United Fiber
Posted: Fri Jun 06, 2008 2:39 pmNot vested. From DMG:-
United Fiber System: Pulp Fiction No More (BUY\S$0.21\Target S$0.31)
Owns one of Indonesia’s largest forest concessions. Unifiber possesses 268,585 ha of forest concession rights in South Kalimantan - one of lndonesia’s largest forest concessions & plantations. According to management, UF is probably ranked number 3 in Indonesia in terms of forest concessions’ land area. The concession rights entitles it to plant, maintain, process and market products extracted from the concession area up to 26 February 2041.
Well located for constant supply of wood raw material. Wood raw material costs make up 60-70% of total manufacturing costs, with the remaining comprising of labour costs, chemicals and energy costs. As such, variability in the price of wood will have the largest impact on costs and profitability.
For Unifiber, the exposure to the variability of wood prices should be partially mitigated as it plans to source a large proportion of its wood raw material from its own plantations. Moreover, Unifiber’s pulp mill and wood chip mill are located in South Kalimantan where there are no nearby mills. As such, plantation owners in the vicinity have a greater probability of selling the harvested trees to Unifiber’s mills rather than elsewhere. The raw materials supplied by Unifiber’s plantation provide it with added bargaining power.
Proximity to fast growing Asian market, particularly China. China is a major producer of paper and paperboard products. However, China’s lack of wood fibre means that it has to continue to rely on imported pulpwood and pulp to meet this demand. China’s import of pulp for paper has grown 272% over a 10 year period from 1996–2006.
In terms of tonnage, that translates to 8.2m tonnes that China imported in 2006, according to Food & Agriculture Organisation of the United Nations (FAO). Unifiber’s proximity to China and other growing Asian markets mean that it would enjoy lower freight costs vis-à -vis its competitors in North and South America.
Lower cost of production. According to management, Indonesia is one of the world’s most cost competitive countries for the production of pulp. The cash cost of production (excluding capital cost) of pulp mills in North America is estimated to be above US$600/tonne, versus above US$500/tonne in Korea, above US$350/tonne in China and between US$300-350/tonne in many pulp mills in Indonesia. Given the proximity of Unifiber’s pulp mill to its plantation, cost of production is expected to be well below US$250/tonne.
Re-initiate with a BUY. Given that Unifiber has a few distinct businesses, we believe that a sum-ofthe-parts valuation is most relevant. We attain a fair value of S$0.31 per share, which implies a 47.6% upside from current levels. Unifiber has the additional kicker coming in from pulp mill PT MBBM when it starts in 2010. We re-initiate coverage on Unifiber with a BUY rating.
United Fiber System: Pulp Fiction No More (BUY\S$0.21\Target S$0.31)
Owns one of Indonesia’s largest forest concessions. Unifiber possesses 268,585 ha of forest concession rights in South Kalimantan - one of lndonesia’s largest forest concessions & plantations. According to management, UF is probably ranked number 3 in Indonesia in terms of forest concessions’ land area. The concession rights entitles it to plant, maintain, process and market products extracted from the concession area up to 26 February 2041.
Well located for constant supply of wood raw material. Wood raw material costs make up 60-70% of total manufacturing costs, with the remaining comprising of labour costs, chemicals and energy costs. As such, variability in the price of wood will have the largest impact on costs and profitability.
For Unifiber, the exposure to the variability of wood prices should be partially mitigated as it plans to source a large proportion of its wood raw material from its own plantations. Moreover, Unifiber’s pulp mill and wood chip mill are located in South Kalimantan where there are no nearby mills. As such, plantation owners in the vicinity have a greater probability of selling the harvested trees to Unifiber’s mills rather than elsewhere. The raw materials supplied by Unifiber’s plantation provide it with added bargaining power.
Proximity to fast growing Asian market, particularly China. China is a major producer of paper and paperboard products. However, China’s lack of wood fibre means that it has to continue to rely on imported pulpwood and pulp to meet this demand. China’s import of pulp for paper has grown 272% over a 10 year period from 1996–2006.
In terms of tonnage, that translates to 8.2m tonnes that China imported in 2006, according to Food & Agriculture Organisation of the United Nations (FAO). Unifiber’s proximity to China and other growing Asian markets mean that it would enjoy lower freight costs vis-à -vis its competitors in North and South America.
Lower cost of production. According to management, Indonesia is one of the world’s most cost competitive countries for the production of pulp. The cash cost of production (excluding capital cost) of pulp mills in North America is estimated to be above US$600/tonne, versus above US$500/tonne in Korea, above US$350/tonne in China and between US$300-350/tonne in many pulp mills in Indonesia. Given the proximity of Unifiber’s pulp mill to its plantation, cost of production is expected to be well below US$250/tonne.
Re-initiate with a BUY. Given that Unifiber has a few distinct businesses, we believe that a sum-ofthe-parts valuation is most relevant. We attain a fair value of S$0.31 per share, which implies a 47.6% upside from current levels. Unifiber has the additional kicker coming in from pulp mill PT MBBM when it starts in 2010. We re-initiate coverage on Unifiber with a BUY rating.