BNPP Bakrie Sumatera UNSP IJ, A mixed bag

INDUSTRY OUTLOOK Ï

ƒDelays on Domba Mas acquisition may limit growth.
ƒGood progress on estate acquisition.
ƒAccounting issue has impacted sentiment recently.
ƒPositive industry outlook but with higher risk. HOLD.

Delays on Domba Mas acquisition
Bakrie Sumatra (BSP) has finally signed the Sales Purchase Agreement on the Domba Mas acquisition. Management expects the whole acquisition process to be completed in the next two months. Initially BSP was targeting to close the acquisition in May and to start production in June-July. With the delay, it would be difficult for the company to achieve its IDR600b revenue target for the oleochemical business this year. There could be more delays during the start-up process given the business is new for the company; the execution risk remains high.

Not all is bad
On a brighter note, BSP has been successful in acquiring several palm oil and rubber companies. The company has acquired PT Monrad Intan and Ciptalaras (both palm-oil companies) and Julang Oca Permana (a rubber company). In total, the acquisition would add a total of 29,000 ha of area, of which 13,126 ha is planted area. Rubber price also remains high, which should support BSP’s bottom line amidst lower productivity on its palm-oil business. BSP’s rubber productivity is still showing growth due to a more favourable age profile. In line with other plantation
companies, BSP believes CPO production will show some recovery in 2Q10, which would further increase in 2H in-line with seasonality pattern.

Negative sentiment on accounting issue
Sentiment has turned negative on BSP, following the recent accounting issue on publishing false information on the amount of its deposits at a local bank. Despite CPO price recovering recently on expectations of stronger demand in 2H on festival days, BSP’s share price dropped 12.7% in the past week, making it the worst performer among the CPO stocks under our coverage.

Despite favourable sector outlook, HOLD maintain
We still maintain our P/E target of 9x to derive our TP for BSP, a 45% discount to Astra Agro Lestari (AALI IJ), which we believe is justified to reflect BSP’s higher risk. Our TP is now IDR330 (vs IDR650), after reflecting lower EPS post the rights issue. Our TP suggests limited upside from current levels. BSP trades at our 2010E P/E of 8.5x, cheap compared to the average of 13.7x for our sector universe. However, with execution risk, BSP might not look attractive even at this level. With
favourable industry outlook but with higher risk than-peers, BSP is a HOLD at best, in our view.