CLSA Astra Agro (AALI IJ) earnings and TP downgrade – Getting Old by analyst Wilianto

Good CPO report from regional guru Wilianto. We have long been concerned with the older maturity profile for AALI for a while. It is now becoming more apparent that their aging will cap volume growth in the next five years. Production yield fell from 10 ton/ha in 6M09 to 8.59 tons in 6M10, sharper than peers. Wili downgrades earnings by 20% to reflect the lower yield, higher costs, and higher FFB purchase price.

For those seeking for more operating leverage, we prefer Lonsum and small cap name like Gozco (cheapest in terms of PE and EV/ha). While AALI's downgrade makes sense fundamentally, the stock remains the proxy of the sector and tends to move in line with CPO prices. In addition, AALI has lower risk profile as it offers more stability with its net cash balance sheet, high ROE and sweet divvy yield.

Key points:
Enters replanting cycle. Nearly half (43%) of Astra Agro’s (AALI IJ - Rp20,500 - U-PF) palm oil trees will enter replanting cycle in the next five years against 25% of new crops coming to maturity. This will limit production growth to 1.2% over the next five years despite higher yield of newly mature crops.

2Q10 earnings preview. Earnings in 2Q10 will be substantially higher than 1Q10 given the 17.6% qoq increase in internal FFB production (nucleus), stable CPO price (+1.3% qoq), and higher kernel price (+18% qoq).

CPO price outlook. The tail winds, demand-supply and oil support, remain key drivers for CPO price. Demand remains strong as high demand in festive seasons are upon us. We continue to look for higher CPO price in 2H10 and watching closely the soybean development in current US planting season. Inventory drawdown continues in both palm oil and soybean, reflecting tight demand supply situation despite good soybean harvest in South America.

CPO price driven upside. Astra Agro is a well run company with strong balance sheet and good corporate governance. However, the lack of production growth means CPO price will be the sole earnings driver while the stock trade at premium to Indo peers.

Target price is lowered from Rp27,500 to Rp20,000 and downgrade to UPF.