Company Overview Established in 1962 and listed on the Indonesia Stock Exchange in 1992, PT Sinar Mas Agro Resources and Technology Tbk “SMART” is one of the largest, publicly-listed, integrated palm-based consumer companies in Indonesia, with total net sales of Rp 31.7 trillion and income attributable to owners of the Company of Rp 1.8 trillion in 2011. The Company’s primary activities range from cultivating and harvesting oil palm trees, processing fresh fruit bunches (“FFB”) into crude palm oil (“CPO”) and palm kernel (“PK”), to refining CPO into industrial and consumer products such as

SMART also distributes, markets and exports palm-based consumer products. Besides bulk and industrial oil, SMART’s refined products are also marketed under several brands, such as FILMA and Kunci Mas. Today, these brands are recognised for their high quality and command significant market share in their respective segments in Indonesia.

Industry Outlook The year 2011 concluded with an outstanding performance and 2012 starts with an optimistic outlook for the palm oil industry, despite continued unstable economic conditions in western countries. The solid fundamentals of the palm oil industry remain intact with robust demand for vegetable oils for edible and alternative uses, combined with the limited growth of global supply. As at end 2011, SMART had almost 50 oil palm estates under its care with total planted area of approximately 139,000 hectares through a combination of owned estates (called “nucleus”) of 108,600 hectares and estates owned by smallholders (called “plasma”) of 30,400 hectares. During 2011, total planted area was successfully expanded through new plantings by almost 900 hectares. SMART also manages more than 300,000 hectares oil palm plantations of its affiliates. SMART’s oil palm estates are all located in Sumatra and Kalimantan. The operations are well supported by the Company’s own research and development centre (SMART Research Institute or ‘SMARTRI’) and its affiliate’s nursery for high-yielding seeds.

The age profile of our estates is favourable with average age of around 13 years, providing a solid foundation for the Company’s long-term growth. Of the 139,000 hectares, 90% are mature while the rest are immature. Over 50% of the mature estates are at the prime age of 7 to 18 years that produces optimum yield and therefore contributes strongly to fruits production. Over 20% of the mature estates are still at the young age of 4 to 6 years, securing the medium-term growth of the company’s production.

Sales and Income Our sales mostly come from CPO and PK- related products, as well as refined products, such as cooking oil, margarine and shortening. Net sales grew strongly by 56% and reached its highest level in the Company’s history at Rp 31.68 trillion. This robust growth was supported by the increase in CPO prices as well as higher sales volume during the year. Our sales are mostly to export markets. Approximately 83% of the total net sales in 2011 were from outside Indonesia, an increase from 81% in 2010.

Sales of unbranded refined products increased to Rp 8.76 trillion as compared to Rp 5.80 trillion in 2010. Sales of branded products, which consist of cooking oil and margarine, was Rp 3.01 trillion, contributing 10% of the total net sales in 2011. We have continued to grow our sales of branded products in the Indonesia as well as export markets.

Solvability

Our total assets grew by Rp 2.25 trillion or 18%, reaching Rp 14.72 trillion as of 31 December 2011. Current assets totaled Rp 7.96 trillion at end of 2011, 27% higher than the previous year of Rp 6.24 trillion. The increase was attributable to higher trade accounts receivable, cash and cash equivalents as well as inventories. Trade accounts receivable as at end of 2011 was Rp 3.26 trillion. More than 98% of these receivable were due in less than three months. Rising trade accounts receivable corresponded to the increase in CPO market prices and were in line with the higher sales of the Company.

Noncurrent assets grew by 8% to Rp 6.76 trillion as at end of 2011 from Rp 6.24 trillion in 2010. The increase mainly resulted from additional facilities at our refineries in Marunda, West Java and Tarjun, South Kalimantan.

Total liabilities increased by Rp 886 billion to Rp 7.39 trillion as at 31 December 2011, primarily attributable to the increase in noncurrent liabilities. Noncurrent liabilities were recorded at Rp 3.12 trillion, 30% higher than last year of Rp 2.39 trillion. Meanwhile current liabilities were recorded at Rp 4.27 trillion, 4% higher than last year’s balance. The increase in noncurrent liabilities was mostly due to additional shareholder’s loan. Most of our debts are US dollar denominated. As of 31 December 2011, our gearing remained at a healthy level, with net debt to equity ratio of 0.59 and EBITDA to interest ratio of 10 times.

Cash flow
Total equity as at end of 2011 reached Rp 7.34 trillion from Rp 5.83 trillion as at end of 2010. The Company’s retained earnings totaled Rp 4.89 trillion as at end of 2011, an increase of 44% from the previous year, with total comprehensive income for the year of Rp 1.79 trillion and after accounting for distribution of Rp 431 billion in dividends against 2010 earnings paid on26July2011.

Dividend and Market Capitalization

The policy on distribution of dividends depends on: • Results of operations, cash flows and financial position; • Industry prospects and capital expenditure plan; • Schedule of debt repayment; • Dividend received from subsidiaries; and • Other factors deemed relevant by the Board of Directors, the Board of Commissioners and our shareholders.

For the year 2010, the Company distributed dividends of Rp 150 per share. This dividend was distributed to the shareholders on 26 July 2011. At the upcoming 2012 Annual General Meeting of Shareholders, the management will seek the approval of shareholders to distribute dividends of Rp 200 per share.

