AALI’s CPO production volume in August showed improvement but unfortunately the improvement mainly came from purchased FFB, which has lower operating margin than FFB from Nucleus. Meanwhile, AALI will lose 14,000ha of its unplanted Rights to Cultivate (42.7% of current unplanted Rights to Cultivate of 32,770ha) from divestment of SPS. We believe that AALI’s organic growth (i.e. new planting) will decrease significantly in the next two years due to limited remaining Rights to Cultivate. We maintain our SELL recommendation with T! P of Rp18 ,000/share, which implies PER10-11F of 15.0x and 14.9x, respectively. The counter is currently trading at PER10-11F of 18.1 x and 18.0x.
CPO production has improved but mainly came from purchased FFB. For the first time in 2010, CPO production in August exceeded last year figure (Aug’10 = 106,541ton vs Aug’09 = 99,317 ton), but unfortunately the increase mainly came from higher purchases of FFB from 3rd parties (Aug’10 = 64,798ton vs Aug’09 = 28,812 ton)which has operating margin of only around 10.0%, fall ! smaller t han Nucleus estates which generate operating margin of around 40.0%.
Nucleus’ FFB production per matured area in Aug’10 still below Aug’09 figure. Nucleus’ FFB production volume improved in August, increasing 5.2% from last year figure (Aug’10 =336,503ton vs Aug’09=319,876ton). Please remember that the main key driver of production cost is Nucleus’ matured area. Increase in Nucleus’ matured area will boost production costs. FFB production per nucleus’ matured area in Aug’10 was still below last year figure (Aug’10= 2.2ton FFB/Nucleus’ matured area Vs Aug’09= 2.3ton FFB/Nucleus’ matured area).
Divestment of SPS will reduce AALI’s unplanted Rights to Cultivate by 42.7%
AALI has signed a Conditional Sale and Purchase of Shares Agreement to sell SPS, one of AALI’s subsidiaries. Currently, SPS has a Rights to Cultivate of 17,000ha, with around 3,000ha planted area and around 14,000ha unplanted area (42.7% of current unplanted Rights to Cultivate of 32,770ha). By divesting SPS, AALI will lose its unplanted Rights to Cultivate by 42.7%. Considering the Government of Indonesia will impose a moratorium on issuance! of new R ights to Cultivate in 2011 and 2012, we believe that AALI’s organic growth (i.e. new planting) will decrease significantly in the next two years due to limited remaining Rights to Cultivate.
Maintain SELL recommendation on the counter. We maintain our SELL recommendation with 12-monthDCF-derived TP of Rp18,000/share (WACC of 11.8% and Terminal Growth of 6.0%). We have SELL recommendation due to its old plantation (55.0% of total plantation is in declining FFB yield phase in FY11F) and costly CPO production from nucleus’ newly matured plantation (for detail analysis, please see our report “Dragged down by plantations’ profile” on August 13, 2010).
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