GMG Global - Weaker rubber price outlook (DBSVickers)

FULLY VALUED S$0.225 STI : 2,640.30

Price Target : 12-Month S$ 0.19 (Prev S$ 0.22)

Reason for Report : Impute new rubber and FX rates

Potential Catalyst: Acquires new processing plants/plantations

DBSV vs Consensus: Earnings below consensus on lower rubber prices (in anticipation of surplus rubber in 2012)

• 2008/09 global crisis caused FY09 earnings to tumble 89% y-o-y on weaker margins, despite 16% higher volumes

• Raised equity risk premium (ERP) on slower global GDP growth; TP cut to S$0.19

• FY11-13F earnings adjusted by -4% to +35% after revision to rubber prices and FX rates

• Maintain Fully Valued; 16% potential downside

Natural rubber (NR) prices collapsed during 2008/09 global financial crisis, and slashed GMG’s FY09 earnings by 89%, despite 16% higher volumes. We expect NR prices to ease next year but not revisit GFC lows if a recession recurs (not our base case). NR stock/usage ratio is forecast to drop to a record low 11.8% this year – even without supply cuts that typically accompany a weak price environment.

But GMG’s share price could still drop because of risk aversion. In anticipation of slower GDP growth ahead, we raised equity risk premium (ERP) assumption to 10.5% from 6.5%, and GMG’s Beta to 1.07 from 1.03 given the recent market volatility. We also extended our DCF valuation by 15 years to better capture long-term value creation from its 45,000k ha new concession in Cameroon. These translate into a lower TP of S$0.19.

FY11F-13F earnings are adjusted by -4% to +35% after raising FY11F rubber price to US$4,675/MT from US$4,200 (for TSR20) and selling expenses in FY12-13F, and cutting Teck Bee Hang (TBH)’s gross margins to 6.3-6.4% from 7.0-7.4% due to tougher operating conditions (volatile rubber prices). The impact would be partly offset by 20k MT p.a. increase in TBH’s capacity from FY12F, and smaller ASP discounts to benchmark prices (use of forward contracts).

Maintain Fully Valued for expected 15% drop in core profit next year (our FY12F TSR20 price of US$4,251 is below consensus) and 16% downside to revised TP of S$0.19. In the worst case (intensified risk aversion), the share price could drop to S$0.13 based on -1SD of mean PE.