Halcyon Agri

UOBKayhian on 27 Mar 2013

Valuations

·      Halcyon Agri (Halcyon) is trading at 9.5x 2012 PE and 3.6x P/B. Its 2012 net profit jumped by about 130% yoy to reach US$10m.

Investment Highlights

·      A solid midstream natural rubber player.Halcyon operates in the midstream segment of the natural rubber supply chain. This involves: a) procurement of raw rubber, b) processing into technically specified rubber, and c) selling to vehicle tyre manufacturers. It had a production capacity of 92,380mt p.a. as of end-12 and is set to expand its capacity by 65% within the next three years. Halcyon owns and operates two processing facilities in Palembang, Sumatra, while its merchandising and marketing office is in Singapore.

·      Risk model protects against rubber price volatility. Halcyon touts a robust risk management model that allows it to reference its raw material prices to market movements. In a typical cycle, Halcyon purchases the amount of raw materials needed one month in advance at a cost that is pegged to the current market rubber price. TheUS$/Rp rate is also fixed simultaneously. At month-end, Halcyon locks in the selling price and prepares for delivery. This approach allows it to consistently secure its target gross material profit of at least US$350/mt and to effectively manage its forex exposure.

·      Better margin from a specialised product. The SIR20-VK (Standard Indonesia Rubber-20 Viskositas Konstanta) is a premium variant of natural raw rubber. Its technical properties lower tyre manufacturers’ cost of production (lower energy costs, higher throughput), which makes it highly in demand. This product commands an extra margin of 1.25% to Halcyon’s other products, and comprises 67% of total sales.

·      Sound credit profile due to concentrated blue-chip customer base. To manage credit risk, Halcyon only services companies that have a strong credit track record. Its top three customers are Cooper Tire, Bridgestone and Sri Trang, which contributed a combined 65% of 9M12 revenue. In spite of this concentration, Halcyon’s credit profile remains sound as it is able to keep payment terms within seven days. Contracts span 3-12 months.

·      Early momentum points to a positive 2013 outlook. For 2013, Halcyon has already received committed orders for the delivery of 42,730mt with customers’ option to increase by 12,701mt. This compares to a total delivery of 67,046mt in 2012. It has completed the addition of 10,500mt new capacity (+11%), positioning it for another year of growth.

·      Strong cash flow to support potential M&As.Halcyon generated FCF of US$7m in 2012 and this boosted its cash balance by 42% yoy to hit US$12m. We see the potential for M&As in the upstream segment, which would enhance Halcyon’s position in the natural rubber supply chain, expand its earnings potential and capture better margins.