SGRO booked 1Q10 net income of Rp43bn (+219.4%yoy, -44.9%qoq). Considering seasonality, the results were in line with ours and consensus FY10F estimates. Because cost structure will improve due to higher contribution of nucleus estate to total production, we upgraded our recommendation from NEUTRAL to BUY with a DCF-derived TP of Rp3,150/share, which implies PER10-11F of 15.0x and 12.9x, respectively. The counter is currently trading at PER10-11F of 11.3 x and 9.7x.
In-line 1Q10 results. SGRO booked 1Q10 net income of Rp43bn (+219.4%yoy, -44.9%qoq), which represented 11.3% and 10.6% of our and consensus’ FY10F estimates. The main factor was CPO production represented 14.6% of our FY10F estimates. In the last 3 years, on average 1Q CPO production represented 16.8% of FY CPO production. Considering seasonality, 1Q10 results were in line with our and consensus estimates.
Expect significant CPO sales volume in 2H10. Under normal seasonality, FFB production will increase significantly in 2H10 and it will reach its peak production in 4Q10. This will result in much higher CPO production volume. A combination of better CPO production volume in 2H10 and seasonally high demand in 2H10 will boost CPO sales volume significantly in 2H10.!
Improvement in cost structure because of higher contribution from nucleus. Cost structure improvements can be sustained because nucleus estates, with average age of 8 years, are reaching their peak production. Nucleus’ 1Q FFB production grew by 60.0%yoy and percentage nucleus production to total production increased from 47.6% in 1Q09 to 49.3% in 1Q10.
Newly acquired sago business will give a new stream of income by 2011 onwards. SGRO has signed the agreement to acquire PT National Sago Prima, a sago plantation in Riau with planted and unplanted area of 12,000 ha and 8,000 ha, respectively. Total cost to acquire the 91.8% of PT National Sago Prima amounted US$12mn (US$1,115/ha planted area). Sago processing plant will be built and completed in 2011. We have not factored in the acquisi! tion to o ur projections.
Fine-tuning forecasts and upgrading to Buy. We did a fine-tuning on our forecasts. We expect cost structure will improve due to higher contribution from nucleus, thus, we upgraded our recommendation to BUY with DCF-derived TP of Rp3,150/share (WACC of 12.8% and Terminal Growth of 6.0%), which implies PER10-11F of 15.0x and 12.9x, respectively. The counter is currently trading at PER10-11F of 11.3x and 9.7x, respectively.
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