Upgrade to Buy (from Sell) rating
This upgrade reflects buoyant outlook for Astra Agro's earnings. We rate the company as one of main beneficiaries from bullish palm oil prices given that Astra derives almost its entire earnings from palm oil, and is supported by excellent management and a healthy balance sheet. We forecast net core earnings to grow strongly by 37% p.a. in the next three years on the back of bullish palm oil prices. Overall, the stock is attractive, offering 30% potential upside from current levels.
Higher CPO price assumptions
Our bullish outlook is supported by our expectation that palm oil and other edible oil supply will surprise the market to the downside while demand should remain at the very least robust (global economic recovery and greater biofuel consumption). Overall, we have raised CPO price forecasts by 17-35% for 2010-12F.
Increasing EBIT forecasts by 16-36% for 2010-12F
This earnings revision reflects higher palm oil price assumptions, which are more than offset higher production costs.
Raising target price to Rp31,800 (from Rp15,200)
This increase is due to earnings forecast upgrades to reflect mainly higher CPO prices and lower COE. This TP is based on the ROE/COE methodology with a COE of 15.9% (from 17.4%). The key risk is the company’s inability to secure the necessary land bank to expand plantations. (See p.4 for details on valuation and risks).
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