Higher CPO Prices and Better Performance of the Wood Segment
1Q22 Earnings Jumped 105% YoY
• Revenue stood at IDR1.64 trillion (+0.49% YoY), reaching 22.02%/18.17% of MNCS/consensus target in FY22E.
• The palm oil segment generated an 8% lower revenue of IDR1.24 trillion as CPO sales volume declined by 28% YoY to 97 thousand tons, but offset by a 20% higher CPO ASP.
• Profitability-wise, DNSG managed to reduce COGS by -4.78% YoY to IDR1.18 trillion, followed by selling expenses and finance expenses which fell -3.49% YoY and -40.13% YoY, respectively.
• As a result, the company managed to record a significant net profit increase of +105.16% YoY to IDR204.67 billion in 1Q22. NPM grew to a 12.44% level (vs 6.10% in 1Q21), due to lower financing costs and forex loss.
CPO seen hitting historic ASP at MYR6,500
• Total FFB processed in 1Q22 was lower by 30% YoY, following lower FFB production by 15% and lower external purchase by 67%. Nevertheless, as OER improved from 22.4% to 23.6% in 1Q22, CPO production reached 107k tons (-26% YoY) primarily due to higher rainfall in East Kalimantan.
• Meanwhile, DSNG recorded CPO ASP of IDR10.56 million/ton or up +21.5% YoY in 1Q22 (vs IDR8.70 million/ton in 1Q21).
• We estimate that CPO prices will remain high ~MYR4,500/ton until FY22E which leads to higher revenue at IDR7.47 trillion (+4.9 % YoY) as well as higher net profit.
1Q22 Wood Business Consistently Grows
DSNG's wood segment continued to show substantial growth in the production volume and ASP for both panel and engineered flooring. Its revenue rose by +42.18% YoY to IDR405.11 billion in 1Q22 (vs IDR284.92 billion in 1Q21) increasing its contribution from 17% to 25% of the consolidated revenue. DSNG sold 29,000 m3 of wood panels and 332,700 m2 of engineered floors, which grew +10.2% YoY and +30.5% YoY, respectively. Moreover, the company also benefited from the increase in ASP panels +24.4% YoY to IDR7.16 million/m3 and for engineered floors, it rose +12.3% YoY to IDR400k/m2.
Changing CPO Policy Rules
The government through the Ministry of Industry plans to withdraw the bulk cooking oil subsidy starting May 31, 2022. The decision was taken after the new regulation regarding the opening of CPO exports, and the domestic market obligation (DMO) policy will be reinstated. We believe that changing policies related to CPO, cooking oil and their derivatives might be confusing to certain market players, such as producers, consumers, and investors. This affects the sideways movement of CPO issuers' stock prices and investors who tend to wait and see waiting for a stable policy by the Government. So decisions that tend to be hesitant can be a negative catalyst.
Valuation & Recommendation: BUY at Target Price IDR720
We maintain our recommendation BUY, with a lower TP: IDR720 implying 10.26x/1.01x PE/PBV FY22E. We believe DSNG should deliver a solid performance throughout the year mainly supported by rising CPO prices amid higher exposure demand, in the midst of lower production. The export ban imposed at the beginning of 2Q22 by the Government had little impact on DSNG, which owns 100% of domestic CPO sales. The efficiency strategy carried out will have the potential to grow the margins of the company.
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