Kim Eng CPIN Beating expectations, BUY

Stellar first-quarter surpassed expectations
In 1Q09 the company’s net profit surged 103% YoY to Rp144b, beating our forecast. Higher net profit was triggered by higher selling prices in all products, and higher sales volume of DOC and Processed Chicken, which outpaced our estimate. In addition, lower raw material cost and operating cost resulted in higher gross margin and operating margin, which were up significantly to 17.2% and 11.9% respectively (from 11.1% and 4.8% in 1Q08). Overall, the results are above our expectation as we conservatively expected lower selling price and sales volume amid concern on global economy slow down.

Benefits from lower material costs and better cost management
The company’s costs came in lower in 1Q09 (COGS only increased 0.7% YoY, while operating expenses declined by 8% YoY). It was mainly due to lower raw material cost (soybean and corn) which account for around 84% of COGS). Based on CBOT (Chicago Board of Trade), average soybean price declined 29% YoY to US$9.42 per bushel, and average corn price declined 27%YoY to US$4.29 per bushel in 1Q09. In addition, the company better managed operating expenses. As a result, operating expenses to total sales came in lower at 5% in 1Q09 from 6% in 1Q08.

Sales volume was not impacted by global crisis
The company booked 8% YoY sales growth to Rp3.1t in 1Q09 due to higher selling price. Meanwhile, it was also supported by sales volume increase in DOC and Processed Chicken (up 16.2% YoY and 12.4% YoY respectively to 122.8m DOC and 9,803 tons). However, Poultry feed sales volume, the biggest contributor to total sales, declined 6.2% YoY to 546,071 tons. Management said lower poultry feed resulted from limited raw material stocks as farmers reduce production amid lower commodity prices. Overall, sales was surprisingly above our expectation as previously we were worried sales volume would be lower like what happened during Asia Crisis in 1998 (Poultry feed and DOC sales volume declined of 30% YoY each). Management said strong domestic consumption and election wealth supported the company’s sales.

Lower working capital and focus to reduce debt
We see lower working capital in 1Q09. Accounts receivable and inventory declined 18.5% YoY and 8% YoY respectively to Rp727b and Rp1,252b. (Inventory turnover came lower at 177days in 1Q09 vs 194 days in 1Q08, while collection period reached 85days in 1Q09 vs.143days in 1Q08). As a result, the company booked strong operating cash flow of Rp533b vs.(-Rp 13.5b in 1Q08). Meanwhile, the company is focusing to reduce debt, especially short-term debt of Rp1.2t. The company plans to reduce US$ denominated short-term debt, and to covert 50% its short term debt to long-term debt. We see positive strong operating cash flow in the future due to lower working capital, and the company plans to reduce its short-term debt.

Retain BUY, upgrade TP to Rp950
We are retain our BUY recommendation and increase our target price to Rp950 (from Rp810). Our target price pegs the stock’s valuation at 7.5x 2009 P/E. (51% upside potential). This is to reflect that all the performance (sales, net profit, and margins) are above our expectations. Therefore, we raise our earning estimate in FY09-FY10 by 18% and 32% respectively to Rp415b and Rp564b as we raise assumptions on selling price and sales volume of Poultry feed, DOC, and Processed Chicken. We retain our gross margin assumption while waiting for stabilized lower material cost in upcoming quarters.