Bahana Plantation sector update Less positive on CPO

Price trend to remain unexciting for now; Cut sector to NEUTRAL
Lower demand out of Europe is likely to depress commodity prices, and CPO price trend will remain unexciting in the short-term in our view. It is worth noting that in 1Q10, Europe accounted for 26% of Indonesia ’s total CPO exports (exhibit 7), the second highest after India . We believe this will adversely impact sentiment on Indonesian CPO counters and with possible lower average CPO price on the cards, partly also due to higher soybean supply from South America, we cut our sector rating to NEUTRAL from overweight earlier in the year. Additionally, within the CPO space, we now prefer big cap stocks like Astra Agro (AALI) and London Sumatra (LSIP) with proven management track record in dealing with volatilities. On the flip side, we advise investors to avoid the more illiquid small and mid cap stocks. In terms of valuation, we now expect the plantation sector to trade at 2010 PE of 12x, around 25% discount to the current market valuation. With our new target PE, we derive new ratings and target prices (TP) for each of our CPO stocks (exhibit 1) as follows: LSIP (TP:IDR9,400) and AALI (TP:IDR21,700) as our new top BUYs.

Impact on the plantation counters
From the total 6 plantation companies we cover (exhibit 5), Tunas Baru Lampung (TBLA) is the only one with more than 50% exposure to exports. According to TBLA, around 95% of its total exports (70% of total sales) stem from Rotterdam , suggesting its exports would be hurt by the current adverse condition in Europe . However, given that the stock has fallen 28% since its recent peak on 14 April, we rate the counter as a HOLD now with IDR320/share TP. Next in line are AALI, LSIP and Bakrie Sumatera (UNSP) which have around 11%, 20% and 16% of total sales coming from overseas respectively, although they have less than 5% exposure to Europe . In our coverage, the safest would be Sampoerna Agro (SGRO) and BW Plantation (BWPT) as all of their sales are domestic.

Indonesia’s March CPO exports down 9% m-m and 10% y-y
As the biggest CPO producer, contributing around 46% of total CPO world supply in 2009, Indonesia holds an important key role in meeting the global CPO demand. From the total 20.9m tons CPO production in 2009, as much as 15.5m tons (74%) were sold overseas, while the remaining 5.4m tons (26%) were consumed domestically, suggesting that the CPO industry in Indonesia is highly dependent on global market and demand conditions. According to Bloomberg , Indonesia ’s CPO exports in March reached 1.06m tons, down 9% m-m and 10% y-y, mainly due to lower exports to India , the EU and China on the back of increasing concerns on the China bubble and the EU’s debt crisis. Indonesia and Malaysia ’s March CPO exports to the EU only reached 298k tons and 122k tons, down 9% m-m and 37% m-m.