Valuation of Pt SMART Tbk

Valuation using Price Earning Ratio(PER)
The price earning multiple is the most widely used and misused of all multiples. it’s simplicity makes in an attractive choice in applications ranging from pricing initial public offerings to making judgments on relative value, but its relationship to a firm’s financial fundamentals is often ignored, leading to significant errors in applications. The PE ratio is consistently defined, with the numerator being the value of equity per share and the denominator measuring earnings per share, which is a measure of equity earnings.

source : reuters(2012)

In this valuation, we use two companies to be used as comparison. The company that used as benchmark is Astra Agro Lestari. This company is just used as comparison in this valuation to find the fair value of SMART. From the table, we can see that the price earning ratio is ranging from 4X to around 20X. SMART from this table shown having lower price earning ratio compared to AALI.

We also need to found the EPS(Earning Per Share) as one of the component that the investor care about. PT SMART EPS is increasing from 2010 to 2011. In 2010, it was Rp 439 earning per share earned by stockholder but in 2011 the EPS increase to Rp 621 per share. This increase is showing the growth of earning per share by around 41% as shown in the graph below.

In the graph, we can see that 5 years back data was used to make a prediction about the future growth. This data in the graph is fulfilled by calculating all the component such as EPS, PER, and also sales. From the graph, we can see this simulation of calculation based on comparing the SMART and AALI as the benchmark. The result of this simulation is shown in the graph which is the sales growth and the eps growth which will be used as the expected growth in the forecast.

From the table above, we can see the expected price based on the growth assumption is ranging from 3000 rupiah to around 66000 rupiah at the end of 2012.

Valuation using Price to Book Value(PBV)
PBV is the market value of the equity in a firm reflects the markets expectation of the firms earning power and cash flows. The book value of equity is the difference between the book value of assets and the b0ok value of liabilities, a number that is largely determined by accounting conventions.
This the comparison of PBV from SMART and AALI in the end of 2011 :

From the figure above we can see that Indonesia price to book value in this sector doesn’t vary that much. Both has higher PBV compared to the industry average but as explained before, in this valuation we will value PT SMART TBK based on AALI as the benchmark not the industry average.

In 2011, we get the book value of the firm is 7.335.552 million rupiah with the 2.872.193.366 outstanding shares. If we compare from the historical data, we can found out that the book value per share or BVPS in the company is growing year by year.

From the graph above, we can see that the book value per share in increasing from year 2008 to 2011. In 2011, the growth of the book value per share achieving 25% compared to the growth in 2010, which only 21%. The average growth from 2011 to the year of is averaging 16% which is lower than the growth in the 2010 and 2011. This lower average was due to the low growth from 2008 to 2009 which is only aound 4%. This average doesn’t indicate something is wrong but it’s only due to the better growth of the company which makes the book value or the equity becoming higher.

Based on the average growth, we can calculate the BVPS in 2012. It will be based from 16% growth and the value is 2963 per share. We can find the expected price of 2012 by the end of 2102 as shown in the graph below :

Based from the data above, we can estimate the price ranging from 6666 to 11200 rupiah at the end of 2012.

Discounted Cash Flow Method

P0 = FCFEk-g

Where: * P0 = Value of stock today * FCFE = FCFE expected next year * k = Cost of equity of the firm * g = growth rate in FCFE for the firm forever

Free cash flow to equity is to estimate how much cash a frim can afford to return to its stockholders, we begin with the net income-the accounting measure of the stockholders earnings during the period- and convert it to a cash flow by subtracting out a firm’s reinvestment needs.
So, first we will calculate the free cash flow to the firm.

2011 = 1.785.737 – ((14.721.889 – 7.386.347) – 1.733.555) – (6.759.360 – 3.115.403) + (7.220.987 + 73.803 + 3.329.345) – (7.467.563 +118.466 + 2.618.952)
= - 7.141.053
2010 = 1.260.495 – ((12.475.642 – 6.499.996) – 1.517.373) – (6.238.534 – 2.393.791) + (4.997.606 + 110.215 + 1.676.914) – (3.683.128 +534.986 + 1.455.340)
= - 5.931.240
2009 = 748.495 – ((10.210.594 – 5.260.154) – 1.362.084) – (5.859.290 – 2.505.715) + (3.028.016 + 952.643 + 2.193.811) – (3.502.815 +92.177 + 2.662.624)
= - 6.276.582
2008 = 1.046.389 – ((10.025.915 – 5.247.488) – 1.262.005) – (5.316.453 – 2.513.169) + (1.766.354 + 110.359 + 96.322) – (1.430.481 +33.908 + 445.528)
= - 6.345.999
2007 = 988.943 – ((8.063.168 – 4.534.912) – 597.392) – (4.296.350 – 2.345.312) + (1.015.129 + 186.204 + 1.256.975) – (227.165 + 650.818 + 556.889)
= - 2.779.523

From the calculation above, we can simply conclude that this model might not be used in this situation. The negative value of the equity might result in negative stock price which will make a bias. This bias could mean that the company is like experiencing a negative earning period. This negative free cash flow to equity makes this model can not be used to calculate the expected price of the stock in 2012.

Conlusion

From the data above, we can conclude that in 2012 the price of SMART can be ranging around 3,270 up tp 11,289 rupiah. This is just based on the calculation from PER and PBV and also based on the comparison between AALI and SMART to found the real value of SMART.