Maintain speculative Buy with Rp670 target price — After hovering in the Rp200-320 range for the past 3.5 months, UNSP's share price breached the Rp350 level on April 14 and can be seen slowly rising. CPO price outlook appears less abysmal than in 4Q08 (4Q08 CPO price ave. of US$450/t vs. 1Q09 CPO price average of US$531/t vs. YTD CPO price ave. of US$553/t vs. current spot price of >US$650/t). Supplement this with UNSP's favourable growth potential (42.8% 3-yr EPS CAGR) and cheap valuations (4x 09 P/E), there just might be hope for this stock. Once corporate governance risk dissipates, stock re-rating likely, in our view. We maintain our Speculative Buy on UNSP and raise our target price to Rp670 from Rp485.
Earnings revisions — CPO prices recently rallied above US$600/t following lower-than-expected ending inventory levels in Malaysia. Soybean production/export issues in Argentina, weaker dollar, CPO discount to key vegetable oil substitutes are also supportive of prices. We raise our 09 CPO price assumption to US$610/t from US$550/t previously. This, coupled with lower tax rates and other cost saving initiatives, risk of earnings deterioration (on the back of lower rubber prices, interest and forex loss risks with bonds hedged at Rp9,700) would be minimized (Fig. 1).
Commitment on cost management remains — Management reiterated that it will continue to manage a) production costs by monitoring fertilizer usage. For all immature plantations, fertilizer application is standard. For mature plantations, application depends on the condition in 2H09. If CPO prices deteriorate to below US$450/ton, no fertilizer will be applied to cut costs. If CPO prices remain above US$450/ton, the bulk of fertilizer will be applied in 2H at 2kg/tree. b) S&GA via business travel reductions, general cost savings at Jakarta Corp. Center.
Agri BV will remain unconsolidated — Despite raising its ARBV ownership ARBV to 51% through its equity partner Agri International Resource PL, UNSP (as approved by the auditors) will continue to recognize ARBV as a mere associate and thus will not consolidate ARBV and its US$150m debt into its books.
Dividend & buyback programme — UNSP plans to distribute 30% of its 2008 net profit or Rp13.8/share as dividends. It also plans to buy back some of its US$160m notes to reduce its interest expense obligation. Both plans are still pending shareholder approval. Next EGM is scheduled in May or June.
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