Citigroup - Bakrie Sumatera Plantations; Downgrade to Sell: Appeal Not As Favourable Relative to Peers

Reduce to Sell (from Buy), target price Rp500 — Operating against a backdrop of a stronger rupiah, lower rubber price outlook and reintroduction of CPO export taxes, UNSP with its 30% rubber exposure and 30% exports, is rendered most vulnerable to earnings downside risks. Compound those factors with: 1) lingering corporate governance risks, 2) interest expense risks (US$160m bonds still sitting on its B/S), and 3) no longer cheap valuations (11.2x 2009PE vs. historical average of 14.6x) following the recent liquiditydriven rally, means UNSP's appeal ceases relative to other stocks within our Indonesia plantation space (pure CPO plays with less export exposure) in our view. Hence, we downgrade UNSP to Sell (from Buy) with a revised target price of Rp500 (from Rp670). We maintain our Speculative Risk rating, factoring in high volatility and high corporate governance risks associated with the stock.

Rubber outlook — Concerns over the global economic and automotive outlook continue to linger. In this regard, planters with rubber exposure like UNSP (~30% of revenues) are unlikely to fare as favourably as the pure CPO plays such as AALI and FRLD.

CPO export tax and outlook — As CPO prices breached the US$700/t mark, the Government of Indonesia opted to reimpose the CPO export tax. Despite the fact that 30% of UNSP's sales are exports, we view the impact should not be substantial. This follows our assumption that CPO prices will likely trend downwards as oversupply remains a concern in 2H09 (CPO price US$550 level. We maintain our US$610/t FY09E CPO price average.

Estimate changes — We revise down our 2009E-2011E net profit estimates by 39-46% due to revised assumptions on: 1) stronger rupiah (2009E at Rp10,700 and 2010E at Rp9,788 vs. 2009E of Rp11,275 and 2010E of Rp10,500 previously), 2) lower rubber prices of US$1.6/kg in 2009E vs. US$1.7/kg previously, and 3) 3% CPO export tax in 2009E (0% previously). We lower our target price to Rp500 (from Rp670) to reflect our revised estimates.