Indopremier CPO Industry - Revised

We had a volatile and tough year in 2008 - 2009. However, currently we have already seen a bright niche for market recovery especially CPO industry. As we had expected before, CPO industry this year would remain strong sustained by consumer spending base. Even though harvest is estimated to pick up around 20 – 25% in line with mature planted area, tightening inventory in both CPO and soybean seems have offered a better prospect for CPO prices.

In addition, damage in soybean production becomes a positive catalyst for CPO. However we also note some downsides for CPO price. Swine flu virus outbreak will curb demand for livestock feed. Hence, soybean oil future price tumbled on speculation. Thus, the hike of CPO price that had broken its highest level this year at US$ 830/Mt would be no longer competitive in term of premium pricing compare to soybean. Therefore, we might see a correction toward US$ 700/MT for CPO since palm oil’s rally has made soybean oil less much cheaper. We would see CPO price to stabilize or consolidate at US$ 700 this year following crude oil price stable above US$ 50/brl this year.

As addition, GoI also would impose export tax against CPO in June 2009 which eventually will dampen CPO prices again. Despite the potential downside on CPO price movement this year, we upgrade our estimation of CPO Rotterdam reference average prices in 2009 and 2010 up to US$ 700/Mt and US$ 750/Mt respectively from US$550/MT and US$600/MT

Escalating Demand, Declining Supply, Soaring Price
Higher CPO demand from China and India seem have been a trigger behind the hike of CPO price until it had broken through US$ 830/Mt. China CPO import rose by 54% YoY up to 410,000 ton while India rose by 28% YoY up to 641,141 tons as per March 2009. CPO price has started its rally, followed by soybean prices since February 2009 following the crude oil price stabilization. Indonesia CPO export reference price in April 2009 (red line) that is determined by Government of Indonesia (GoI) lastly has been adjusted up to US$ 540/Mt in April 2009 versus current CPO price at US$ 760/Mt. Thus, GoI would obviously impose tax export to CPO in June 2009. Interestingly, Indonesia CPO auction price has accelerated more rapid than Rotterdam CPO price as seen in exhibit 2 up to Rp 8.600 – Rp 8.700/kg.

In Q109, Palm Oil world consumption reached 11.14 million tons exceeded total production of 10 million tons. While soybean oil consumption reach 8.56 million tons slightly above its production of 8.45 million tons. The worst drought in more than four decades in Argentina, as the largest soybean oil shipper has led increasing demand in CPO since the two commodities are substitutes.

We downgrade AALI to SELL on Strength, time for profit taking offering 26.9% potential downside
Earning multiple for AALI currently is traded at premium compare to the market valuation, which we noted near to its highest premium against JCI in late 2007 at range 1.2x – 1.35x. Thus we are seeing that AALI is overbought and will susceptible for profit taking. We change our recommendation for AALI from BUY to SELL with new TP at Rp 14,250 implying PE09F at 13.1x. Currently AALI PE09F traded at 17.99x.

We upgrade SGRO to Buy on Weakness and Maintain HOLD for LSIP and SELL for UNSP
Our new TP for LSIP is at Rp 6,100 implying PE09 of 13.2x while currently LSIP’s PE09F traded at 14x. Seems market already priced in our new TP for LSIP. Thus we maintain our HOLD recommendation for LSIP. While for SGRO we upgrade our HOLD recommendation to Buy on Weakness for SGRO with new TP Rp 1,850 implying PE09F at 12.1x which currently SGRO PE09F traded at lowest level compare to peers at 11.4x. We also arrive in attractive valuation on UNSP applying the additional 5% tax incentives policy adjustment regarding to public shares that account more than 40%. However, currently UNSP PE09F traded at 17.1x closed to AALI and we still concern with its unconsolidated total debt from ARBV which amount total of US$ 300 Bn. We maintain our SELL recommendation for UNSP with new TP at Rp 600 implying PE09F at 14.6x higher due to tax advantage and earning leverage into our DCF valuation.