Indonesia Market Summaries 3 September 2013

• PT Astra Agro Lestari Tbk (AALI, Rp20.550 BUY TP: Rp21.200 ) and Kuala Lumpur Kepong form a joint venture to market AALI downstream products abroad. Both have set up a company engaged in crude palm oil refined products (downstream products), and market their products abroad. (Company Release)
• Management of PT Media Nusantara Citra Tbk (MNCN, Rp2.825 ) said they have terminated the discussions with VIVA group regarding the proposed acquisition of ANTV. MNC said that the company's valuation and market situation into uncertainty become the reasons for cancellation of the acquisition.
  Furthermore, they said that there is a better way to increase shareholder value is doing a buyback. The Company also will wait for a more opportune moment to make acquisitions. Previously rumored, that MNC group interested in buying shares of VIVA group. (Inilah.com)
• Based on data from the Central Statistics Agency (Badan Pusat Statistik / BPS), the soybean imports in this year (January to July) stood at 1.1 million tons, worth U.S. $ 670 million equivalen to Rp 6,7 trillion.
  Details, soybean imports in July amounted to 227 thousand tons or U.S. $ 140 million. That number is higher than June which amounted to 175 thousand tons or U.S. $ 105 million. So also with Mei that recorded 184 thousand tons or U.S. $ 113 million. (DetikFinance)
• Bank Indonesia (BI) will accelerate the launch of the implementation of the rules of banking services without offices alias branchless banking, because of banking supervision will move into the hands of the Financial Services Authority (Otoritas Jasa Keuangan / OJK) began early in 2014.
  Initially, branchless banking rules will glide after branchless banking test pilot project ends in November 2013. However, the central bank will promote the launch of a regulation in September or no later than October 2013. (Kontan.co.id)
• Significant Expense of PT Unilever Indonesia Tbk (UNVR, Rp30.550 Rp30.650 NEUTRAL TP) imposed by the related parties by June 2013 rose 48.14% compared with the same period last year to Rp 689,946 billion.
  The increase is due to the cost of services fueled by UBGS which skyrocketed while the royalty burden down. Meanwhile, the burden of royalties owned by Dutch giant retail is down 29.18% from Rp 360,412 to Rp 255,234 billion. (Bisnis.com)

Indonesia Market Summaries 3 September 2013

Plantation: The calm before the storm

Plantation: The calm before the storm (Underweight)

YTD, plantation companies have underperformed the JCI. However, we see further downside in share prices of plantation stocks in 2H13 because we expect CPO price would decrease further in 2H13, which would drag down their PE multiples. Hence we rate AALI, BWPT and LSIP as SELL, and SGRO as Neutral on cheap valuation.

Bleak outlook on CPO price. We foresee Rotterdam-based FY13F average CPO price of US$825 per ton (equivalent to RM2,271 per ton), a 17.3% yoy decline from FY12.  We expect strong CPO production growth in FY13F following large addition to newly maturing plantation area in FY12 and FY13F (from aggressive new planting in FY08 and FY09). 1H13 may see relatively high average CPO price of US$865 per ton due to seasonally low production, but we expect palm oil inventory to spike, generating unfavorable palm oil stock usage ratio, in 2H13 due to rising newly maturing plantation area and seasonally high FFB yield. This may well compel CPO mills to become distressed sellers because CPO production is likely to outpace sales. Thus we expect CPO price to slide to US$785 per ton in 2H13.

Not all volume production growth contributes additional net income. Due to a large part of their volume growth coming from newly maturing plantation area in 2013, AALI and BWPT’s expected rise in revenue would not in our view contribute additional net income. Newly maturing area often generates losses as their low productivity fails to compensate for their production costs.

SELL call on AALI, LSIP and BWPT, Neutral on SGRO. PE multiples of palm oil plantation companies decrease when CPO price decreases. Therefore, although plantation companies have underperformed the JCI, we still see further downside as we expect CPO price would further decrease in 2H13. As a result, we have sell calls for 7 months period on AALI, LSIP and BWPT. We have Neutral rating on SGRO as we think the downside of its share price is limited as its EV/ha of US$7,930 as cheap as new planting cost.