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REA
REA Kaltim, 9.7x upside...
🎯 🌴 📈 ➡️ £4.85
12m Free cashflow -$16m ⬆️⬆️
May 17th, 2020
⏰ 1 minute read
⏰ 1 minute read
Sales
REA had an impressive production performance in the 2H with fruit down only 2% from a year earlier, while most plantations fell by more. With higher prices, sales jumped almost 20%, 4.6% below our forecast. With production likely to rise again this year & prices to rise on average too, we predict 12 month sales growth of 17.3% to $146.6m.
Cash flow
REA free cashflow has been deteriorating from 2015 to 2018 as operating cashflow was weak & investment spending high. But as investment has slowed & prices/production have risen, 12 months cashflow improved to -$16.6m by the 2H. The cashflow has been weaker than we would have expected & we expect a catch-up in the next 12 months to +$10.3m.
REA had an impressive production performance in the 2H with fruit down only 2% from a year earlier, while most plantations fell by more. With higher prices, sales jumped almost 20%, 4.6% below our forecast. With production likely to rise again this year & prices to rise on average too, we predict 12 month sales growth of 17.3% to $146.6m.
Cash flow
REA free cashflow has been deteriorating from 2015 to 2018 as operating cashflow was weak & investment spending high. But as investment has slowed & prices/production have risen, 12 months cashflow improved to -$16.6m by the 2H. The cashflow has been weaker than we would have expected & we expect a catch-up in the next 12 months to +$10.3m.
17% sales growth ➡️ Positive cashflow ➡️ 9.7x higher target price...
Balance sheet
The negative free cashflow has meant net debt. REA net debt has been hovering just below $200m, but improved since 2018 & was $183m in the 2H. This is because other payables increased. With our forecast for free cashflow in the next 12 months & assuming it is used to pay debt, the net debt will drop to $173m.
Profit
Like all palm oil companies, REA has seen better profitability because of higher prices. The total cost ratio (net profit add depreciation minus sales) returned to its 2015 level of 75% in the 2H. This meant REA reported their first net profit in 5 years! We use a cost ratio of 81% to get a 12 month profit of $0.2m.
Value
REA is extremely cheap. The market value is now just $26.5m. That’s 0.18x our sales forecast, 0.05x the total assets & 0.1x the value of the equity with a profitability of 0.1%. We use our cash flow valuation (10.3/.016) with a 60% discount because of the still large debt, which gives a target price of £4.85, 9.7x the current price...
The negative free cashflow has meant net debt. REA net debt has been hovering just below $200m, but improved since 2018 & was $183m in the 2H. This is because other payables increased. With our forecast for free cashflow in the next 12 months & assuming it is used to pay debt, the net debt will drop to $173m.
Profit
Like all palm oil companies, REA has seen better profitability because of higher prices. The total cost ratio (net profit add depreciation minus sales) returned to its 2015 level of 75% in the 2H. This meant REA reported their first net profit in 5 years! We use a cost ratio of 81% to get a 12 month profit of $0.2m.
Value
REA is extremely cheap. The market value is now just $26.5m. That’s 0.18x our sales forecast, 0.05x the total assets & 0.1x the value of the equity with a profitability of 0.1%. We use our cash flow valuation (10.3/.016) with a 60% discount because of the still large debt, which gives a target price of £4.85, 9.7x the current price...
