Indopremier Volatility Currency Risk, Raise our Concern to Slash the Bottom Line

FY08 Performance Result below our Estimates

The UNSP un-audited FY08 Sales result was 6% below our estimates. The ASP for CPO in FY08 was 5$ below our figure (Rp 7.300/kg versus Rp 7.600/kg). Meanwhile the CPO sales volume was 11% lower than our projection, reaching 272,800 tons.

“Red Alert” USD Bonds Debt Exposure
Company has significant USD debt exposure of US$ 160 million (equal to Rp 1,6 trillion with Rp 10,000/US$). Weakening Rupiah value would eventually raise burden to the company’s non operational expenses especially interest expense and foreign exchange loss. Based on our calculation, the FY08 bottom line would drop from our previous estimation, around 35% lower to Rp 306 Bn from Rp 474 Bn. Foreign exchange loss of Rp 200bn and interest expense of Rp 180bn would put pressure on net profit. Eventually, the dividend payment will be affected as well.

Key Base Assumption Revision
Considering current condition, we make some adjustment revision to our key assumptions as follow:
1.We revise exchange rate for FY09 and FY10 up to Rp 11,500 and Rp 10,000 from previously at Rp 9,500.
2.We adjust our assumptions, especially related to production, sales volume and ASP FY09 and FY10. From the updated industry condition, CPO demand currently being advantaged as the drought in Brazil, Argentina and China damages soybean production
3.Seems that rubber outlook is worse than CPO as reflected in China’s import trade for rubber and CPO per January 2009 has dropped 65% Ytd to 60,000 tons and 27% to 260,000 tons respectively. Future contract for rubber for July 2009 delivery in Japan commodity exchange tumbled to ¥143,6 or US$ 1,563/Mt in line with the negative news of production cut from Toyota to 519,000 tons until March 2009 or decline 54% from the same period previous year, Our New Earning Estimates FY08 and FY09 far below Consensus

Currency risk has attracted our concern for the company performance in 2009. However we view that in 2010, global recession should subside. It would give positive impact to the company. Our assumption for exchange rate seems more conservative than the consensus figure. Our net income projection 2009F is much lower 49% from consensus. While our operating profit and EBITDA are 5% and 18% higher than consensus respectively.

Recommendation and Valuation
Based on our new assumptions, our valuation DCF model with WACC 16.8% (Rf 12%, risk premium 6.5%, beta 1.5, target debt ratio 35% and terminal growth of 5%) arrive new TP at Rp 285,- per share (or decline 22% from previous TP at Rp 368,-). Our valuation result show us that UNSP with share price at Rp 325 (19/02/09) have traded P/E 2009F and 2010F at 10.2x and 3.1x. We change our recommendation from HOLD to SELL with TP Rp 285, giving downside potential of 12.3% from the last trading price at Rp 325.