Astra Agro, Mounting production cost, CLSA

Astra Agro Lestari (AALI IJ) is set to see production growth slowing to
5% Cagr over 2011-14CL as plantation ages, exacerbated by lack of land
bank and rising costs. Third party FFB dependency will continue to erode
margin, while rising wage will lead to 5% higher production costs. We
thus trim our 2012/13 EPS by 12-16% respectively elaborating new
export tax as well as higher production costs. We set our TP at
Rp24,000/sh, based on 14x FY13 EPS, its 5-yrs mean P/E. Re-initiate
with U-PF.


Getting new land is difficult and pricey
AALI’s capability to grow will largely be limited by its land bank availability as
they have only 15k ha as of now. In fact, getting new land bank is now very
difficult and pricey (company’s last purchase price was about Rp4-5mn/ha for
green field, higher than industry standard of Rp2-3mn/ha). This is aside from
the fact that we are still in moratorium until April 2013. Company’s new
plantings are thus estimated to be very minimal at 3,000 ha in the next
couple of years, on top of 3,000 ha re-plantings for aging plantation
(25yrs+).

Production set to decline
Its aging plantation (14 years vs average peers of 10 years) is the key reason
behind its slower production growth of 5% Cagr over 2011-14CL. Their old
trees have been enormously increasing, from 2% of total in 2008 to 17% in
2011. Also, their minimal new plantings exacerbated the situation. We expect
FFB yield to come off to 21.5tons/ha this year, from 21.7tons/ha in 2011.
Also, total OER may potentially be lower factoring more 3rd party FFB.

Rising cost and dependency on 3rd party FFB
Rising wage will lead to 5% higher production cost, as labour represents
about 30% of company’s total cost. Also, increasing third party purchase (to
20% of total production, from 10% before 2010) may continue to limit
company’s margin. We forecast company’s gross margin to drop by 40-50bps
in 2012-13CL.

Re-initiate with U-PF
After factoring new CPO price assumption of RM3,300/t for 2012CL as well as
higher production cost, we came up with Rp24,000/sh TP, implying 13x
2013P/E, in line with its 5-years average. We believe that the company will
continue to face structural production growth problem going forward.

Download file : Indonesia AALI Final