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Monday, December 12, 2011

Sampoerna Agro Tbk (SGRO) - Undemanding Valuation + Performances Improvement

by Trimegah Securities

Surprising Production Recovery SGRO managed to produce 440k tons of FFB in 3Q11, making up1.3mn tons of FFB in 9M11, on the back of higher than expected plasma production. Plasma contributed 58% of total company’s FFB production in 9M11, higher than 2010 level. Despite of this surprising plasma recovery growth, we believe that nucleus portion to grow strongly against plasma going forward on the back of massive nucleus new planting since 2007. 9M11 FFB production formed 84.4% of our 2011 estimates. 4Q11 production should be similar with 3Q11 level at around 400k tons. Moving to 2012, despite of the high base in 2011 due to the production recovery, the survey conducted by the field operator shows that there’s still potential for production to grow further These lead us to raise our 2011-2013 FFB production by around 1.7%- 6.3%. We are still looking for 6.5% of 5-year CAGR on FFB production until 2015, making it the 2nd highest growth among our plantation coverage.

Latest Updates on Its Expansion Program

Until 9M11, SGRO only managed to plant 2,150ha of new planting. We revise our 2011 new planting assumption of 4,500ha, while keep maintaining our assumption for 2012 onwards as the management commit to catch up the new planting target of 50k ha until 2014. Land bank availability should not be an issue here as the company owns 59,841ha of land bank, sufficient to meet its medium term expansion program. With regards to its sago business, SGRO’s starch factory is expected to start its commercial operation in 4Q11 with 33,000tons of annual capacity. SGRO has signed a contract with several buyers with 100% purchase commitment. Indeed, the revenue contribution is minimal (around 4.0% of our 2012est by assuming USD425/ton of sago starch and production is running at full capacity), but if the sago business proven to run well it should ease the market concerns about its sago expansion.

Maintain BUY, TP of Rp4,100

We reiterate our BUY call on SGRO, mainly driven by its undemanding valuation.

On an asset valuation basis, SGRO is the cheapest plantation company among our coverage based on EV/planted area. Such valuation, we believe, is mainly driven by company’s high plasma portion compared to peers. However, it should reverse as we expect nucleus growth to outperform plasma (65%-35% in 2015).

We’ve revisited our model to adjust the higher than expected FFB production in 2011 and new CPO price assumption. We also incorporated higher export portion, which led to higher opex. As a result, our FY12 EPS increased by 9.5% while FY13 EPS trimmed by 4.2%. Our TP is derived from 11.7x Forward PE, a 10% discount to its plantation peers.

Key Risks: CPO prices fluctuation, high plasma portion to create a volatility on company’s FFB production, worse than expected upcoming La Nina should give an upside risk to our forecast.

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