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Saturday, January 13, 2018

What is Potential for CEPAT?

I believe some readers did read Sin Chew newspaper investment article about CEPAT which it is undervalue due to the diversifying into power plant business back in early March 2017. At that time, CEPAT share price was 82 cents.

Once the news was released, CEPAT share price was shot up to 98.5 cents in the end of Aug 17 and then retreating all the way back to 80.5 cents (post-dividend is 82 cents), exactly the same share price as the day before the investment article released. 

CEPAT share price was started to retreat way before its 3Q17 QR releases, may be due to insider news or trade. And hence once the poor 3Q17 released, the share price did not goes down further. The poor 3Q17 result is thanks to the 2 months scheduled maintenance, and I believe the subsequent quarter profit will be back on track.

If you don’t know yet, CEPAT is a small cap company operating palm oil business with only 8,450 hectares land bank, 1 palm oil mill with 90 mt/hr capacity. CEPAT has recently ventured into power plant, including 12MW biomass power plant and 3.8MW biogas power plant, which both have 16 years of contracts selling renewable electricity to Sabah Electricity Sdn Bhd (SESB) at 34.86 cents/kWh and 41.69 cents/kWh respectively. 

Below are CEPAT’s oil plant age profile statistics.

From the statistics, we can notice that it has 42% prime, which expect the FFB yield to be stable, and coming up with 6% young mature estate. Unfortunately, it also has past prime high rate of 36%, which requiring heavy investment on replanting and offsetting the prime FFB yield. I have not seen CEPAT expanding its planation land bank over the past 7-8 years. That’s why I’m not surprising its share price has been running flat over the past 7 years.

So what prospect does this company has for investor?

From the look at the plantation and milling business, CEPAT has nothing to offer on the table compare to other plantation companies, as it has no land bank expansion and acquisition plan over the past 8 years. The maximum it can goes up is just like KMLOONG, with PER 12-13. 

If we look into CEPAT past 3-4 QRs in details, the power plants income are started to kick in. Up to 9 months, power plant business has contributed PBT of $6m, about 18% of the total PBT. The amount is derived from biomass plant of 42,528mWh and biogas plant of 10,646mWh respectively. We expect the contribution will be gradually increasing due to better efficiency and higher exporting of electricity. Eventually it will takes up at least 30-40% of total CEPAT PBT within 2-3 years’ time.

As CEPAT is using oil palm EFB as primary fuel for its biomass power plant, and capturing methane gas from palm oil mill effluent (POME) to generate electricity, that is why it called renewable electricity and able to sell such a reasonable price to SESB. With the cost of both power plants are almost fixed, we can expect the margin for this business is better than oil palm. Hence, we can understand why the management tries to focus on power plant rather than expanding its current palm oil business.

I suspect that the management obtained the Feed-In Tariff (FiT) approval from SEDA using its political power, where SESB is currently suffering huge loss but yet still need to buy these renewable electricity from similar contracts at this premium price. But of course, the loss seems to be bear by the Government as TENAGA is not going to do losing business. Anyway, that’s one of the points, which means others may not easily get into similar FiT with SEDA within the state itself. Hence, CEPAT possibly can expand similar power plant business within the state if it continues to do well.

With current share price of 80.5 cents dated 29 Dec 2017, CEPAT is capitalized at $256m with PER of 7.x. If we calculate the valuation of CEPAT land bank, it is priced at about $16K, which is still slightly below market price but it is not as cheap other plantation companies like JTIASA and RSAWIT. As per management commented in 3Q17 QR, they also expect the earning performance will be better in the coming quarter due to normalize power plants income.

If we buffer in FY18 power plant income with stabilized palm oil price and currency exchange, CEPAT PER can possibly drop to 6.x. Let’s say the full valuation for CEPAT is PER 11-12, its upcoming share price should worth around $1.32 and $1.44, about 64% upside to go.

The upside may not seems as attractive as other small cap, but at least its business is more stable and predictable. I always need to remind about Warren Buffet's 2 golden rules.

Note: This post is not recommendation of buy or sell of a company shares, but only personal opinion.

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