Mandiri Sekuritas Plantation: Supportive substitutes

CPO export sales started to rebound in the 2Q09, supported by worsening outlook of soybean output in America. The US Agricultural Department estimated that the El Nino, if not severe, will slightly benefit palm oil sector as palm is more resistant than soybean raising possibility of CPO price increase (due to soybean scarcity) which could more than offset FFB yield contraction. However, furthe r price increase is limited due to better harvest in the 2H09 (putting aside possible El Nino) and concerns on India’s new CPO tax policy. We upgraded our TP, factoring lower risk-free rate and higher CPO price assumptions. Our top pick is SGRO because of attractive intrinsic and relative valuation. In term of ytd return, SGRO is also lagging far behind its peers (50.4% vs 138.1%).

Stable CPO price outlook. CPO price has risen by 40.7% ytd, which triggered us to adjust our valuation because we believe that the supply-demand conditions are in favor of stable CPO prices, one of them is the existence of circular problem between drought and lack of financing in soybean sector. Lingering drought in America reduced cash flow generation amidst limited lending activities in global financial market. The lack of financing has forced soybean planters! , especially the small ones, to reduce fertilizer application, which may result in low yield in the next harvest. Therefore, as the USDA estimated, soybean output will remain under pressure so that substitution process to the CPO will continue. Beside that, El Nino is expected to curb harvest this year, especially for soybean which is more susceptible to such weather anomaly than palm oil. We believe the CPO outlook is stable, if not positive, because there will be more CPO harvest in the 2H09, and rising concerns that if the new elected India government re-enacts CPO import tax on request from domestic planters.

SGRO is our top pick. Our preference for SGRO among the plantation stocks is largely due to undemanding valuation both on intrinsic and relative valuation. In term of relative valuation, SGRO has the most attractive PER09F-10F, and relatively cheap EV/ha. SGRO is also lagging behind other plantation stocks with only 50.4%ytd return (vs industry average of 138.1%). In term of harvesting costs, SGRO is most elastic in facing downturn business cycle. Note that, even though we like the fundamental of AALI an! d LSIP du e to their economies of scale, we believe both stocks are already pricey with relatively high PER09F-10F and EV/ha.

Upgrade our TP. We upgraded all TPs for plantation stocks under our coverage due to (1) lower risk-free rate assumption of 9.5% (from 11.2%), reflecting positive outlook on general economy, and (2) higher CPO price assumption of US$650-700/ton for FY09F-10F, and US$750/ton for long term assumption. Risks to our forecasts: 1) demand slowdown due to poor economic climate, 2) potential threat of import tax on palm oil by India’s new government, 3) severe El Nino that could hamper harvest, 4) stocks liquidity, which is lower than peer average.