CLSA Initiating coverage Sampoerna Agro (SGRO IJ)

Wilianto initiates coverage on Sampoerna Agro (SGRO IJ) with a BUY rating and TP of Rp2,000.

GROWTH POTENTIAL: SGRO owns 48k ha of planted CPO estates (nucleus) and manages another 40k ha of plasma estates. It also got unplanted landbank of around 100k ha, which has been developed rapidly with a target to double its nucleus planted area from 48k ha to 100k ha over the next 5 years.

ATTRACTIVE VALUATION: SGRO currently trades at 12x PER 09CL and EV/ha of US$2,500/ha, well below the US$3,500/ha cost of new planting and is the cheapest in the sector. Our TP of Rp2,000 implies a target EV/ha valuation of US$4,500 which is 20% below our target valuation for LSIP and half below AALI.

Reasons for cheaper valuation than the peers and why these reasons are dissipating going forward:
1. SGRO is a smaller plantation company. However, we believe that there will be less need for exit strategy going forward (our view is that CPO price is likely to stay firm). As such, we think the valuation gap is likely to narrow and smaller plantation companies like SGRO offers larger upside potential.

2. Another issue for SGRO is that their estate quality is a mix between a well run 30.6k ha South Sumatra estate and not so great 17.6k ha Kalimantan. The Kalimantan estate was ill maintained when acquired in 2006 and intensive rehabilitation since then has resulted in yield improvement from 10.1 tons in 2007 to 12.3 tons in 2008. Therefore, we expect its blended average yield of 16.8 ton in 2008 to gradually increase to 20 tons.