1) How stable is Cameroon and Ivory Coast ?
2) What about Execution Risk ?
Bouncy outlook for plantation play GMG By VEN SREENIVASAN
IF THERE is one overiding investment theme which has emerged over the past few months as the global economy claws its way out of recession, it must be commodities.
All set to roll: GMG - 51% owned by Sinochem, the largest rubber producer for the China market - is the cheapest plantation play here, trading just above its NTA per share of 11 cents
Most investment houses are 'overweight' on this sector - and for good reason. The demand for commodities - both mineral and agricultural - is set to quadruple over the coming decade to feed the needs of populous and fast growing economies such as China and India.
Singapore's agri-commodity stocks are primarily regional palm oil plays. Stocks like Indofood Agri, Wilmar and Golden Agri have been running up amid bullish analysts' reports about the prospects for crude palm oil.
But one Singapore listed plantation/ commodity player appears to be cruising quietly well below the radar. This is GMG Global, the only pure natural rubber play listed here.
GMG has been a supplier of processed rubber and latex to the world's big tyre makers like Goodyear and Bridgestone. It has over 40,000 ha of landbank in Cameroon and Cote Di Voire (Ivory Coast) in Africa, half of which is rubber plantation.
It also recently bought processing facilities in Kalimantan. GMG's total rubber output is just under 70,000 metric tonnes (MT).
But what is interesting about GMG - and what the market seems to have largely missed - is its parentage.
The Singapore-listed company is 51 per cent owned by Sinochem International Corp, a Chinese state-owned enterprise which is the largest rubber player in that country.
Shanghai-listed Sinochem - with sales of over 27 billion yuan (S$5.5 billion) and assets of over 15 billion yuan - bought into GMG in September 2008. It did so for good strategic reasons.
Sinochem is the single largest rubber producer for the Chinese domestic market, commanding just over 10 per cent of China's rubber supply. In 2008, it supplied 325,000 MT of rubber to China. But this is barely enough to feed the country's growing appetite for the commodity, especially from the automotive sector.
China is now the world's largest automotive market, with total vehicle sales in 2009 of some 13.5 million - well exceeding that of the United States. And this is expected to grow at 15 per cent annually over the next 10 years.
Total natural rubber consumption in China is around 2.7 million MT, or 27 per cent of global output. And the only domestic rubber source is some 500,000 MT from Hainan, in southern China. The rest is imported.
This demand has been a major cause of the doubling of global natural rubber price over the past 12 months.
With China's rubber consumption projected grow at around 10 per cent over the coming decade, the country has to continue importing substantial amounts of natural rubber to meet its demand. This is why Sinochem made the strategic acquisition of a controlling stake in GMG in 2008.
Today, GMG is the Chinese state-owned enterprise's international platform for sourcing and supplying rubber for country's national consumption. But to play its role effectively, GMG needs to more than triple its output to around 250,000 MT. It appears to have the means to do so.
Following a $100 million fund raising via a share placement last year, GMG is sitting on a cash-pile of some $170 million.
It is already in talks with potential sellers of processing facilities and plantations in South-east Asia, and recently bought one plant in Kalimantan. At least a dozen more similar acquisitions could be in the pipeline in Thailand and Indonesia over the next 12 to 18 months. Meanwhile, GMG still has another 20,000 ha of land in Cameroon and Cote Di Voire which have yet to be planted.
The company has virtually no gearing, and made $41 million profit in FY2008, after raking in $22 million in FY2007.
But FY2009's numbers could be depressed as the company found itself at the wrong end of forex moves and was locked into long-term unfavourable supply contracts with global tyre makers. However, these commitments have been gradually wound-down.
Meanwhile, the stock is currently trading just above its NTA per share of 11 cents, making it the cheapest plantation play here (compared to peers which are trading at 2.5 times and more). Despite its attractive numbers and promising prospects, this is a company which gets scant coverage from analysts.
But the recent stirrings by its stock suggest that some of the more savvy investors may be starting to take notice of this rather reticent and low profile company.
Source: Business Times Singapore
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