GP Margin
2014
66%
9%
na
9%
6%
35%
20%
14%
26%
41%
39%
22%
26%
2015
71%
9%
na
9%
6%
36%
21%
14%
27%
42%
45%
24%
28%
EBIT Margin
2014
48%
7%
1%
4%
3%
28%
3%
4%
11%
41%
35%
8%
16%
Net Margin
2015 2014
54% 26%
7%
6%
2%
2%
4%
1%
3%
6%
28% 21%
4%
1%
4%
1%
12%
7%
40% 27%
38% 24%
10%
7%
17% 11%
2015
31%
6%
2%
1%
6%
21%
1%
1%
7%
27%
24%
7%
11%
Source: CLSA, Bloomberg
28 October 2014
stifanus.sulistyo@clsa.com
9
Surya Esa - BUY
Growth ammo
Summary financials
Year to 31 December
2012A
Summary P&L forecast (US$m)
Revenue
40
Op Ebitda
11
Op Ebit
9
Interest income
0
Interest expense
(1)
Other items
(1)
Profit before tax
7
Taxation
(2)
Minorities/Pref divs
2
Net profit
7
Summary cashflow forecast (US$m)
Operating profit
9
Operating adjustments
Depreciation/amortisation
3
Working capital changes
1
Net interest/taxes/other
(6)
Net operating cashflow
7
Capital expenditure
(7)
Free cashflow
0
Acq/inv/disposals
Int, invt & associate div
0
Net investing cashflow
(6)
Increase in loans
(15)
Dividends
0
Net equity raised/other
15
Net financing cashflow
0
Incr/(decr) in net cash
0
Exch rate movements
Opening cash
21
Closing cash
21
Summary balance sheet forecast (US$m)
Cash & equivalents
21
Debtors
5
Inventories
1
Other current assets
1
Fixed assets
25
Intangible assets
Other term assets
29
Total assets
81
Short-term debt
6
Creditors
3
Other current liabs
3
Long-term debt/CBs
16
Provisions/other LT liabs
1
Minorities/other equity
3
Shareholder funds
49
Total liabs & equity
81
Ratio analysis
Revenue growth (% YoY)
Ebitda growth (% YoY)
Ebitda margin (%)
Net profit margin (%)
Dividend payout (%)
Effective tax rate (%)
Ebitda/net int exp (x)
Net debt/equity (%)
ROE (%)
ROIC (%)
EVA®/IC (%)
29.0
18.9
0.0
27.5
16.2
1.9
15.3
11.5
(3.5)
2013A
2014CL
2015CL
2016CL
42
21
18
0
(1)
1
18
(5)
1
13
37
21
18
1
(4)
0
14
(5)
0
10
48
29
26
0
(6)
0
20
(5)
0
15
119
72
57
1
(23)
0
35
(9)
(1)
25
18
3
(2)
(5)
14
(19)
(5)
0
(19)
(6)
0
26
19
15
21
36
18
3
0
(8)
13
(138)
(125)
1
(137)
43
0
58
101
(23)
36
13
26
4
(1)
(11)
17
(324)
(307)
0
(324)
305
0
40
345
38
13
51
57
15
(8)
(32)
33
(252)
(220)
1
(252)
203
0
0
203
(16)
51
34
36
6
1
2
42
32
118
6
2
5
14
1
2
88
118
13
5
1
2
176
32
228
1
2
5
62
1
60
97
228
51
6
1
2
497
32
589
1
3
5
367
1
100
113
589
34
16
3
2
734
32
822
1
7
5
570
1
101
137
822
6.9
87.0
50.7
31.4
0.0
30.3
22.4
(17.7)
19.4
20.0
5.0
(12.5)
(2.0)
56.8
26.5
0.0
32.0
6.1
31.9
10.6
8.5
(6.5)
31.1
40.3
60.8
31.4
0.0
25.0
5.0
149.4
14.5
5.3
(9.7)
146.1
145.1
60.6
20.7
0.0
25.0
3.3
224.7
19.8
6.6
(8.4)
Source: CLSA
28 October 2014
stifanus.sulistyo@clsa.com
10
Surya Esa - BUY
Growth ammo
Companies mentioned
Surya Esa (ESSA IJ - RP3,250 - BUY)
Stock price (Rp)
Recommendation history of Surya Esa Perkasa Tbk ESSA IJ
Stifanus Sulistyo
Other analysts
No coverage
BUY
U-PF
N-R
O-PF
SELL
4,000
3,000
2,000
1,000
May 12
Date
09 Sep 2014
Sep 12
Rec
BUY
Jan 13 May 13 Sep 13
Target
4,250.00
Date
Jan 14 May 14
Rec
Sep 14
Target
Source: CLSA
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28 October 2014
stifanus.sulistyo@clsa.com
11