Wednesday, June 8, 2011

Cheap Valuations, Healthy Fundamentals - but better exposure higher up the structure? - PP London Sumatra Indonesia Tbk

by JP Morgan Securities

• Refreshing forecasts – Adjusting PT to Rp 2,950: We refresh forecasts on LSIP – updating numbers for recent quarterlies and cost trends. The impact is minor with just a 0.5% change to FY11E EPS. We use the opportunity to roll our DCF Derived PT forward to June 2012 adjusting it from Rp 2,920 (split adjusted) to Rp 2,950.

• Stock is inexpensive & our forecasts ahead of consensus – maintain OW: At 11x FY11E PE, we see LSIP as inexpensive and an attractive way to gain plantation exposure for country funds. Our EPS forecasts are 8-10% higher than consensus, with the difference rooted in revenues, we think that the street is most likely more conservative ASP’s, either on CPO or underestimating rubber prices - which are YTD averaging about 50% higher than FY10 average levels. Maintain OW

• IFAR perhaps the better exposure to the same assets: YTD, LSIP has been broadly flat, (down about 5%). Parent IFAR however (which controls 53.6% of LSIP Pre SIMP IPO) has declined in the same period by 43%, with declines exacerbated in the last fortnight after SIMP priced its IPO. At this point we see IFAR as a potentially cheaper point of exposure to LSIP’s assets (See IFAR “What’s Next after SIMP listing” 31 May 2011).

• Group Agri structure is a long term risk: Longer term however, we have some concern that on the completion of the SIMP listing, investors would be faced with 4 listed entities offering exposure at different levels to LSIP’s assets (INDF » IFAR » SIMP » LSIP). If choice results in lesser demand for LSIP, the stock could remain at inexpensive valuations in the absence of other catalysts. This is a risk to our PT on the stock. Ultimately we think there will be a case for consolidation, but it may be a few years away as the Salim group is still listing additional entities at this time.

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