SGRO Buy

Sampoerna Agro



Better productivity set to continue



Higher CPO sales volume

Revenues increased by 35.9% to Rp 3.1tn in FY11 - in line with our estimate and the consensus. This was thanks to the higher sales volume of CPO (up 22.1%) and higher ASP (up 10.5%). Yet despite the strong sales volume growth, earnings only increased by 19.8%, or below our forecast and the consensus, due to surging costs. On a quarterly basis, revenues fell 22.4% to Rp 625bn in 4Q11 while net profits dipped 31.4% to Rp 73bn as CPO sales volume dropped 17.7% and ASP declined 5.9%. Given the company's relatively young profile of its nucleus estates (8 years vs. 14 years for plasma) and some 13,600 ha of newly mature areas, we envisage the CPO production to reach 394k tons this year.



Margins squeezed

FY11's margins were lower due to: 1) the higher plasma portion that accounted for about 69% of the total COGS, 2) increasing labor costs, both in terms of the number of workers and higher wages, and 3) infrastructure improvements, Rp 30bn higher than in the previous year. With the COGS surging 41.7% to Rp 2tn, the gross margin declined 2.6% to 33.8%, resulting in 2011 gross profits of Rp 1.06 tn. The opex to sales ratio also increased. It rose to 9.9% due to higher export taxes, almost four times higher than in the previous year. This year, we expect margins to be fairly resilient as the company's higher plasma proportion means the company will be less affected by lower expected CPO prices despite the higher fertilizer and labour costs.



Best performance since IPO

Last year was the best year for SGRO since IPO. The FFB yield reached its highest level of 20.6 tons/ha, or up from 18.7 tons/ha in 2010. FFB production increased by 21.8% to 1.6 mn tons, supported by the higher OER and KER of 21.3-5.4%, translating into higher CPO and PK production of 355k tons and 91k tons, respectively, an increase of 23.1-22.4% YoY. The better yield profile reflects a sounder management strategy for its estates. In terms of the FFB contribution, Sumatra accounted for the bulk (83% of total FFB), but the production growth was actually higher in Kalimantan at 35.8% yoy vs Sumatra at 14.2% yoy.



Ramping up the expansion

New plantings reached 5,207ha in 2011. Looking ahead, the company's target of 50k ha of new plantings in 2014 looks difficult to achieve in our view. Rather, we forecast new plantings to remain about the same as this year's level of around 5k ha from the current unplanted landbank of 54k ha. At the same time, SGRO also plans to build a new mill in West Kalimantan. The capex will be funded from internal cash and external loans in our view (there is room for the company to take on loans since its net gearing is only 3.4%). Meanwhile, there is good news that the company's sago brand Prima Starch passed BPOM's food safety tests, classifying it as a premium starch product. Nonetheless, sago's contribution is still small at less than 5% of total revenues.



Maintain BUY, TP unchanged

SGRO's 2011 performance was good despite the lower margins. We have incorporated the FY11 results into our forecast and lowered our WACC assumption to 14% to reflect the lower risk free interest rate (8.5%). Given the company's relatively stable margins thanks to a higher plasma portion in addition to solid long term CPO production growth estimated at 12% CAGR FY11-14F, we maintain our BUY recommendation with a TP of Rp 4,200, implying FY12-13 P/E of 13.8-11.7 x. The shares currently trade at 11.3x P/E with 22% potential upside.