Softer production will not last
We met with the management recently and conclude that there is potential upside to the current low production. Barring any weather shocks, this year’s production profile is likely to replicate 2009’s pattern given the similar-age profile, meaning also a similar FFB yield. The key focus is now shifted towards optimization of its plantations, through slashing and replanting of lower yielding trees. The plan is to have around 3,000ha replanted this year, 20% higher than last year, but a mere 2% of the total nucleus mature area – meaning little impact on the current production. For now, at least, we keep our CPO production target of 1.1mn tons intact, a touch higher than the company’s guidance of 1mn tons. We also maintain our TP and forecasts.
Poor plasma production
AALI’s 1Q10 production is nothing to cheer. It was down 5% YoY. Poor plasma production is the main reason, as application of fertilizers was lacking. AALI will need 9-12 months to revitalize the plasma plantation, meaning AALI’s own plantations will be key to reaching its production target. Note that plasma accounts for 22% of AALI’s total plantations area, with a large proportion of it located in Sumatera. Partly contributing to the low CPO production is a 34% YoY decline in third-party purchases, a strategy needed to keep its profitability intact. Third-party purchases are intended to keep capacity up, yet the gross margin is low at just 10%.
Costs under control
The ex-factory cost jumped to Rp3,630/kg in 1Q10, 14% higher than 1Q09’s. Mainly this is due to lower production volume. On a nominal basis, the production cost grew by only 9% YoY. Labor still accounted for the bulk of the ex-factory cost, up 6% YoY, as minimum regional wages were hiked. Past concerns over rising fertilizer costs have proven to be groundless so far. However, with AALI switching from single fertilizer (urea) to compound fertilizers – largely for higher productivity at premium pricing, we may see fertilizer costs pick up again this year. Meanwhile, the idea of minimizing costs has led AALI to start using mechanization, although the impact will still be minimal at this stage.
Expansion intact
Guidance for new plantings remains at less than 10,000ha, with capital expenditure likely to reach over Rp1.2trn, including two mills to be built this year. Much of the expansion will be in Kalimantan , where land is aplenty. The two mills, with total capacity of 75-ton/hr, will be located in Kalimantan . The 30-ton/hr capacity mill is expected to be ready by YE10. This expansion is necessary since 55% of AALI’s mature area is of old age (>15 years), for which yields tend to be low. Funding shall not be a problem as net cash has always been AALI’s key trait, ensuring the expansion plans are implemented.
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