RHB Indonesia - Regional Plantation - Time To Lock In Profits (Regional Plantation, Astra Agro Lestari, PP London Sumatra Indonesia, Summarecon Unknown Jumat, 31 Maret 2017




Good morning,

Regional Plantation – Time To Lock In Profits

We believe it is time to lock in some profits for the sector, as we expect CPO prices to be on a downtrend going forward, given the abundant supply coming into the market in 2H17, as well as the fourth bumper crop of soybeans coming out of South America from April onwards. This is on top of the still lacklustre demand from China and India. The wildcards are Indonesian biodiesel mandates and weather risks. We downgrade our overall sector rating to Underweight (from Neutral). Regionally, our top SELL is London Sumatra while our top BUY is Sime Darby.

¨ CPO prices on a downward trend given the abundant supply of CPO coming into the market in 2H17, as well as the fourth bumper crop of South American soybean coming out from April. Demand continues to be sluggish, and is not expected to recover to previous growth levels of 5-6% p.a., despite the current still relatively low stock levels in Malaysia and Indonesia.
¨ We believe the market is forward looking and investors should therefore aim to lock in profits. CPO prices have already started to moderate from its highs of MYR3,300/tonne in Jan to MYR2,900/tonne currently. The price gap between CPO spot and futures prices has widened to MYR200/tonne (from MYR80/tonne a few weeks ago), while the price gap between CPO and soybean oil prices has widened back to around USD60/tonne currently (from USD13/tonne a month ago). While the price premium between soybean oil and CPO is still far from its historical average of USD100-150/tonne, we believe there is still room for the premium to widen.
¨ Demand – not likely to recover in 2017. While the story about the supply recovery is well known, there have also been expectations that demand may make a comeback in 2017. However, we believe this is not going to be the case, with the global economy struggling to grow and domestic consumption remaining at sluggish levels. Although inventories of CPO for importing countries are at low levels currently (2.2m in India versus 2.8-3m tonnes normally; and 5.1m in China versus 6-7m tonnes normally) we do not expect restocking to occur in a significant manner in the coming months.
¨ In 2017, the 17 oils and fats composite will be in a surplus position of c.6m tonnes, while the 8 vegetable oil complex will be in a surplus of c.7m tonnes. Although stock levels may still not be normalised at the end of the crop year of Oct 16/Sep 17, we expect the normalisation to occur by calendar year-end 2017.
¨ Our earnings forecasts have been raised by an average of 4.3% for FY17 and lowered by 0-4% for FY18-19, after raising our CPO price assumption to MYR2,600/tonne (from MYR2,500) for FY17 and lowering our FY18 assumption to MYR2,400/tonne (from MYR2,500).
¨ Downgrade to UNDERWEIGHT. We have lowered our valuation targets as we believe valuations will moderate as CPO prices fall. For the big-cap stocks, we now apply a P/E of 18x 2017 (from 20x), while for the mid-cap stocks, we now apply a P/E target of 16x (from 17x). We note that historically, P/E valuations shrink by 1 to 2 standard deviations during a CPO price downtrend. We downgrade our recommendations on six stocks and upgrade our recommendation on one stock. (Hoe Lee Leng, Hariyanto Wijaya, CFA, CPA)

Link to report: Regional Plantation: Time To Lock In Profits
Link to Daily report: Indonesia Morning Cuppa - 310317



Company Updates:

