Danareksa Astra Agro Lestari (AALI IJ, Rp25,000 BUY) Soft production but not to last

Maintain BUY; TP of Rp28,000
Following the release of the 2009 results, we slightly adjust our FY10-11E EPS estimates to account for the higher oil extraction rate (OER) – although the adjustments are largely offset by higher production costs. Meanwhile, our CPO production estimate remains at 1.1mn tons – despite a decline in the January-February production. We like AALI and maintain our positive stance on the company given: 1) its strong balance sheet, 2) the large size of its plantations, 3) its economies of scale and 4) the savvy management. Our optimism is supported by the positive outlook for CPO prices. The adjustments to our EPS estimates trim our TP to Rp28,000. This TP is based on 1.5x std deviation of the sector multiple of 16.5x FY2010 P/E and implies US$20,933 EV/ha. Our target multiple takes into account the higher momentum of the CPO price - set at US$850/ton CIF this year or 25% higher than 2009’s level.

Softer Jan-Feb production
FFB production reached 541,000 tons in the first two months of the year, down 5% YoY, partly because February is a shorter month. Lower rainfall was another factor, but more importantly were tree stress, we believe. Most of the decline was seen in the Sumatera and Sulawesi estates with the plasma plantations down more than the nucleus ones. However, the OER picked up to 24% in January-February. This explains our upward revision to the OER, restricting the decline in CPO production to a mere 5% YoY in 2mth10. AALI’s guidance is for this year’s CPO production to be flat at about 1.1mn tons (note that production in the first two months of the year is around 12% of our FY10 production estimates). We also think that around 12,700 ha of 2006’s plantings will mature this year, resulting in 17,600 tons of additional CPO.

Maximizing production at its existing estates
Maximizing production at its existing estates is a top priority for the company this year. Hence, more re-plantings are expected. No guidance has been provided by AALI to indicate how many hectares will be re-planted, but the idea is to slash low-yielding and old age trees to ensure long-term production growth remains intact. Any areas intended for re-plantings are said to be less than 20% of the total area in the specific region. That being the case, new plantings are likely to be less than 10,000ha this year – a downward revision from the previous guidance of 12-13,000ha. Although we estimate the new plantings to cost around Rp800bn, the overall capex may reach as high as Rp1.4trn. Two new factories are in the pipeline: the first being a 45ton/hr mill in Central Kalimantan and the second a 30ton/hr mill in East Kalimantan . Cash is sufficient as AALI has a FCF yield of 5%, even to cover AALI’s overall capex.

Reining in costs
While the production cost per ton is expected to increase 12% this year – mostly due to higher labor costs – stable, if not lower, fertilizer costs will help rein in the costs. In 2009, AALI’s ex-factory cost was flat at around Rp2,657/kg. Fertilizer costs were 32% of the total costs, or up from 30% in 2008 – partly due to higher fertilizer prices of Rp8,000-9,000/kg in 1H09. And this year, fertilizer costs should be stable at around Rp5,000-6,000/kg, accounting for around 30% of AALI’s ex-factory costs, in our estimates. All in all, we expect AALI’s EBITDA margin to stay firm at 43%. It will be supported by higher CPO prices as 80% of the company’s production costs are pretty much fixed.