Macquarie AALI Looking expensive

Event
We maintain our Underperform recommendation on Astra Agro Lestari (AALI) but raise our 12-month target price to Rp11,700 (from Rp7,800 previously) based on our new CPO price assumptions.

Impact
Downside risk to CPO price in the near term: We have raised our market CPO price assumption to US$520/t for 2009 (from US$400/t earlier) due to higher prices in the first four months of the year. However, we believe that CPO prices will weaken from June until end-2009, as supply concerns will likely recede, exports will slow and Malaysian inventories will start rising again.

Soybean supply shortage could lead to higher prices in 2010: We have also raised our price assumption to US$625/t for 2010 from US$450/t earlier, but still below the current price of US$770/t. The change has been driven by the current low soybeans stock in the US, soybean reserve-building by China and poor South American bean production. We believe that the world is likely to be dependent on the upcoming US crop for the supply of oilseeds next year and, hence, the risk to the price will be on the upside for 2010.

Higher costs in 1H09 likely to limit upside from higher price: Despite a 27% upgrade to our 2009 CPO price assumption, our earnings upgrade for FY09E has been limited to 21%. This is because of higher-than-expected costs reported by AALI in 1Q09. We estimate AALI’s cost of production (excluding FFB purchases) rose by 12% YoY in 1Q09. We understand that AALI locked in its fertiliser requirements for 1H09 late last year, when prices for some fertilisers had still not declined substantially from peak levels.

Earnings and target price revision
We have raised our FY09E, FY10E and FY11E EPS by 21%, 56% and 30% respectively, on higher CPO price assumptions. We also ascribe a higher target PER multiple of 9x one-year forward earnings (7x previously), assuming a lower risk premium for plantation stocks in a rising CPO price environment. We raise our target price to Rp11,700 from Rp7,800 previously.

Price catalyst
12-month price target: Rp11,700 based on a PER methodology.
Catalyst: Rise in Malaysian CPO inventories from June onwards and higher soybean plantings in the US in May.

Action and recommendation
We maintain our Underperform recommendation on AALI. At 12x oneyear forward earnings (June), the stock is trading closer to +1 standard deviation above the historical PER average of 9x. Given our expectations of a decline in CPO prices from June onward until end-2009 and low visibility on the US soybean plantings so far, we see little justification to pay a multiple for AALI higher than the historical average.