RHB Indonesia - Results Review: London Sumatra (LSIP IJ, BUY, TP: IDR1,900), Cheaper Than Replacement Costs Unknown Senin, 31 Oktober 2016




Results Review:
London Sumatra (LSIP IJ, BUY, TP: IDR1,900)
Cheaper Than Replacement Costs
We think Lonsum should book sizable earnings recovery in FY17 on the back of sizable oil palm production recovery from the impacts of El Nino and manageable FY17 costs – partly the result of a low rise in 2017 minimum wage. We fine-tune our forecasts and reiterate our BUY call with a higher IDR1,900 TP (from IDR1,800, 26% upside) and unchanged 16.4x target P/E. Our call is on estimated sizable earnings recovery in FY17 and undemanding valuations. Its USD6,626 EV/ha is cheaper than the replacement costs of ~USD8,000-10,000.

♦      Sizable earnings recovery ahead. We think London Sumatra (Indo) (Lonsum) should book sizable earnings recovery ahead. This is on a sizable oil palm production recovery from the time-lagged impact of El Nino and manageable FY17 costs as a result of a low increase in minimum wage for 2017 (Figure 2).
♦      Manageable costs due to low increase in minimum wage. The palm oil and rubber businesses are labour-intensive. Employee costs are the biggest cost components of Lonsum’s total operating costs (46.3%). An 8.25% rise in 2017 minimum wage – the lowest in the last five years – should make the company’s FY17 costs more manageable.
♦      9M16 core earnings above ours, but in line with consensus. Lonsum booked strong 3Q16 core earnings (+27% YoY, +177% QoQ), which were driven by higher CPO prices and strong cost controls. It booked 9M16 core earnings of IDR307bn (Figure 4), which is above our but in line with consensus expectations.
9M16 core earnings: above ours, but within consensus expectation
(IDR bn)
3Q15
2Q16
3Q16
QoQ (%)
YoY (%)
Comments
Revenue
997
849
965
13.7
(3.2)
Inline with expectations (9M16 represents 69%/65% of our/consensus FY16F )
Gross profit
268
179
307
71.5
14.5
Above our expectation. Strong 3Q16 due to cost control and higher CPO price
Operating Profit
217
95
230
143.4
6.0
Above our expectation. Strong 3Q16 due to cost control and higher CPO price
Net profit
161
62
159
156.4
(0.9)
There was forex loss of IDR4bn in 3Q16 (vs forex gain of IDR33bn in 3Q15)
Core profit
140
64
179
177.0
27.4
Above ours but inline with consensus (9M16 represents 76%/60% of our/consensus FY16F)
Net margin%
16.1
7.3
16.5




Source: Company data, RHB

♦      Reiterate BUY with a higher IDR1,900 TP. We fine-tune our assumptions in order to factor in manageable costs by increasing FY16F-18F earnings by 5.4-14.5%. Our IDR1,900 TP (from IDR1,800) is based on an unchanged P/E target of 16.4x. It implies EV/ha of USD8,364, which is within the range of the EV/ha of Indonesia’s listed planters.

Kindly click the following link for the full report: London Sumatra (Indo) : Cheaper Than Replacement Costs

Best regards,
Hariyanto Wijaya, CFA, CFP, CA, CPA
Vice President
Research Analyst – Heavy Equipment, Plantation
PT. RHB Securities Indonesia
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