Danareksa Astra Agro Lestari No Cost Benefit

Higher costs squeeze profits
AALI’s 2008 core profits reached Rp2.2tn, or 14.5% lower than our estimate. The lower-than-expected core profits was attributable to higher fertilizer and labor costs which drove up the ex-factory cost to Rp2,637/kg pp, some 11.9% higher than forecast. Higher opex squeezed AALI’s profits further (note that AALI’s selling expenses surged 28% qoq in 4Q08 as greater efforts were needed to sell its products that quarter).

Not fully enjoying the decline in fertilizer prices
AALI is not fully enjoying the 50-60% drop in fertilizer prices from their 2008 highs. This is because the company still has plenty of high priced fertilizer (mostly urea) carried over from last year. Indeed, by the end of last year, AALI had some Rp357bn worth of fertilizer in its inventory due to the late delivery of urea. As such, going forward, AALI is expected to start securing urea again only in 2H09. Meanwhile, the price of potash seems to be fairly stable while the drop in prices of phosphate fertilizer are offset by the weaker rupiah. All in all, our 09-10F cash cost assumptions are revised down by only 2%-3.2% to Rp3.3-3.4bn.

Expecting a lower yield following the asset disposal to ADRO
We have revised down our 09-10F yield to 20-19.3ton/Ha after taking into account the disposal of the “Right to Exploit” areas of 7,163Ha in South Kalimantan to ADRO in order to settle the issue of overlapping plantation areas. In return, AALI has received $60mn in compensation and booked a Rp403bn gain in 2008. As a result of the asset disposal, AALI’s current mature area is some 4% lower than our previous expectation of 192,000Ha.



TP raised to Rp7,800 but SELL recommendation maintained
We raise our 09-10F profit forecasts by 8%-13% to Rp1,025bn-1,346bn on the back of lower cash costs (due to lower fertilizer costs) and lower depreciation assumptions (due to less planted areas). Although this leads to an 11.4% increase in our TP to Rp7,800, the stock still looks expensive, and we therefore maintain our SELL recommendation.