Lonsum, Superior profitability, CLSA

We like London Sumatra (LSIP IJ) on its superior cost structure and
production growth profile. We expect to see company’s oil yield
improving to 4.5-4.8tons/ha in 2012-13, from 4.3tons/ha in 2011
supported by its continued infrastructure improvement coupled with
maturing age profile. Its Ebit margin also stands out at 41-42% range,
the highest amongst CPO companies under our coverage. We set our TP
at Rp3,600/sh, implying 13x 2013 P/E, 10% discount to Astra Agro. BUY.


Plenty of land bank available
We believe company’s 40k ha of remaining unplanted land bank should
ensure sustained long-term production growth. We expect the company to
plant around 5,000 ha annually, allocating Rp200-250bn for 2012 on new
plantings alone. Sitting on Rp2tn cash last year (the highest cash position
within our plantation coverage) should provide the company with greater
flexibility to venture both organic and inorganic growth.

Strong production growth profile
We forecast a strong 9% FFB production Cagr in 2011-14CL, with the oil yield
improving from 4.3tons/ha in 2011 to 5.1tons/ha in 2014. The potential shift
of its young plantation to a more productive stage will lead to a greater
production growth profile. We estimate about 18k ha will shift into prime age
over the next three years, which should yield 15% of its total CPO production.
We expect prime age contribution improving to 66% in 2014, from 58% in
2011.

Sustaining low production cost
As the company has continued to work on its infrastructure development
particularly in South Sumatra area, we expect its production costs to decline
further to Rp4,540 in FY13, from Rp4,725/kg in FY11 (about 10% lower than
Astra Agro). Also, its internal transportation system may lead to higher FFB
yield of 18-19tons/ha in 2012-13 (2011: 17.4tons/ha). As weather woes
eased off, we also assume company’s extraction rate to be stable at 23%.

Re-initiate with BUY
We continue to like LSIP given its turnaround story, strong production growth
profile, and undemanding valuation. We arrived at Rp3,600/sh target price
based on 13x FY13CL EPS, 10% discount to Astra Agro.

Download file : Indonesia LSIP Final