KimEng AALI: 9M09 result in line, HOLD

Net profit in line both at operating level and net profit level
Astra Agro Lestari published its 9M09 result with net profit of Rp1,248b, a 41% drop compared to that of last year period, in line with our expectation, but lower than consensus estimate. Revenue was down by 18% to Rp5,463b on the back of 21% lower CPO price. Gross and operating profits were also down by 34% and 38% to Rp2,255b and Rp1,913b (from Rp3,408b and Rp3,109b in 9M08 respectively). Gross and operating margins were down to 41.3% and 35%, from previously 50.9% and 46.4%. Below operating line, the company booked financing expenses of Rp23b, mostly for financial charges related to total US$150m loan facilities from a group of lenders consists of The Bank of Tokyo-Mitsubishi UFJ Ltd, OCBC, Standard Chartered Bank, NATIXIS and Sumitomo Mitsui. The loan facility was taken earlier, but is yet to be utilized, for capital expenditure to anticipate deteriorating cash flow in case of low CPO price persists.

Robust production from nucleus in 3Q09
The company harvested 1.14m tons of FFB from its nucleus and plasma estates in 3Q09, a total of 4% growth QoQ compared to that in 2Q09. Robust production of FFB from nucleus is the main driver, in our view, with growth of 6% QoQ to 908k tons, while production from plasma and purchased from third party was actually down by total 6% QoQ to 321.1k tons. The lower FFB purchase from plasma and third party also contributed to improved quarterly gross margin in 3Q9 at 46.8% (vs. 45.5% in 2Q09) despite of 12% QoQ lower CPO price (Rp6,247/kg in 3Q09). Geographically, Sumatra and Kalimantan grew by 4% and 7% with total contribution of 77% or 942k tons to total FFB processed. CPO production in 3Q09 is a record high with 286k tons, even when there was a long holiday due to the Muslim festive. YTD the company has produced 3.14m tons of FFB and 786k tons of CPO and 169k tons of kernel. With the El Nino is expected to be mild, we see the company should not have any problem to meet our production estimate of 1.02m tons of CPO. In terms of production, we see the risk would be more on the upside.

Reaching fair value
We expect CPO price to remain relative stable hovering at MYR2200/ton in 4Q09. However, we estimate higher CPO price in 2010, assuming MYR2500/ton, as we expect global economic recovery to boost edible oil consumption. We have fined tune our forecast and slightly increased our CPO production estimate by 1% from 1.01m tons to 1.02m tons. We reckon a strengthening rupiah may put pressure on margin in 4Q09, since CPO price is mostly quoted in US$ but costs are in rupiah. With El Nino is expected to be relatively mild and come in June 2010, later than earlier estimate, we expect production in 2010 should be relatively strong with 2% growth. We use DCF method for valuation with WACC 14%, which arrives at fair value of Rp21,921 a share. Our target price translates into HOLD recommendation. At present the stock trading at 19.5x -16.2x FY09-10 PE.