Fundamentals remain strong
We remain positive on the fundamentals of CPO price, underpinned by global supply-demand imbalance and high soybean price, the main substitute of palm oil. As such, we have revised up our CPO price assumptions by 7%-18% for FY07F-09F, which led to 8% - 31% upgrades in our earnings estimates for plantation companies under our coverage. We maintain our Overweight stance on the sector with Sampoerna Agro (SGRO) as our top pick given its attractive valuation and strong earnings growth potential.
Supply-demand imbalance to continue. We continue to believe that global demand for CPO will outpace supply, on the back of rising demand for food from emerging markets, like China and India, and the growing bio-fuel industry. According to Oil World, the stock-to-usage ratio for vegetable oil will decline to 9.7% in 2008 from 11.5% in 2006.
Benefiting from high soybean price. Weak soybean production from Latin American countries as well as switching in plantings from soybean to corn in the US have driven soybean price higher (+42% ytd). The possibility of further planting switch to corn and wheat in the US will keep soybean price high, we believe, thus sustaining the positive momentum in CPO price.
Upgrading earnings estimates. We have therefore raised our CPO price forecast (CIF basis) by 7% in FY07F to US$750/ton, by 17% in FY08F to US$840/ton and by 18% to US$800/ton in FY09F. Additionally, we have increased our long term CPO price assumption by 10% to US$640/ton. This led to 8%-31% upward revisions in FY08F and FY09F earnings for plantation companies under our universe.
Buy SGRO and UNSP. Our top pick for the sector is Sampoerna Agro (SGRO, Rp2,625, Buy, TP: Rp3,650) for its strong earnings growth potential, on the back of favorable production growth outlook, and attractive valuation. We have upgraded our recommendation for Bakrie Sumatera Plantations to Buy from Neutral with target price of Rp2,200 while downgraded our recommendation for Astra Agro Lestari to Neutral with a target price of Rp23,400. Risks in our earnings estimates and valuation are (1) change in weather condition (2) global economy slowdown and (3) fluctuation in foreign exchange.
Liliana Bambang
+6221 526 3445 ext.6421
liliana.bambang(*)mandirisek.co.id
Plaza Mandiri 28th floor
Fax: +62 21 527 5711
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