DBS Sampoerna Agro: Strong yield recovery (Buy, TP Rp2,650)

Strong yield recovery

• 3Q09 result exceeded expectations, the strong performance driven by a surge in production

• Adjusted FY09F-10F EPS after imputing higher FFB yield and ASP, partly offset by lower new planting (FY09F), revised cost structure and resale of treasury shares

• Raised TP to Rp2,650, Buy call reiterated.

Strong 3Q09 result. 3Q09 net profit grew 33.6% q-o-q to Rp109.1b on the back of 55.0% q-o-q jump in revenue to Rp625.8b. 3Q09 revenue and net profit accounted for more than half of 9M09 result because a 62.7% q-o-q jump in CPO production more than offset the 13.6% q-o-q drop in ASP. Cumulative 9M09 net profit, however, still fell 48.9% y-o-y to Rp204.1b due to lower CPO prices, flat y-o-y production growth, and a drop in germinated seeds sales. Nevertheless, the group’s realised 9M09 ASP is 6.8% above our full year forecast.

Yield assumptions raised, reduced new planting. The q-o-q jump in CPO production exceeded our expectation because of strong yield recovery in Sumatra estates. Hence, we raised blended yield by 15% for FY09F and 5% for FY10F. We now expect FY09F CPO production to ease by only 5.3% y-o-y vis-à-vis 17.4% drop previously. We also cut FY09F new planting target by 2k ha to 3k ha as 9M09 new plantings was only c.2k ha. Our assumptions for FY10F and FY11F remain 10k ha p.a.

Aligning cost structure. We also exclude inventory differences from SGRO's cost structure due to difficulty in forecasting and to align our methodology regionally. This resulted in slightly higher costs, net of top-line revision.

Raised TP to Rp2,650, Buy. Our DCF-based TP is raised to Rp2,650, implying 12.5x FY10F PE. Our upgrades reflect higher FFB yields, higher ASP (ratio to spot adjusted upwards by 70-450 bps) and resale of 75.6m treasury shares. We continue to like the group’s growth volume prospects and reiterate our Buy call for the 16.5% upside potential.