In spite of higher FFB purchases of about 600k tons in FY09 (+10.0% yoy), Sampoerna Agro (SGRO)’s CPO production still was down by 0.5% yoy to 264k tons. Large decline was seen in South Sumatra’s yield which was down by 10.5% yoy to 17.6tons/ha, mostly due to unfavorable weather and huge plasma proportion (56.3% as of FY09). Therefore, we think the company’s yield recovery would take longer time and we cut our CPO production assumption to 281k tons (+6.6% yoy) in FY10F, in line with the management’s guidance. We trimmed down our earnings by 5.! 5-3.3%, respectively for FY10F-11F. Downgrade to Neutral with lower TP of Rp2,900/share, implying PER10F of 13.9x.
In line FY09 earnings. Sampoerna Agro’s FY09 top-line figure came slightly above our number due to higher-than-expected FFB purchases. The company booked revenue and earnings of Rp1.8tn (-20.7% yoy) and Rp282bn (-35.9% yoy), respectively as of FY09. Bottom-line figure represents some 100% and 95% of our and consensus estimates. Operating margin was lower substantially in 4Q09 (4Q09: 20.0% vs 3Q09: 29.7%) which was mostly due to: 1) heavy fertilizer application and 2) huge FFB purchases during the period. Upkeep and cultivation cost in 4Q09 was Rp59bn, doubling from the previous quarter.
Declining CPO production in FY09. Amidst the trend of CPO production growth in other plantation companies (with 6-10% yoy growth), SGRO experienced a decline of 0.5% in CPO production. It produced 264k tons CPO in FY09, of which the FFB yield declined to 17.2tons/ha (-6.0% yoy). Noted that other plantation companies under our coverage booked 6-7% increase in their yields. We therefore think its huge plasma proportion (46.4% as of FY09) coupled with centralized location were the main factors contributing to the lower yield. South Sumatera area, where 80% of company’s area located, experienced a 10.5% decline in yield to 17.6tons/ha.
What about 2010F? We share the management’s view that CPO production is likely to grow at a moderate level of 5-10% this year. We have therefore cut our CPO production target to 281k tons (+6.6% yoy) in FY10F. On the back of lower CPO production assumptions, we also downgraded our earnings estimates by 5.5% and 3.3% in FY10F-11F, respectively.
Downgrade to Neutral. We downgraded our recommendation to Neutral as we are concerned with the company’s sustainable productivity. In line with our earnings downgrade, we also trim our TP to Rp2,900/share based on DCF-based valuation with 12.8% WACC and 6.0% TG.
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