Accelerating growth
* 2Q10 earnings grew 8% y-o-y on volume recovery, within expectations; volume will accelerate in 3Q/4Q
* Minor adjustments to PKO and rubber prices; FY10F and FY11F EPS cut by 2% and 0.7%
* Reiterate Buy call with revised TP of Rp3,250 on slower
expansion plans
2Q10 within expectations. Sampoerna Agro (SGRO) reported 2Q10 net profit of Rp88.2b, up 106% q-o-q and 8% y-o-y. Growth was driven by 47% q-o-q jump in revenue, mostly reflecting 54% higher CPO production volume during the period. For 1H10, group net profit of Rp131.0b accounts for 34% of our full year forecast. Like last year, we expect 2H10 production to recover faster than peers (i.e. 2H10 earnings represent 65% of our full year forecast). Operating margin improved slightly to 28.9% in 2Q10
from 29.4% in 2Q09, while net margin was flat at 19.9% from 20.4% in 2Q09. Group average CPO ASP was Rp6,521/kg or c.91.6% of the average spot price for the period.
Planting delays this year, but minimal impact on value. The group bought 1,733 ha of planted oil palm land in 2Q10, of which 528 hectares are matured. SGRO's new planting in 1H10 reached 2,213 ha (own estates only) - representing 22% of our initial target of 10k ha, mainly due to heavy rainfall in 1Q10. To reflect this, we now cut the group's planting target to 5k ha this year and 7k ha next year (own estates only) from 10k ha each.
Buy for 33% upside. We continue to recommend SGRO as a play on volume growth, as we expect c.4kha of the group's estates to mature next year. While stock liquidity remains below that of larger peers, we believe SGRO's value still lies in its strong balance sheet (i.e. potential acquisitions and investments) and improving margins going forward. Our revised Rp3,250 target price (imputing slower expansion plans over the next few years) still offers attractive 33% upside. SGRO remains one of
our top picks.
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