Margin pressures into FY09
FY08 profits below par, masked by one-off income: *AALI reported FY08 Net Profits of Rp 2.6 trn, including an Rp 403 bn (11% of PBT)nonrecurring income from sale of certain plantation assets. Adjusting for the nonrecurring item (which was expected), FY08A Net profits were 11% below our forecasts and about 9% below consensus.
4Q margin drop on high input costs: *4QFY08 revenues were in line, but EBITDA margins surprised at just 22% as production costs/T were about 35% higher than our forecast. Although AALI’s financial statements do not break costs down to the line item, we ascribe high fertilizer prices (about 31% of ex-factory costs) in 4Q as the likely cause of depressed margins. Even though 4Q profits were supported by a Rp78bn FX gain on AALI’s USD cash balances, net profits adjusted for one-off’s at Rp 219bn were down almost 60%, both q/q and versus our estimates.
High fertilizer inventories likely to carry margin pressures into*
FY09: *With urea prices down 50-60% from their peaks in 3QFY08, the question is how soon will cost pressures reverse? We note that AALI held Rp357 bn worth of fertilizer inventory at the end of FY08, up about 9x y/y and 50% q/q (detailed on page 2). We estimate the FY08 inventories constitute about 3 months consumption, and hence we worry that high inventory purchase prices carry margin pressures into 1QFY09.
We expect the stock to react negatively to the results: *AALI’s stock price was up 7% ahead of results, and we expect the gains to reverse on these numbers. We rate the stock Neutral, and our Rp 9,000 Dec FY09 DCF-derived price target values AALI using an M$1,575 CPO price (YTD actual 1,866) and a 22% cost of equity, implying a 10x FY09E PE. We see AALI as overvalued in the short term, unless CPO prices are likely to remain over M$2,000, which is a risk to our view that weak demand is likely to overshadow slowing supply growth in the near term.
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