Astra Agro Lestari (AALI IJ, Sell, TP: IDR12,800), Downtrend In CPO Prices Push Share Prices Down
We believe it is time to lock in some profits for the sector, as we expect CPO prices to be on a downtrend from hereon. This is given the abundant supply coming into the market in 2H17, as well as the fourth bumper crop of soybean coming out of South America from April onwards. They are on top of the still lacklustre demand from China and India. The wildcards are Indonesian biodiesel mandates and weather risks. Downgrade to SELL (from Buy) with a lower TP of IDR12,800 (from IDR19,700, 16% downside) on the back of lower earnings and lower P/E target multiple.
¨ CPO prices on downward trend. We believe CPO prices would be on a downtrend from hereon. This is given the abundant supply of CPO coming into the market in 2H17, as well as the fourth bumper crop of soybean coming out of South America from April onwards. Demand continues to be sluggish, and is not expected to recover to previous levels of growth of 5-6% pa, despite the current still relatively low stock levels in Malaysia and Indonesia.
¨ Market is forward looking. We believe the market is forward looking and investors should therefore look to lock in profits. CPO prices have already started to moderate from highs of MYR3,300/tonne in January to MYR2,900/tonne currently. The price gap between CPO spot and futures prices widened to MYR200/tonne (from MYR80/tonne a few weeks ago), while the price gap between CPO and soybean oil prices widened back to around USD60/tonne currently (from USD13/tonne a month ago). While the price premium between soybean oil and CPO is still far from historical averages of USD100-150/tonne, we believe there is still room for the premium to wide.
¨ Demand – not likely to recover in 2017. While the story about the supply recovery is well known, there has also been expectations that demand would make a comeback in 2017. However, we believe this is not to be, with the global economy still struggling to grow and domestic consumption still at sluggish levels. Therefore, despite the fact that inventories of CPO at the importing countries are at low levels currently (2.2m in India vs 2.8-3m tonnes normally; and 5.1m in China vs 6-7m tonnes normally), we do not expect restocking to occur in a significant manner in the coming months.
¨ Earnings revisions. Given the height CPO prices had achieved in the first two months of 2017, we raise our CPO price forecast for 2017 to MYR2,600/tonne (from MYR2,500/tonne). However, we lower our price assumption for FY18 to MYR2,400 (from MYR2,500) to account for our expectation that prices would continue to be weak. We have also adjusted our forecasts for higher PK/PKO prices and latest in-house exchange rate assumptions. All in, our forecasts were raised by 4.8% for FY17, but lowered by 2-4% for FY18-19.
¨ Downgrade recommendation to SELL with a lower IDR12,800 TP. We reduce our TP to IDR12,800 on the back of lower earnings and a lower P/E target multiple of 14x (from 16.5x). Historically, during the downtrend in CPO price, Astra Agro Lestari’s (Astra Agro) P/E multiple tends to shrink to 12x level (Figure 3). Our TP implies an EV/ha of USD9,200. (Hariyanto Wijaya, CFA, CPA)



PP London Sumatra Indonesia (LSIP IJ, Sell, TP: IDR1,200), Downtrend In CPO Prices Push Share Prices Down
We believe it is time to lock in some profits for the sector, as we expect CPO prices to be on a downtrend from hereon. This is given the abundant supply coming into the market in 2H17, as well as the fourth bumper crop of soybean coming out of South America from April onwards. They are on top of the still lacklustre demand from China and India. The wildcards are Indonesian biodiesel mandates and weather risks. Downgrade to SELL (from Buy) with a lower TP of IDR1,200 (from IDR1,900, 20% downside) on the back of lower earnings and lower P/E target multiple.
*CPO prices on downward trend. We believe CPO prices would be on a downtrend from hereon. This is given the abundant supply of CPO coming into the market in 2H17, as well as the fourth bumper crop of soybean coming out of South America from April onwards. Demand continues to be sluggish, and is not expected to recover to previous levels of growth of 5-6% pa, despite the current still relatively low stock levels in Malaysia and Indonesia.
*Market is forward looking. We believe the market is forward looking and investors should therefore look to lock in profits. CPO prices have already started to moderate from highs of MYR3,300/tonne in January to MYR2,900/tonne currently. The price gap between CPO spot and futures prices widened to MYR200/tonne (from MYR80/tonne a few weeks ago), while the price gap between CPO and soybean oil prices widened back to around USD60/tonne currently (from USD13/tonne a month ago). While the price premium between soybean oil and CPO is still far from historical averages of USD100-150/tonne, we believe there is still room for the premium to wide.
*Demand – not likely to recover in 2017. While the story about the supply recovery is well known, there has also been expectations that demand would make a comeback in 2017. However, we believe this is not to be, with the global economy still struggling to grow and domestic consumption still at sluggish levels. Therefore, despite the fact that inventories of CPO at the importing countries are at low levels currently (2.2m in India vs 2.8-3m tonnes normally; and 5.1m in China vs 6-7m tonnes normally), we do not expect restocking to occur in a significant manner in the coming months.
*Earnings revisions. Given the height CPO prices had achieved in the first two months of 2017, we raise our CPO price forecast for 2017 to MYR2,600/tonne (from MYR2,500/tonne). However, we lower our price assumption for FY18 to MYR2,400 (from MYR2,500) to account for our expectation that prices would continue to be weak. We have also adjusted our forecasts for higher PK/PKO prices and latest in-house exchange rate assumptions. All in, our forecasts were raised by 4.8% for FY17, but lowered by 2-4% for FY18-19.
*Downgrade recommendation to SELL with a lower IDR1,200 TP. We reduce our TP to IDR1,200 on the back of lower earnings and a lower PE target multiple of 12x (from 16.4x). Historically, during a downtrend in CPO price, London Sumatra's (Lonsum) P/E multiple tends to shrink to 10x level (Figure 3). Our TP implies EV/ha of USD5,700/ha. (Hariyanto Wijaya, CFA, CPA)
Results Review:

