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Thursday, August 11, 2011

Sampoerna Agro Tbk - Strong Production Growth

by Mandiri Sec

SGRO booked strong 1H11 net income, beating our and consensus estimates. The main driver was higher- than-expected CPO production volume. We expect its strong production growth in nucleus FFB to continue in 2012 due to its aggressive new planting in 2007 and 2008. Its margins in 2Q11 decreased from 1Q11 mainly due to cyclical increase in plasma contribution to total processed FFB (exhibit 4). We expect FFB contribution from nucleus to keep increasing on year- on- year basis due to its nucleus and plasma plantation profile. We maintain the BUY recommendation on SGRO due to strong growth in its nucleus FFB production. Our PE derived-TP is Rp4,500/share. We use target PE FY12F of 12.7x, 15% discount from AALI’s PE of 15.0x.

Strong 1H11 performances. 1H11 net income (net of minority interest) of Rp356bn (+171.9%, -9.1%qoq) beat our (62.7% of our FY11F) and consensus (65.5% of consensus FY11F) estimates. The main reason was higher-than-expected production volume, especially FFB production from plasma. Its 2Q11 gross margin of 35.7% narrowed from 1Q11 of 43.7% mainly due to higher FFB contribution from plasma to total processed FFB in 2Q11 of 60% than in 1Q11 of 55%. Gross margin from plasma was only around 15%, meanwhile gross margin from nucleus was around 75%. (exhibit 7)

Booster from plasma in 2Q11. FFB from plasma in 2Q11 grew 26.7%qoq, which faster than the growth of FFB from nucleus of 6.9% qoq (exhibit 1). This matter made higher FFB contribution from plasma to total processed FFB in 2Q11 than in 1Q11. QoQ fluctuation in nucleus contribution is common (exhibit 4). However, contribution from nucleus is increasing on annual basis due to strong growth in nucleus in the future because SGRO did aggressive new planting in the last 4 years.

Strong growth in Nucleus FFB production continues. SGRO is one of few plantation companies, which did aggressive new planting in the last several years (exhibit 5). Oil palm trees start to generate FFB since 4 years old. We expect strong growth in nucleus FFB production to continue with 2010-2012 CAGR of 18.9% as a results of its aggressive new planting in 2007-2008.

Maintain the Buy recommendation with higher TP of Rp4,500. We like SGRO due to its strong growth in its nucleus FFB in the future. Our PE derived-TP is Rp4,500/share. We use target PE FY12F of 12.7x, 15% discount from AALI’s PE of 15.0x.

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