Patenting the F1 production process. PT PP London Sumatra Indonesia Tbk’s (Lonsum)subsidiary, Sumatra Bioscience (SB), announced yesterday that it has developed a process,reportedly the world’s first, to produce F1 oil palm hybrid seeds, reinforcing our belief in thestrength of their research facility. The European Patent Office has verified SB’s approach to F1oil palm hybrids as the first of its kind and hence, potentially allowing SB to be the first commercial producer of F1 oil palm hybrids.
Yield estimated to triple, boosting competitiveness over rival oils. Based on historic yieldsfrom other F1 hybrid crops in USA, such as corn, oil palm’s conventional yield is estimated tomore than triple, reaching 18.5 tonnes/ha. For illustration, corn’s annual yield in the USAincreased six folds since the 1930s, after using F1 hybrid seeds. Palm oil is currently thecheapest and most productive of all oil crops. The potential increment in yield would boost palmoil’s competitiveness vis-à-vis its rival vegetable oils.
Freeing up precious land. With the ability to generate higher yields, the hybrid seeds will resultin less land required for crop cultivation. This would help alleviate the escalating global foodshortage crisis – the World Bank estimates global demand for food is forecasted to double by2030, with the world’s population expected to grow by an additional three billion by 2050.
More environmentally sustainable. With the rapid growth in palm oil consumption, there havebeen many environmentalists/ organizations lobbying for sustainable palm oil production. Thereis concern that this growth in production has occurred at the expense of irreplaceable tropicalforests in Indonesia and Malaysia. With the reduction in land required for palm oil cultivationmentioned above, this concern can be partly assuaged.
No near term impact on earnings. SB expects to commence commercial production of F1 oilpalm hybrids by 2018. In line with its commercialization plans, SB will invest US$5m in FY09 toexpand its existing R&D facilities.Sensitivity analysis and valuation.
Current CPO spot prices are around RM1,800-1,900/tonne.At this price range, our sensitivity analysis indicates that Indofood Agri’s (IFAR) target pricewould be S$1.48. We are currently using a CPO price assumption of RM2,600/tonne for FY09,obtaining a target price of S$2.65. With IFAR trading at 2.8x FY09 earnings we maintain ourBUY rating.
The Material provided above is for information only and does not constitute an offer or solicitation to purchase or sell the shares mentioned
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