BNPP Astra Agro Lestari: Improvement in 2Q10 numbers but 1H10 earnings were still below our and consensus.

Price IDR19750, TP IDR28500, Mkt cap $3,448m, Avg t/o $3.2m
2010E: Rec EPS 1771, P/E 11.2, P/B 3.8, ROE 38.7, Yld 2.7
2011E: Rec EPS 1745, P/E 11.3, P/B 3.3, ROE 31.0, Yld 4.5
2012E: Rec EPS 1775, P/E 11.1, P/B 2.8, ROE 27.3, Yld 4.4

· After hitting record low in 1Q10, Astra Agro has seen its production rebounded in 2Q. CPO production in 2Q was up 15.3% q-q to 252k tonnes. Nonetheless, cumulative 1H10 production of 471k tonnes (48% of BNPP forecast) were still 6% lower than last year.
· With higher production in 2Q, top line jumped 16% q-q to IDR1.89t. In 1H10, top line was flat y-y at IDR3.5t, helped by higher ASP of IDR6,590/kg, up 3% y-y. ASP was still 7.9% lower than our full year ASP forecast of IDR7,155/kg as we would expect for stronger CPO price in 2H.

· Margin expanded to 35% in 2Q (vs 34% in 1Q) in spite of flat q-q CPO price, supported by higher productivity. However, margin increase was not as high as we would anticipate. COGS was up 14% q-q in 2Q10 which we believe was mainly due to higher fertilizer spending to improve yield, an initiative that has been taken by management since earlier this year. We expect COGS will trending down in 2H, as rainy season will keep fertilizer usage to remain low. This should support margin going forward.

· Net profit up 34% q-q in 2Q10 to IDR364b. Tax rate started to trend down to 27% in 2Q from 29% in 1Q. We believe that this will further decline in 2H to an average of 25% for 2010.

· Cumulative 1H10 net profit decline 17% y-y to IDR636b, accounts for 23-28% of our and consensus full year forecast. While the results look low, we believe that earnings could potentially catch up in 2H due to: 1) higher CPO price on stronger demand; 2) expected lower fertilizer usage, 3) some pick up in productivity on seasonality, and 4) lower tax rate. However, as we would expect that 1H profit to contribute 30-35% of full year forecast, there’s a potential for earnings downgrade from the market following the results.

· Despite the potential earnings downgrade following the results, Astra Agro remains attractive at this level. Underperforming market by 36% ytd, we believe that most of bad news have been partly priced in. With stronger demand season with Hari Raya, Deepavali and Christmas in 2H, CPO price will be well supported. While we expect for better productivity in 2H, however, production in 2010 will remains flattish compared with 2009, which should keep CPO price buoyant. CPO price has risen 6% in the past 3 weeks to MYR2,530/tonne.. We maintain our positive call on Astra Agro. We like the company for its good corporate governance, strong balance sheet, high ROE and dividend yield.