Indonesia Agro News 24 May 2013

Plantation (Underweight): Short-lived Bounce

We think the euphoria sparked by Malaysian palm oil inventory decrease to below 2 million tons and higher palm oil demand before Ramadan would last only about 2 months. Maintain Underweight as we have bearish view on CPO price in 2H13 due to strong supply growth in 2H13 and softening demand from China. Reiterate Sell call on AALI, BWPT and LSIP, and downgrade SGRO to Sell.

Astra Agro Lestari: Volume growth mainly from external FFB (AALI, Rp26,200, Sell, TP: Rp15,000)

• Among Indonesian listed plantation companies under our coverage, AALI booked the highest CPO production growth in1Q13. However, the main source of volume growth come from external FFB, which generates low profit margin. We  maintain our Sell call with lower TP of Rp15,000 (Previously Rp15,300) as we think downtrend  in CPO price in 2H13 would drag down its PE multiple.

BW Plantation: Deteriorating Altman’s Z-score (BWPT, Rp980, Sell, TP: Rp775)

• BWPT’s Altman’s Z-score kept deteriorating (from 3.3 [safe] in 1Q11 to 1.5 [ignorance] in 1Q13).  There is no room for error in managing its cash flow considering: 1) 62% of its 1Q13 EBITDA is used only for interest payment. 2) 1Q13 current ratio of 0.4X.  2) 1Q13 net gearing ratio of 169.6%.  3) further decrease in CPO price in 2H13. Reiterate Sell with lower TP :Rp775 (previously Rp850).

London Sumatra: Too much sacrifice for improving quality of FFB Plasma (LSIP, Rp1,730, Sell, TP: Rp1,200)

• Although supported by liquidation of inventory of 21ths tons (around 19% of 1Q13 CPO sales volume), 1Q13 profit dropped by 66.4%yoy mainly due to lower CPO price and higher costs. We think flat FY13F CPO production and lower 2H13F CPO price would hit FY13F profit (our FY13F EPS is 24% lower than consensus). Reiterate Sell call with lower TP of  Rp1,200 (Previously Rp1,570).
• Too much sacrifice in improving quality => decrease in FFB from Plasma. LSIP want to improve the quality of purchased FFB from plasma by imposing more criteria. The result is 1Q13 CPO production decreased by 7.7%yoy and purchased FFB from plasma dropped by 29.8% yoy in 1Q13. The benefit of higher quality of purchased FFB is not significant as OER only improved slightly and the selling price of CPO is not significantly difference.

Sampoerna Agro: Not in the right time (SGRO, Rp1,920, Sell, TP: Rp1,625)

• Although SGRO is suitable for value investor because it is traded EV/ha at US$7,086, which is as cheap as cost of new planting, we think its weak FY13F earnings would further drag down its share price in the next 6 months. Therefore, we downgrade it to Sell with TP: Rp1,625.
• Higher production pattern in 2H13 is unfavorable due to lower CPO price. Although SGRO’s yearly FFB production grows steadily, its quarterly FFB production pattern usually fluctuates significantly with different pattern from year to year (in some years, 1H FFB production contributed more than 60% of FY, while in other years, 2H FFB production contributed more than 60% of FY). We expect production spread in 2013 will be similar to 2012 (2H FFB production contribute more than 60% of FY).

for Indonesia Market Summaries 24 May 2013