Rubber play GMG may be just the kind of S-chip SGX needs

By VEN SREENIVASAN

THE largest supplier of natural rubber to a country which consumes a third of the global supply. A strong balance sheet to support upstream and downstream capacity expansion as rubber prices continue to surge.

Surely a winning proposition for any company?

Yet, GMG Global's stock price has been stagnating as market players remain fixated on situational punts.

Listed in 1999, GMG is the only pure natural rubber play on the Singapore Exchange (SGX). It has some 43,000 hectares of rubber plantation land in the African countries of Cameroon and Cote d'Ivoire (Ivory Coast), only half of which are now under cultivation. It has also bought into two processing plants in Kalimantan, Indonesia, with a total capacity of 55,000 tonnes. Last year, it acquired a controlling stake in Thai rubber processing company Teck Bee Hang.

Its Ivory Coast operations - which account for 20 per cent of GMG's gross profit - are back onstream after a month-long suspension during the political turmoil in that country.

GMG is one of the world's only few listed rubber plays which has a presence in plantation, processing and distribution. But more critically, the company is the single largest supplier of natural rubber to China.

It is 51 per cent owned by Beijing-headquartered Sinochem, one of China's Tier-1 state-owned enterprises (SOEs). Sinochem bought into GMG for $265 million, at an average of 26.5 cents per share, in 2008. A year later, it picked up its share of a $100 million rights issue, taking its average price in GMG down to 17 cents per share. Sinochem officials have said that the SOE could raise its stake in GMG to around 60-70 per cent over time.

Sinochem is also the biggest rubber trader in China - supplying over 15 per cent of the needs of a country which consumes a third of the world's rubber production.

Secure distribution

The Sinochem parentage gives GMG secure distribution into one of the most dynamic rubber markets in the world, significantly reducing its exposure to third-party clients elsewhere.

The global rubber sector has been facing a tightening supply-demand squeeze over the past year due to a combination of underinvestment in plantations and processing, and rising demand for the commodity from China, India and the rest of the world. Natural rubber is used in everything from car parts to home appliances and medical-scientific equipment.

China's demand for this commodity has grown at an average of 10 per cent annually. The only domestic rubber supply is some 500,000 tonnes from Hainan, in southern China. According to Sinochem officials, China considers rubber to be a more critical strategic asset than oil.

The Association of Natural Rubber Producing Countries estimates that natural rubber consumption in China would rise 9 per cent to 3.6 million tonnes this year, while in India, it is on target to grow 5.2 per cent to 991,000 tonnes. Not surprisingly, rubber futures have gained 20 per cent so far this year, extending last year's 50 per cent rally.

Analysts expect the rubber price rally to last well into 2012 and beyond.

In a report last week, DBS Vickers noted that robust demand and slow supply response could shift the natural rubber stock-usage ratio lower over the next 10 years.

'On average, we expect NR (natural rubber) prices to remain above US$3,500/tonne over this period - significantly higher compared to previous decade's average of US$1,597/tonne,' it said. 'We believe GMG is a key beneficiary of strong rubber prices, given its significant upstream contribution and growing processing volumes.'

BOA Merrill Lynch seems even more bullish.

'The (company's) upstream earnings, in our view, deserve a peak multiple (full production cycle) given a robust rubber price cycle,' it noted last week, pasting a 46-cent price target on the stock. 'The target multiple reflects our optimistic view of the rubber price extending its rally (our 2011E price is US$5,500/tonne) as well as GMG's imminent upstream expansion.'

The growing demand and rising price boosted GMG's net profit for the full year to end-December 2010 more than ninefold to $45 million.

Armed with some $130 million in cash, no debt and controlled by a Tier-1 SOE from the world's biggest consumer, GMG remains well positioned to consolidate its already dominant position in the natural rubber market.

If it executes its plans, GMG could be just the kind of 'S-chip' which the local bourse sorely needs.