DBS AALI Tip-toeing to sustainability TP IDR 19500

• FY10-11F cut by 19% and 13%; TP reduced to Rp19,500
• Slower expansion reflects tighter internal control on sustainability criteria
• Upgrade to Hold on steady dividends expected from large planted area. Yield recovery and maturing hectares point to better growth ahead  

Forecasts revised. We revised AALI’s FY10F and FY11F revenues by -1.6% and +1.5%, respectively, after taking into account 2Q10’s lower-than-expected volumes; offset by
better-than-expected CPO ASP. We also raised COGS by 6.5% and 9.9%, respectively, mainly reflecting higher upkeep and harvesting costs, as we bump up the group’s estimated fertilizer costs. AALI’s FY10F and FY11F gross profits have consequently been cut by 11.1% and 8.9% and translate to earnings cuts of 18.9% and 13.4%, respectively.

Slower expansion ahead. In 1H10, AALI had planted 1,337 ha (-64% y-o-y) and replanted 183 ha (-23%) of oil palm estates. The group tightened its internal control over new planting policy this year to pre-empt any potential legal
hurdles, in light of stricter control over licensing requirements for land clearing activities. For this reason we cut AALI’s FY10F and FY11F new planting targets to 3k ha and 5k ha, respectively.

Hold for dividends and near-term growth. Based on revised forecasts, our DCF valuation for the stock is now lowered to Rp19,500/share (based on WACC: 14.5%;
Rf:9.5%; Rm14.5%; B:1.0; TG:3%). We believe any further weakness should present an opportunity for investors to pick up the shares, as we believe AALI’s large planted area would still provide a steady stream of dividends (current FY10F yield is
4.3%). Moreover, 53k ha of oil palm trees maturing in FY10-12F should provide more growth momentum going forward, despite poor performance this year.