Despite posting weak 1Q10 result, we retain 18x PE multiples on AALI valuation. We believe the company deserves to be traded at this multiples given its large mature area. After slightly reduce our margin and EPS assumption for FY10F, we derived AALI’s TP at Rp22900/share, which offers limited upside potential. Our TP implies USD14,034 EV/planted in FY10F. The catalysts for the company are only higher CPO price and growth in mature estates. As such, AALI needs to step up its replanting effort to exhibit stronger yield and ffb production, in our view. HOLD.
Low margin in 1Q10
Same as any first quarter of previous year, AALI registered weak production figures in 1Q10. However, margin was way below our expectation (only 35.6% gross margin) due to higher labor cost, in which the company has just raised the workforce salary. Management elaborated that increase in wages only occurs once in the first quarter every year. Hence, we expect gross margin should climb back to 40-45% in the next quarter, given CPO price at around USD800 level. We raise our ASP assumption to Rp6600/kg (from Rp6400) but reduce our yield target to 20-21 tons/ha (from 21-22 tons/ha) for FY10F.
Yield to remain flat
Up to March 2010, AALI has 207,889 ha of mature area, an additional of more than 15,000 ha since the end of FY09. However, despite substantial growth, we see AALI’s old and very young trees still account for more than 60% of total mature plantations. As such, we believe it is rather difficult for the company to fetch yield above 21 tons/ha.
More CPO mills
Currently, AALI has 21 CPO mills and planning to add two more plants, one in Central Kalimantan and another in East Kalimantan. These two mills will commence operation in late 2011.
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