Friday, July 29, 2011

PP London Sumatera Indonesia Tbk - CPO Volume Growth Supported by Diversification Strategy = BUY

by Citigroup

Raise TP — We expect CPO prices to be supported at US$1,000/t. Thus, a) higher CPO volumes, b) higher seed sales, c) higher rubber prices and d) lower tax rates would serve as key earnings drivers. We raise our 2011-2012E earnings estimates by 5.5%-8.3% mainly to factor in higher CPO/Seed prices and stronger rupiah. But as we roll forward valuations to Jun 2012, overall, our TP is raised to Rp3,350 from Rp3,160.

Raising CPO price assumptions — Our current CPO price assumptions are US$1,080/ton for FY11E, US$1,000/ton for FY12E and US$950 for 2013E and the LT. Previously our CPO price forecast was US$1,050/ton for FY11E. To factor in the stronger rupiah, we also adjust our 2011E and 2012E forex assumptions to Rp8,622 (prev. Rp8,974) and Rp8,425 (prev. Rp8,675) respectively.

Production growth — With better weather in 2011 relative to 2010, LSIP can resume its infrastructure initiatives in South Sumatera. This, coupled with ongoing production recovery and a favourable plantation profile (ave. age of 12yrs; 78% mature trees; over 60% in optimum yield phase), should help LSIP to deliver our CPO production expectations of 9.3% YoY in 2011 and 9.5% in 2012.

Higher seed volumes and prices — Effective Jun 2011 delivery, LSIP raised its seed prices from US$1.2 to US$1.5. Though the prices will be muted in rupiah terms given stronger rupiah, overall seed revenues should still register positive growth on higher volumes. LSIP has yet to publish its 1H11 statistics. But as at 1Q11, seeds sales volume grew 69% YoY to 3.4m seeds.

Rubber business provides further boost — Rubber prices have been quite stable in the US$4.5/kg level, which is still higher than 2010’s avg of US$3.3/kg.

With c.15% of its total planted area comprising rubber, LSIP looks set to benefit.

Lower tax rate by year end 2011 — The increased float to 40.5% qualifies LSIP to a lower tax rate of 20%. As at 1Q11, a 25% tax rate was still applied. But the lower tax is already factored in our model as we expect the tax rate to be effective by year-end 2011 and would have a retroactive effect.

Foreign shareholdings & 1H11 results — Foreign shareholders held 20.9% of LSIP as at 22 Jul 2011. LSIP aims to report its 1H11 results on the 3rd week of August. Our FY11E net profit forecast is 12% above consensus.

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