Bahana LSIP Unfavorable impact from forex rate move

Strengthening IDR to produce adverse impact on the margins
With the recent revised assumption in the USD/IDR exchange rate to IDR9,700/USD at end 2009 and IDR9,500/USD at end 2010 (from the initial estimated IDR10,000/USD at 2009 and 2010), we have accordingly downgraded LSIP’s 2009 and 2010 revenues to IDR2.9t (-4.5%) and to IDR3.3t (-10.8%) respectively (table 1), on the back of the unfavorable impact from the forex rate move towards the domestic selling price. Ironically, although the company would be benefited from obtaining the lower average production costs arising from the weakening in USD against IDR, the slower than expected revenue growth would pressure the company’s gross margins to 39.0% from 40.2% in 2009 and to 45.5% from 46.2% in 2010. It is worth of noting that around 56% of the costs are in USD related. Meanwhile, we maintain our CPO average price assumption at USD600/MT for 2009 and USD700/MT for 2010. To improve the operating cost efficiency going forward, LSIP would utilize its house transportation system to reduce its transportation cost. This would allow the operating margin to improve to 33.5% in 2010 from the estimated in 26.7% in 2009.

Forex gains to prevent the bottom lines from deteriorating
Despite the lower than expected margins, the bottom lines have only downwardly corrected 3.1% and 9.6% for 2009 and 2010 respectively, to IDR5.9t (-36.5% y-y growth) and IDR8.1t (+37.5% y-y growth). This is helped by the expected foreign exchange gains of IDR28b 2009 and IDR8b in 2010 arising from the continued weakening in USD against the IDR. It is worth of noting that the company carried net debts of USD22m at end June 2009.

Better weather and nucleus production in 2H09
As we mentioned in the previous Spotlight, LSIP had reached higher nucleus production of 10.2% y-y to 520k tons (1H09) while FFB purchase dropped 11% y-y to 214k tons. This lower FFB purchase decline and 46% y-y decline in CPO price contributed to 33% y-y lower FFB cost in 1H09. This trend is likely to stands intact, enabling FFB cost to stay low. As discussed with the management, the better weather, supported by sufficient rainfall, could help LSIP production in 2H09.

Downgrading to HOLD with lower target price of IDR8,800
Apart from the foreign exchange rate, we have maintained our other assumptions. For example, we have retained our 2009 and 2010 CPO sales volume target of 347k MT and 376k MT while the average CPO prices stand at USD600/MT and USD700/MT respectively. The lower earnings expectation, due to the unfavorable impact from foreign exchange rate move, has encouraged us to lower our recommendation to HOLD with the revised target price of IDR8,800 (-9.3% from previous estimates). This is based on 14.8x 2010 PE, some 20% discount from the average Malaysian planters’ 18.5x 2010 PE.