Company update:
London Sumatra (LSIP IJ, BUY, TP: IDR1,800),
On The Road To Recovery
London Sumatra (LSIP IJ, BUY, TP: IDR1,800),
On The Road To Recovery
While London Sumatra (Lonsum) booked weak
1H16 earnings due to dismal CPO production caused by El Nino, we expect CPO
production to recover from 2H16 onwards – which should lead to lower unit
production costs and improved profitability. We fine-tune our assumptions and
reiterate our BUY call with a revised TP of IDR1,800 (from IDR1,850, 23%
upside). Its earnings should recover in FY17, due to a recovery in production
post El Nino. Valuations remain undemanding with a EV/ha of USD7,574,
which is as cheap as the cost of new planting.
¨
CPO
production to recover from 2H16. Taking a lesson from its El Nino
experience in 2009, Lonsum’s decrease in CPO production in 2010 was followed by
strong production growth in 2011 (Figure 2). CPO production has recovered from
the El Nino impact since Jun 2016, which should be sustained in the
coming months. Its CPO production recovery should enable production costs per
unit of palm products to drop and enable it to generate higher profit.
¨
New
planting to sustain future production growth. Unlike Astra Agro Lestari (AALI IJ,
NEUTRAL, TP: IDR16,000) which has stopped new planting since 2016, Lonsum
continues to do new planting in order to sustain its future production growth.
Lonsum still has 10,000 ha of unplanted landbank, which is enough to keep it
busy for the next 10 years. It targets to do new planting of 1,000 ha in FY16.
In 1H16, Lonsum did new planting of around 150 ha.
¨
Weak
1H16 results was due to a sizeable drop in production. Its weak 1H16
earnings (-63.5% YoY) were mainly from a 29% YoY fall in CPO production caused
by the time-lagged impact of El Nino. This is much weaker than our FY16F
CPO production growth of -3.7% YoY. As as result, we cut our FY16F production
growth to -17.2% YoY, which is the main reason why we also cut our earnings
estimate for the same period by 36.6%.
¨
Indonesian
palm oil Industry updates:
i. Indonesian palm oil inventories declined. According to the
Indonesian Palm Oil Association (GAPKI), inventories fell further to 1.8 m
tonnes in Jun 2016 (vs 4.5 m tonnes at end-2015).
ii. B20 biodiesel mandate for public service
obligation is on track. According to Indonesian Estate Crop Fund, biodiesel
domestic consumption has reached 1.4m kilolitres (kl) in 6M16 (vs 593,000 kl in
FY15) (Figure 4), which mostly comes from subsidised biodiesel B20.
¨
Buy with
a revised TP of IDR1,800. We fine-tune our assumptions to factor in
weaker-than-expected production in 1H16 and cut FY16F-18F earnings by
36.6-0.1%. Our TP is based on an unchanged 16.4x target P/E on FY17F’s revised
EPS. Our TP also implies an EV/ha of USD9,306, which is within the range of
Indonesia-listed planters. Key risks to our call includes weaker-than-expected
demand for CPO and a strengthening rupiah.
Best regards,
Hariyanto Wijaya,
CFA, CFP, CA, CPA
Vice President
Research Analyst – Heavy
Equipment, Plantation
PT. RHB Securities
Indonesia
