Citigroup - PP London Sumatra Indonesia: Downgrade to SELL

Downgrade to Sell: Remaining Quarters Should Offer Reprieve but Current Valuation No Longer Appears Cheap

Challenging 1Q09 — 1Q09 proved challenging for Lonsum as it not only had to deal with lower CPO and rubber prices YoY, but also a 5.7% YoY drop in CPO volumes following the transport related problems on the back of heavy rainfall in the South Sumatra region. However, we enter 2Q with more optimism and expect future CPO prices, as well as CPO volumes, to fare better than in 1Q.

A host of factors still supportive of CPO prices — Low stock inventory in Malaysia, rising oil prices, soybean production/export issues in Argentina etc. should provide CPO price support. To put it into perspective, the April avg. CPO price stood at US$692/t vs. the March avg. of US$556/t, a YTD avg. of US$592/t, and a 4Q08 avg. of US$450/t. The current CPO price hovers at >US$800/t level.

Easing weather conditions and new mill bode well for volumes — On volumes, we expect LSIP to play catch up in 2Q09 as weather conditions improve. A new mill is slated to complete in July-09. More FFB can then be processed to CPO.

Earnings and target price revision — We had previously factored in higher CPO prices and volumes. Thus we only make minor changes to our estimates, factoring in a dividend payment of Rp208/share (30% of 2008 profits) and lower rubber prices (automotive outlook remains a concern). This leads to 5-6% downward revision of our FY09E-11E estimates and 2% off our target price.

Downgrade to Sell (target price Rp5,200) — Fundamentally we still like LSIP, but think most of its key positives are starting to be reflected in its current stock price. With the recent price rally, the stock is now trading at 8.1x 2009E and 11.3x 2010E PE and no longer appears cheap relative to its peers. Hence, we recommend investors Sell into any strength and will re-evaluate if the stock reaches lower levels.

What's new? — While there is a new management on board, the strategy going forward remains fairly similar. One area of key strategic focus for LSIP is to seek ways to pool its currently scattered plantations closer. This could either be via purchasing landbanks/plantations located close to current plantations or via selling current smaller ones to replace future purchases. At the moment, the latter is less likely to occur as conveyed by management.