Company update:
PP London Sumatra Indonesia (LSIP IJ, BUY, TP: IDR2,050)
Monetising The CPO Price Upcycle And Weakening IDR
PP London Sumatra Indonesia (LSIP IJ, BUY, TP: IDR2,050)
Monetising The CPO Price Upcycle And Weakening IDR
We
think Lonsum is a good counter to monetise the CPO price upcycle and weakening
IDR. Its share price movements tend to follow that of CPO prices. We expect
such prices to remain robust up to 1Q17. In addition, we think the
strengthening USD should weaken further the IDR to IDR13,700 in FY17, which
should increase Lonsum’s earnings during this period. We fine-tune our
forecasts to factor in weaker FY17-18 IDR assumptions and reiterate our BUY
call on this counter with a higher IDR2,050 TP (from IDR1,900, 17% upside).
♦ A weakening IDR
should improve PP London Sumatra Indonesia’s (Lonsum) earnings. We think the USD
ought to continue to strengthen, especially after a US Federal Reserve (Fed)
rate hike. This strengthening USD trend is projected to result in the
USD/IDR rate averaging IDR13,700 in FY17 (2016 YTD: IDR13,290). We think Lonsum
should benefit from this weakening IDR trend, as its CPO selling price is
linked to the movement of the USD. Based on our sensitivity analysis on its
earnings to the USD/IDR rate change, every 1% the IDR weakens, Lonsum’s
earnings improve by 3.4%.
♦ Monetising the
upcycle in CPO prices. The movement of Lonsum’s share price tend to follow those
of CPO prices. We expect such prices to remain relatively robust up to 1Q17.
This is on the back of lower-than-normal palm oil inventory levels as a result
of the time-lagged impact of El Nino. However, after 1Q17, we expect CPO
prices to moderate. This would be on the back of a strong recovery in CPO
output post El Nino.
♦ Palm oil production
levels to recover in 2017. After Lonsum’s palm oil production is set to
decrease by 17.1% YoY in FY16 from the the impact of El Nino, we
estimate its production in 2017 to grow by 21.9% YoY to 481,000 tonnes. This
would be mainly due to a recovery from the impact of El Nino.
♦ Low increase in
minimum wage should make costs more manageable. Palm oil is a
labour-intensive business, where employee expenses make up ~40% of total
operating cash costs. We consider the Manpower Ministry’s announcement of an
8.25% increase in the minimum wage for 2017 to be low. This is compared with
the double-digit percentage increases over the last five years. Meanwhile,
fertiliser prices are relatively stable. Therefore, we expect production costs
for plantation companies to remain manageable in 2017.
♦ Reiterate BUY with a
higher IDR2,050 TP (from IDR1,900). We fine-tune our assumptions in order to
factor in a weaker IDR by increasing FY17-18 earnings by 7.5%. Our IDR2,050 TP
is based on an unchanged P/E target of 16.4x. Our TP implies EV/ha of
USD10,518, which is within the range of the EV/ha of the local listed planters.
♦
Lonsum
is our Top Pick among the domestic plantation counters. This is due to its
undemanding valuation (its EV/ha of USD8,978 is as cheap as the replacement
cost of USD10,000), clean balance sheet (with a net cash position of IDR696bn)
and good stock liquidity. The key risk to our call is weakening CPO prices from
the current strengthening price trend.
Kindly click the following link for the full report: Monetising The CPO Price Upcycle And Weakening IDR
Best regards,
Hariyanto Wijaya,
CFA, CFP, CA, CPA
Vice President
Research Analyst – Heavy
Equipment, Plantation
PT. RHB Securities
Indonesia
