Takeaways from Jakarta — Astra Agro Lestari presented at Citi's Indonesia
Investor Conference on Aug.4-5.Below are key takeaways.
FFB volume decline — Unfavorable weather during 1H10 and previous
fertilizer usage cuts caused FFB volume to decline primarily among plasma
palm oil producers.AALI had more than 40%plasma exposure in Sumatra.
Meanwhile,in their efforts to conserve cash,some of the plasma palm oil
producers had cut their fertilizer usage during the financial crisis in 2008.
This led to a 14%YoY yield decline in FFBs harvested from AALI ’s plasma (a
total of 404,000 tons)while the yield of nucleus palm oil producers were
only down 6.5%YoY (1.4m tons).
Replanting — Palm oil trees in Sumatra are older in age ((past the optimum
yield age of 7-18 years).Thus,replanting efforts are more focused in this
area.
Higher OER compensated for lower FFB yield — As of June 2010,oil
extraction rate (OER)increased from 22.68%to 23.40%.Hence,1H10 CPO
production was only down 5.7%YoY to 471,000 tons despite an 8.3%YoY
decline in FFB harvest to 1.8 million tons due to falling FFB yields from 10
tons/ha to 8.59 tons/ha.
2H10 production outlook more favorable — Going into 2H10,,AALI expects
production to improve on the back of:a)improved weather conditions,b)
less negative effects of the previous fertilizer usage cuts,c)seasonality
factor (the second half of the year is typically a stronger production period
than the first half),and d)ongoing intensification initiatives,i.e.improved
farming techniques,better fertilizer application,mechanization and other
efforts to boost productivity.
New planting slowdown;exploring PNG — As at 6M10,AALI only planted
1,337 ha and it is targeting 3k ha by year end.Going forward,AALI expects
its new plantings to slow down given more stringent criteria in its land
acquisition/purchase policy post the Norwegian moratorium.Land surveys
that previously only took AALI 3-4 days to complete can now take 3-4 weeks.
This was the primary reason for the increase in professional fees and
training and education costs from Rp17bn and Rp5.2bn to Rp32.3bn and
Rp8.3bn in 1H10 respectively.AALI is also exploring opportunities and
conducting feasibility studies in Papua New Guinea.
Capex spending — 6M10 capex spending rose 11.6%YoY to Rp643.8bn.Of
the Rp643.8bn,62.5%(Rp402.5bn)was spent on plantations,while the
remaining 28%and 9.4%were spent on non-plantations,and mills &ports
respectively.AALI expects FY10 capex to be at similar levels with FY09
capex of Rp1.3trn.
Mechanization of fertilizer application — Through mechanization,fertilizer
application is expected to be more efficient and effective.Under manual
fertilizer,a worker can only cover an area of 15 ha/day.With the new
mechanized fertilizer application method,the coverage can be increased ten
folds.Fertilization of 50,000 ha (primarily over flatter areas),out of AALI ’s
total planted area of 265k ha,has already been mechanized.AALI is working
on mechanizing another 25,000 ha of sloping/rolling land area within the
next couple of months.
Valuation
Our target price for AALI of Rp27,720 is based on an average of 2010E and
2011E EPS (in 55:45 ratio)of Rp1,686 and PE multiple of 16.4x,the average
of 1)the stock's historical P/E mean of 13.5x and 2)1sd above the average,
which equates to 19.4x and factors in its improved growth prospects.As a
cross-check,we employ DCF based on cash flows out to 2019E and a terminal
value of 9.8x EV/EBITDA,a derivation of a constant growth multiple.We use a
discount rate of 12.5%,which imputes an Rf of 9%(to better reflect current
market conditions)and a market risk premium of 6%.Our DCF yields a net
present value of Rp27,030/share.
Risks
We rate AALI Low Risk as per our quantitative risk-rating system,which tracks
260-day historical share price volatility.Risks that could prevent the stock from
reaching our target price include:a)CPO price volatility;b)Fluctuating crude-
oil prices;c)Poor weather conditions that might hamper CPO production;and
d)Fluctuating USD-IDR rates.
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