Danareksa Sorini Agro Asia Corporindo (SOBI IJ, Rp1,920 BUY) 1H10 Results - Below expectation

Highlights:

l 1H10 sales grew 16% YoY, and are 44% of our full year forecast. On a QoQ basis the 2Q10 revenues are up 10%.

l The gross margin was squeezed further to 17.4% in 2Q10 from 22.3% in 1Q10. The 2Q10 gross margin is much lower than our gross margin forecast of 26% for the full year.

l The Thai export cassava starch price rose 39% to US$ 550/MT in 1H10.

The 2Q10 operating expenses to sales ratio was stable at 11.1% on a quarterly comparison.

1H10 net profits were down 46% YoY and were only 28% of our FY10 forecast.

The net gearing rose to 74% at the end of 1H10 from 36% at the end of 2009.



Comments:
The 1H10 gross margin is lower than expected. This is largely due to: 1) the fact that raw material prices rose more rapidly than expected; and 2) the larger-than-expected starch portion of total revenues.

To counter the impact of rapid raw material price increases, the company has started to reduce its usage of cassava based starch raw materials and to increase its usage of cheaper corn-based starch. In our view, this will lead to better gross margins in 3Q10. However, the company is still unlikely to meet our targeted full year gross margin of 26%.

Our 2010 sales volume forecast of 355,000 MT is still attainable. However, a difference in the sales mix from our forecast may result in lower-than-expected gross margins. In conversations with the company we learn that lower margin products (starch) will account for around 30% of total sales volume in 2010, or higher than our estimate of only 26%. Due to the scarcity of cassava starch, the 1H10 starch sales volume rose to around 52,000 MT (65% growth YoY), or higher than our expectations. However, the starch sweeteners 1H10 sales volume of around 120,000 MT is lower than expected due to the lengthy trials taking place at the new maltose and maltodextrine plants.

For the time being we maintain our BUY recommendation with a target price of Rp 2,025. Note that there may be a possible change in the recommendation in the near future given that the current share price is close to our target price.