In FY09, London Sumatra Indonesia (LSIP) achieved strong CPO production growth of 10.5% yoy (the highest among our plantation coverage). CPO production reached 378k tons buoyed by its nucleus plantations’ which grew by 14.9% yoy. However, due to substantial lower CPO price, total revenue and earnings dropped to Rp3.2tn (-16.8% yoy) and Rp707bn (-23.7% yoy) in FY09. We continue to believe in its operation turnaround this year, on the back of: 1) full implementatio! n of in-h ouse transport, and 2) better plasma management. Therefore, we upgraded our earnings estimates by 6.5% and 3.6% in FY10-11F, respectively. Reiterate Buy with TP of Rp10,500/share, implying PER10F of 15.4x.
FY09 earnings of Rp707bn in-line with ours but slightly above consensus estimates. As of FY09, LSIP delivered revenue of Rp3.2tn, fell by 16.8% yoy. In spite of lower CPO price, palm oil contribution still improved to 84.6% from 79.1%. This is on the back of FFB yield improvement (FY09: 19.0tons/ha, FY08: 17.8tons/ha) and additional mature area which boosted CPO production to 378k tons (+10.5% yoy), the highest among plantation companies under our coverage.
75% of capex is for South Sumatra and East Kalimantan. As potential growth in South Sumatera and East Kalimantan areas is larger, the company has targeted some Rp578bn or 75% of FY10F’s capex for the two areas. We therefore raised our CPO production assumption to 415k tons (from 400k tons previously), in line with the company’s guidance of 5-10% growth. This is to take into account: 1) infrastructure improvement mainly in South Sumatra, 2) palm oil mill expansion in North Sumatra ( from 30tons/hr to 40tons/hr), and 3) better plasma management.
Slight earnings upgrade. On the back of higher CPO production assumption, coupled with higher cost efficiency and lower interest expense, we upgraded our earnings estimates by 6.5% and 3.6% for FY10F and FY11F. We expect higher cost efficiency on the back of further implementation of internal FFB transportation system. Note that in FY09, when in-house transport was 50% completed, LSIP’s total cost was reduced by 5.2% (compared with a slight increase of 0.3% for Astra Agro). Moreover, t! he compan y has paid its US$50mn debt in Dec09, while incurred another US$30mn in mid Jan10. Still, interest expense will fall to Rp32bn in FY10F, from Rp53bn last year, according to our calculation.
Buy with TP of Rp10,500/share. We maintain our Buy call for LSIP since the operation turnaround is likely to continue and we should be looking at decent 28.9% earnings growth in FY10F. Our target price of Rp10,500/share implies a 20% upside from the current level, based on DCF-based valuation with 11.5% WACC and 6.0% TG.
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