Summarecon Agung (SMRA IJ, Neutral, TP: IDR1,420), Weak Performance May Persist
We keep our NEUTRAL recommendation on Summarecon, with an unchanged SOP-derived TP of IDR1,420 (6% upside). We are still cautious over its high gearing level and high interest costs. Although its sales mix has shifted to focus more on landed properties in 2016, we may continue to see pressure on GPM due to its previous sales mix, which was more skewed towards condominiums. The company closed FY16 with revenue and net income declining 4% and 63.6% YoY respectively.
¨ Still under pressure. We maintain our assumptions for Summarecon Agung (Summarecon) and still expect it to see some earnings pressure in FY17F-18F. This is due to our flat revenue growth forecast for the next two years, coupled with increasing costs and higher interest costs stemming from its high gearing levels. While we have not factored in commercial land lot sales, on which it has said that it would be able to generate a presales value of IDR175-350bn, we may impute this assumption post-1Q17 results. 2M17 marketing sales were at IDR230bn, or 5% of its IDR4,500bn FY17F target. This is an improvement, compared to the 1% booked in 2M16.
¨ Gearing level may improve. As of Dec 2016, Summarecon’s total gearing ratio reached 91%, while interest costs grew 31% YoY on the back of a 20% YoY increase in its debt. Nonetheless, we believe the current lower Bank Indonesia (BI) rate may provide some support, whereby we expect its interest coverage ratio to improve slightly to 2.41x in FY17F-18F from 2.2x currently. We also expect its net gearing to improve to 81% in FY18.
¨ Better-than-expected FY16 earnings. Summarecon’s FY16 topline was in line, at 99%/107% of our/street estimates respectively. Its earnings, however, were an upside surprise and were at 201%/128% of our/street estimates respectively. This was due to the company’s lower-than-expected operating expenses, taxes and minority interests.
This report marks the transfer of coverage on this stock to Yualdo Tirtakencana Yudoprawiro. (Yualdo Tirtakencana)
Media Highlights:

Corporate

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Currently, there are three types of vehicles that will be covered in the program LCEV: hybrid cars, natural gas vehicles (CNG), and electric cars. Taxation for the three types of cars would be adjusted based on carbon emission and fuel consumption.

The removal of PPnBM incentive on LCGC may increase its selling price since car makers likely to increase this higher tax to consumers. Auto makers which are ready for LCEV technology will be the key beneficiaries. However, the LCEV timeline is still uncertain since this is still being discussed, especially on LCEV scope and incentive models. (Andrey Wijaya)

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Best regards,

Helmy Kristanto
Director
Head of Indonesia Research
PT. RHB Securities Indonesia
DID: (6221) 2970 7056
Fax: (6221) 2783 0777

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