Wednesday, December 7, 2011

Astra Agro Lestari (AALI) - Limited Growth, Not Enough to Offset Lower CPO Prices

by Trimegah Securities

Indeed, 2011 is expected to become superior year for any planter post prolonged wet season in 2010, which is actually good for palm trees fertility. As such, we expect 2011 as a high base for the company’s FFB production as we believe that AALI’s plantation profile will cap the growth further. We are looking for a 1.9% YoY substantial increase on FFB production in 2012 to reach 4.63mn tons. For a longer term basis, we estimate FFB production to grow by 2.8% CAGR in the next five years, the lowest in our plantation universe. The 69,214ha of new planting in 2006-2009 periods will contribute the growth, but it is not enough to offset the old estate in our view. Around 108,945ha (41% of total planted area) is already above 15 years old of age. This is compounded by the company’s limited ability to conduct a new planting.

Declining Margin Due to High 3rd Parties Fruit

9M11 third Parties FFB already reached 690.4k tons, significantly jumped by 86.1% YoY, representing 20.1% of total FFB harvested. The numbers already exceeded our 2011 estimation of 682.8k tons. As a result, company’s gross profit margin trimmed to 38.2% in 9M11 vs. 40.8% in FY10 and 41.8% of our FY11 estimate.

As the management will continue to optimize any potential for third parties purchase going forward, we expect the high volume to persist as well as the high raw material costs. This is leading us to revise our gross margin assumption to become 37.4% and 33.1% in FY12 and FY13, respectively.

Healthy Balance Sheet Provides Catalysts for Dividend and Acquisition The company’s cash balance reached its highest level in 9M11 at Rp1.6tr with debt free balance sheet, sufficient enough to maintain its high dividend payout ratio and conduct acquisition for inorganic growth. We are still looking for 65% dividend payout ratio in 2011, equivalent to Rp1,079 dividend per share or 5.0% dividend yield. With regards to the business line expansion, we’ve heard the recent news that AALI has a strategic plan to enter sugar plantation as it offered a lucrative outlook. AALI basically needs 20,000ha of estate and 3-year development to start the production. However the management admitted that it’s very hard to find 20k ha land now.

Maintain HOLD, with Lower TP of Rp23,700

We maintain our HOLD recommendation on AALI on the back of its limited growth outlook as well as the declining margin. We do believe that the growth prospect is what investors are looking for nowadays, particularly in the middle of soften CPO prices outlook. 9M11 results top line was in line with our expectation but bottom line came below our expectation due to the higher than expected 3rd parties’ FFB. We revise our model to incorporate those higher 3rd parties’ fruit, but higher CPO price assumption has raised our FY12-FY13 EPS by 5.4% and 24.4%, respectively. We slightly cut our price multiple targets to become 13x forward PE, implying TP of Rp23,700.

Key Risks: CPO prices fluctuation, worse than expected upcoming La Nina should give an upside risk to our forecast.

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