DBS Astra Agro Lestari: Rec - TP under review; Rp19,750; AALI IJ

2Q10 earnings fell below forecast and consensus

Astra Agro Lestari (AALI) 2Q10 net earnings declined by 34% y-o-y to Rp364.5b. On annualized basis, the group's earnings were c.23% below our forecast and c.37% below consensus. The drop translated from 11% y-o-y decline in 2Q10 revenues to Rp1,884.7b. Approximately 14% y-o-y lower FFB yields had caused a 8% y-o-y drop in 2Q10 CPO production to 252,202 MT; while the group's CPO ASP also declined by 7% y-o-y to Rp6,630/kg due to stronger IDR y-o-y.

AALI's gross profit dropped by 33% y-o-y to Rp665.1b, mainly as labour costs increased by 5% y-o-y, keeping pace with inflation. As a consequence, gross margin also shrank to 35% - down from 47% in 2Q09. AALI's operating expenses also increased by 23% y-o-y, mainly due to higher salaries and professional fees in G&A expenses. This resulted in a 41% drop in operating profit to Rp517.3b, representing 27% margin - down from 41% in the same period last year.

Sequentially, AALI's earnings showed a decent 34% improvement, as 1Q10 yields were abnormally low due to small contribution from smallholder estates. The group's 2Q10 revenues rose by 15% q-o-q, reflecting 15% increase in CPO production; while CPO prices were almost flat from previous quarter (1Q10: Rp6,544/kg). Likewise, gross and operating margins improved marginally q-o-q to 35.3% and 27.4%, from 34.4% and
26.7%, respectively.

We understand that the poor performance was due to a combination of lagged impact of the absence in fertilizer application on smallholder estates in 1H09; while lack of sunlight due to rainfall in 1Q10 had resulted in slightly lower number of fronds. Because these were mainly lagged impacts from earlier circumstances, we expect production volumes to improve in 2H10. Notwithstanding this, our current forecasts now look optimistic, as we did not anticipate the severity of rainfall impact on AALI's own production.

We are likely going to cut FY10F and FY11F earnings by over 10% each, which would bring down the stock's fair value by 5-6% below our current TP of Rp21,200. Our call on the stock is now under review, pending analyst briefing on Friday, 30 July.