UOB SGRO 1H10: Robust net profit, but below expectation, TP IDR 2950

Results
•Robust quarterly net profit, but below expectation. SampoernaAgro’s (SGRO) 2Q10 net profit surged 105.9% qoq to Rp88.2b andrevenue jumped 46.8% qoq to Rp443.5b on the back of higher quarterlyCPO and palm kernel (PK) sales volumes. However, results are belowexpectation as 1H10 net profit only accounted for 30% of our previous2010 earnings forecast due to higher-than-expected CPO productionassumption.

•CPO production jumped 54% qoq in 2Q10. Despite heavy rains in2Q10, SGRO’s CPO production rose 54% qoq and PK production rose49% qoq. On a yearly basis, CPO production recovered to increase22% yoy in 1H10 as a result of: a) low crop production in South Sumatraas well as flooding during 1Q09, and b) improvement on new drainagesystem in Sumatra area.

•CPO ASP remained flat, but PK ASP increased. Although CPO ASPin 2Q10 dipped 0.3% qoq, it was still better than Malaysian Palm OilBoard (MPOB) CPO prices (-1.5% qoq), while PK ASP of SGROincreased 17.7% qoq.

Stock Impact
•Better CPO production growth going forward. We still expect strongCPO production in the remaining quarters.Hence, we target CPOproduction to increase 5% yoy in 2010. For the long term, we believe CPOproduction growth will remain sturdy on the back of extensive amount ofimmature area (about 25.6% of total planted area) as a result of huge newplanting in the past years, and attractive plantation profile with average ageof 11 years old.

• New planting of 2,577ha in 1H10 to sustain growth. SGRO increasednew planting by 2,577ha in 2010, of which 86% are nucleus area andremaining plasma (owned by farmers). In the next five years, the companyexpects to increase new planting by 50,000ha, or about 10,000ha per year.

Earnings Revision/Risk
• Reduce earnings forecasts. We lower our assumptions for CPO and PKproduction volumes and CPO price. After incorporating 1H10 results, wereduce our net profit forecasts by 10.8% to Rp387.6b for 2010, and by7.1% to Rp435.3b for 2011.Valuation/Recommendation

• Maintain BUY with higher target price of Rp2,950. Despite our lowernet profit forecasts, we are still positive on SGRO as we expect sturdyproduction in the next two quarters. As we roll over our target PE into2011, we raise our target price to Rp2,950, based on 13x 2011F PE.SGRO is trading at 10.6x 2011F PE, still undemanding vs sector’s 11.7x2011F PE.