CREDIT SUISSE, Sept 1
WE reinstate coverage of Halcyon Agri with an "outperform" rating (previously "neutral") and target price of S$1.20 (previously S$0.80). We believe there is over 40 per cent share price upside driven by significant capacity growth and supported by increasing demand in the global tyre market, which should lead to a five-fold growth in net profit over 2013-16 estimated.
Following the acquisition of Anson Company from Lee Rubber for a consideration of S$450 million, Halcyon's licensed capacity will increase by 408,000 tonnes to reach 748,000 tonnes, making it one of the largest producers of Technically Specified Rubber (TSR) globally. Rising demand for natural rubber is likely to be driven by an expanding tyre market, which we expect to grow at 3.8 per cent per annum in 2013-17 estimated.
With the use of Halcyon's sales and marketing to support Anson's operations, we see scope for Anson's margin to increase from US$161/tonne in 2013 to US$320/tonne in 2016 estimated, in line with Halcyon's margin. Overall, we expect the volume growth and acquisition synergies to drive an increase in net profit from US$9 million in 2013 to US$50 million in 2016.
Halcyon currently trades at a 2015 estimated PE of 9.2x and 2016 estimated PE of 5.8x, a discount to global tyre manufacturers and commodity traders. Our S$1.20 target price is based on a 2016 estimated PE of 8.0x, in line with its peers. In our view, the successful execution of its planned capacity growth would drive re-rating. Key risks include high net gearing post acquisition of 2.5x, which would be closer to 2.0x after adjustment for working capital loans.
OUTPERFORM
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