DBS Sampoerna Agro: Buy; Rp2,700; TP Rp3,250; SGRO IJ

To Build Sago Processing Factory

Bisnis Indonesia today reported that SGRO will start the construction of its Tebing Tinggi Island (Riau) sago processing factory in October 2010. The factory is expected to be commissioned next year; and will have production capacity of 100 MT per day. The construction cost was said to range between US$7m and US$8m. The group's sago plantation covers 21,620ha, of which 12,000ha have been planted. The plants are ready for harvesting by the end of 2011.
SGRO is currently focusing on rehabilitating the sago estates and is not expanding the planted area. The cost for this rehabilitation is c.US$5m, which is funded by bank loan.

SGRO has also increased their stake in PT National Sago Prima from 75.5% to 91.85% as part of their diversification plan from crude palm oil business.
We have not yet imputed contribution from this venture, as it will not come of stream in the near term and is relatively insignificant relative to the group's consolidated earnings. For now, we are maintaining our forecasts, rating and TP for the stock.

DBS Sampoerna Agro: Buy; Rp2,450; TP Rp3,250; SGRO IJ

Accelerating growth
* 2Q10 earnings grew 8% y-o-y on volume recovery, within expectations; volume will accelerate in 3Q/4Q
* Minor adjustments to PKO and rubber prices; FY10F and FY11F EPS cut by 2% and 0.7%
* Reiterate Buy call with revised TP of Rp3,250 on slower

expansion plans
2Q10 within expectations. Sampoerna Agro (SGRO) reported 2Q10 net profit of Rp88.2b, up 106% q-o-q and 8% y-o-y. Growth was driven by 47% q-o-q jump in revenue, mostly reflecting 54% higher CPO production volume during the period. For 1H10, group net profit of Rp131.0b accounts for 34% of our full year forecast. Like last year, we expect 2H10 production to recover faster than peers (i.e. 2H10 earnings represent 65% of our full year forecast). Operating margin improved slightly to 28.9% in 2Q10
from 29.4% in 2Q09, while net margin was flat at 19.9% from 20.4% in 2Q09. Group average CPO ASP was Rp6,521/kg or c.91.6% of the average spot price for the period.

Planting delays this year, but minimal impact on value. The group bought 1,733 ha of planted oil palm land in 2Q10, of which 528 hectares are matured. SGRO's new planting in 1H10 reached 2,213 ha (own estates only) - representing 22% of our initial target of 10k ha, mainly due to heavy rainfall in 1Q10. To reflect this, we now cut the group's planting target to 5k ha this year and 7k ha next year (own estates only) from 10k ha each.

Buy for 33% upside. We continue to recommend SGRO as a play on volume growth, as we expect c.4kha of the group's estates to mature next year. While stock liquidity remains below that of larger peers, we believe SGRO's value still lies in its strong balance sheet (i.e. potential acquisitions and investments) and improving margins going forward. Our revised Rp3,250 target price (imputing slower expansion plans over the next few years) still offers attractive 33% upside. SGRO remains one of
our top picks.

DBS Sampoerna Agro: Buy; Rp2,475; TP Rp3,275; SGRO IJ

2Q10 earnings in line with expectations

Sampoerna Agro reported net profit of Rp88.2bn, representing an increase of 105.9% q-o-q and 8.0% y-o-y in line with expectations. The increase was mainly driven by 46.8% q-o-q jump in revenues, reflecting FFB yield recovery over the same period. Operating margin for 2Q10 improved slightly to 28.9% from 29.4% in 2Q09; while net margin was flat at 19.9% from 20.4% in 2Q09.

For 1H10, the group's net profit of Rp131.0bn represented 34% of our full year forecast. As in the last year, we expect 2H10 production to recover slightly faster than peers. The group was in net cash position of Rp78.0bn at the end of March.

We are maintaining our forecasts and buy call and TP of Rp3,275, pending analyst briefing today; although we are likely to reduce the group's targeted new planting this year due to heavy rains year-to-date. This may not significantly reduce our valuation.

DBS Sampoerna Agro: Buy; Rp2,650; TP Rp3,300; SGRO IJ

4Q09 results in line with expectations
At a Glance
• 4Q09 net profit of Rp77.6b (-28.8% q-o-q), inline with expectations
• Weak net profit mainly due to flat revenue growth and higher COGS
• No change in forecasts. BUY call reiterated.
Comment on Results

Sampoerna Agro (SGRO) 4Q09 net profit came in line within our expectations at Rp77.6b, (-28.8% q-o-q; +94.2% y-o-y). The q-o-q lower net profit translated down from 22.3% q-o-q drop in gross profit, on account of flat revenue growth (+0.6% q-o-q) and higher COGS (+13.0% q-o-q). 4Q09 operating profit of Rp125.9b (-32.2% q-o-q) was, nevertheless, slightly ahead of expectations, as revenues were 3% higher than forecast – offsetting a 33.3% q-o-q jump in 4Q09 operating expenses (due to higher-than-expected salaries).

For full year, net profit dropped by 35.9% y-o-y to Rp281.8b, translated down from a 20.7% y-o-y drop in revenues, given lower CPO prices. The group has yet to reveal full year production volumes, most likely to exceed our expectations as drop in 4Q09 volumes may not be as severe as anticipated.
The group remains in net cash position with ending balance of Rp387.3b, from Rp304.7b in 3Q09. Its cash conversion cycle also improved to 11 days (from 25 days in 3Q09), mostly accounting for lower inventory days (i.e. to 41 days from 64 days in 3Q09) as a result of post Eid festival sales deliveries.

Recommendation
We are maintaining our forecasts, Buy call, and Rp3,300 TP (based on DCF; WACC: 15.4%; Rf. 9.5%; B:1.23, TG: 3%). SGRO remains our top-pick for Indonesian plantation stocks, underpinned by its strong growth potential going forward. We expect 1Q10 production to be seasonally lower than 4Q09, before rebounding in 2Q onwards.