DBS London Sumatra Plantation: Better-than-expected 2Q10 ASP (Hold; Rp9,300; TP Rp8,650; LSIP IJ)

• 2Q10 earnings grew 36.1% y-o-y to Rp249.9b, ahead of our forecast but in line with consensus
• Profits were boosted by strong CPO, PK and rubber prices, as volumes were weaker-than-expected
• FY10F-11F EPS raised by 9.2%-13.9%, but FY10F new planting cut to 3,000 ha
• TP remains at Rp8,650, as the impact of higher prices is offset by lower FFB yields and new planting; maintain Hold call

Strong 2Q10 result. 2Q10 net profit of Rp249.9b (36.1% y-o-y, +48.9% q-o-q) was ahead of our expectations, but inline with consensus. Growth came from stronger-than-expected rubber, CPO and PK prices, as FFB volume was slightly below expectation. For 6M10, the group achieved CPO price of Rp6,603/kg – 93% of spot (Rp7,090), while rubber ASP of Rp28,522 is close to RSS3 spot (Rp28,810). The group’s 6M10 FFB production was 511,768 MT, which represents only 42% of our initial projection (historically c.45%).

Expansion stalled, cut new planting. As indicated in IndoAgri result, Lonsum’s new planting lagged behind at only 75 hectares. We have since factored in a lower target of 3,000 ha to the end of this year, which the group should achieve given the seedling preparations in 1H10.

FY10-11F earnings raised by 9.2%-13.9%, after imputing higher CPO, rubber, and PK prices for this year based on higher ratios to spot reference prices that were unchanged. But we also
cut FFB yield to 17.4 MT/ha from 18.3 MT/ha, resulting in 9.1-5.1% lower FY10F-11F CPO sales volume.

Maintain TP and Hold call. Our target price is unchanged at Rp8,650 (based on DCF: WACC 14.3%, Rf 9.5%, Rm10.5%, B 1.1x, TG 3%), implying 8% downside from current price – excluding 2.2% dividend yield. Hence, we maintain our Hold call. We recommend investors to switch to cheaper counters such as Sampoerna Agro.