Company Update:
London Sumatra (LSIP IJ, BUY, TP: IDR1,850),
Trim Down CPO Price Assumptions
London Sumatra (LSIP IJ, BUY, TP: IDR1,850),
Trim Down CPO Price Assumptions
London Sumatra
(Lonsum) is our Top Pick among Indonesian planters. Following a sector-wide CPO
price downgrade, our TP is revised to IDR1,850 (from IDR1,950, 24% upside).
Maintain BUY due to its:
1. Undemanding valuation. Its current
EV/ha of USD7,704 is almost as cheap as the cost of new planting;
2. Clean balance sheet (no debt at all);
3. Cash on balance sheet of IDR863bn.
Our
TP is based on an unchanged 16.4x P/E target on FY17F revised EPS as we
roll-forward our valuation target. Our TP also implies EV/ha of USD9,565, which
is within the range of Indonesia-listed planters.
¨
High
CPO prices not sustained for long enough. While the recent strong El Nino
episode did result in CPO prices rising by as much as 50% (to a high of
MYR2,716 in early May 2016 from a low of MYR1,806/tonne at end-Aug 2015), CPO
prices did not stay high long enough for the plantation companies to truly
benefit, given the significant negative impact on productivity. Malaysia’s FFB
production in YTD-May fell 16.8%, while Indonesia’s FFB production rose by an
estimated low single-digit percentage. In previous strong El Nino
episodes, CPO prices rose by an average of 30% and within a range of 20-110%.
¨
Trimming
CPO price assumptions. In order to achieve our original average CPO price
assumptions of MYR2,700/tonne for 2016, we had initially projected CPO prices
to stay at high levels of between MYR2,700-2,900/tonne for the whole of the 2Q,
before taking a breather in 3Q and then rising again in 4Q. However, this was
not to be and CPO prices have recently moderated to around MYR2,630/tonne. We
believe this could be due to the anticipated recovery in CPO output in 2H16, as
well as concerns of demand weakness. We believe the previous concerns
surrounding the bumper harvests of soybean are no longer as valid, given the
recent spate of flooding in Argentina, drought in Brazil and potential upcoming
drought in North America as a result of La Nina. Given the faster-than-expected
retreat of CPO prices, we now expect trading to range between MYR2,300/tonne
and MYR2,700/tonne for the rest of the year. As a result, we are trimming our
CPO price forecast to IDR7,648/kg (from IDR7,978/kg) for 2016 and IDR7,903/kg
for 2017 and 2018 (from IDR8,145/kg).
¨
Next
catalyst required – La Nina. Going forward, the next catalyst for prices
would be the onset of La Nina, the probability of which is now at 76%
for 4Q16. We have not imputed this phenomenon into our forecasts as yet. If a
strong La Nina were to occur, history tells us that CPO prices would also react
positively (ranging from +20-65%), as strong soybean prices caused by a drought
in the Western Hemisphere would pull CPO prices up. If a strong La Nina does
not occur, we expect prices to remain relatively range bound next year, as the
positive after effects of El Nino on CPO prices could be offset by
lacklustre global demand. This is a factor that bears watching.
¨
Maintain
Buy with a revised IDR1,850 TP. We reduce our earnings by 13-21% for
FY16F-18F. We also roll forward our valuation target to 2017.
Kindly click the following link for the full report: London Sumatra (Indo) : Trim Down CPO Price Assumptions
Best regards,
Hariyanto Wijaya,
CFA, CFP, CA, CPA
Vice President
Research Analyst – Heavy
Equipment, Plantation
PT. RHB Securities
Indonesia
