KimEng CPIN: Strong results amid superb margin expansion, BUY

Net profit surpassed expectation
In 9M09 net profit surged 172% YoY to Rp1t, beating our forecast. The net profit figure is a record high in the company’s history since listed in JSX in 1991. Higher net profit was spurred by higher sales from all divisions (poultry feed: 5% YoY, DOC: 14% YoY, and processed chicken: 22% YoY), lower raw material cost and higher efficiency in operating expenses. As a result, gross margin and operating margin rose to 18.5% and 13.6% respectively in 9M09 (from 13.8% and 7.7% in 9M08). In addition, higher net profit also came from stronger Rupiah translated into huge foreign exchange gain, as more than 50% of total debt is US$ denominated. Without forex gain, the net profit was still above our expectation

Strong operating cash flow and healthier balance sheet
In 9M09 the company booked strong operating cash flow of Rp1t vs. negative operating cash flow (Rp87b) in 9M08. It was mainly due to lower working capital. We also see the company’s balance sheet figures look healthier in 9M09. The company booked account receivable and inventory decline of 19% YoY and 24% YoY respectively to Rp787b and Rp1,509b. Inventory turnover reached 62 days in 9M09 vs 83 days in 9M08, while collection period reached 27days in 9M09 vs.35 days in 9M08. The company also reduced debt. Based on 9M09 financing cash flow figures, we see the company paid its short term debt of Rp942b and long term debt of Rp156b. We expect the company to continue to reduce debt until YE09 and YE10. As a result, we expect gearing ratio to go lower to 24.1% in FY09 and 3.3% in FY10 from 173.4% in FY08. As it will huge cash next year, we expect the company potential to distribute cash dividend. With assumption of DPOR at 30%, DPS is Rp126 or 6.1% yield. The company has not distributed dividend since last two years.

Rosy industry outlook
We see industry outlook remains positive. The Indonesia Feed mills Association expects feed mill industry growth of 8% to 14m tons in 2010, better than growth target this year of 5% to 13m tons. It is related to robust chicken and egg consumption. Chicken consumption during five next years is expected to reach 7 kg per capita per year compared to current consumption 4.8 kg per capita (7.8% CAGR). In addition, egg consumption is expected reach to 8 kg per capita per year, compared to current consumption of 5 kg per capita per year, or (9.9% CAGR). Management plans to expand its capacity. Management expects the company to increase capacity around 600,000 tpa to 4.6m tpa in 2012.We have factored in poultry feed expansion plan in our estimate.

Retain BUY; raised target price to Rp3,300
We raised our target price for Charoen to Rp3,300 (equivalent to 7.9x 2009 P/E and 7.2x 2010 P/E) from Rp1,550 previously. We raised our target price as 9M09 earnings surpassed our estimate, industry outlook remains firm, poultry feed and DOC to undergo capacity expansion, healthier balance sheet, strong operating cash flow, potential to distribute dividend next year and revised earning estimate in FY09-13. Our target price is based on PER and DCF method, it is still below the highest P/E level in last five years of 14.2x. Based on our revised earnings estimates, the stock is trading at 5.0x 2009 P/E and 4.5x 2010 P/E (with a 59% potential upside). Reiterate BUY.