DBS London Sumatra Indonesia (FULLY VALUED; Rp3,450;)

London Sumatra Indonesia (FULLY VALUED; Rp3,450; Bloomberg Code: LSIP IJ)
Expanding cautiously Price Target : 12-month Rp 2,325 (Prev Rp 1,600)

We recently met with London Sumatra (Lonsum) management. We expect the company to proceed with its expansion plans this year, despite a US$26m debt repayment and existing immature capex. Higher yields should also improve production growth (vs DBSV assumption) for this year. We tweaked our production assumptions and imputed a weaker IDR, but maintained our CPO price assumption at US$570 (CIF). Lonsum remains Fully Valued with a revised Rp2,325 target price.

4Q08 results preview. We understand that Lonsum might have achieved slightly lower-than-expected FFB and CPO production volumes last year due to falling yields in 4Q08. It also had a slightly larger matured area in 2008, although new planting achieved was 25% less than expected.

However, with a weaker average IDR rate for the quarter, we still expect 4Q08 net
profit to meet our Rp134bn forecast. Solid balance sheet to sustain growth. We expect 10,000 ha of new planting this year as Lonsum should have sufficient cash, although management declined to give a target. CPO production growth could also be larger as FFB yield is guided to improve this year.

Higher target price due to weaker IDR. We imputed weaker IDR/USD rates in our forecast. Our new rates are Rp11,000 (from Rp9,575) for FY09F and Rp9,700 (from Rp9,150) for FY10F. Accordingly, our target price for LSIP is raised to Rp2,325 (from Rp1,600), but we are maintaining our Fully Valued rating for Lonsum.