Sampoerna Agro, Inferior margin, CLSA

Sampoerna Agro (SGRO IJ), the fourth-largest plantation company by
planted area, would likely to see inferior margin compared to its peers,
particularly during strong CPO price environment. The fact that their
plasma production accounts for 40% of company’s plantation area would
translate to higher cost – of which about 70-75% of production cost still
come from FFB purchased. Re-initiate with U-PF on its inferior margin and
more volatile production.


Sitting on 59k ha land bank
Management plans to accelerate its new plantings, targeting to have planted
50,000 ha within 2010-14. Although Sampoerna’s new plantings have
typically been short of its target, given the weather conditions and company’s
ability to open up land, we estimate about 10k ha new plantings in 2012-
13CL, in line with management guidance. Its 59k ha land bank would enable
them to execute their plan.

Production is volatile
Due to its high dependency on one location (South Sumatra) and abundant
contribution from plasma products, we expect Sampoerna’s production to be
relatively more volatile compared to its peers. We forecast FFB and CPO
production to grow by 10% Cagr in 2011-14CL, which subject to downside
risk as its South Sumatra’s estates are exposed to erratic weather. Note that
its 1Q12 FFB production is estimated to be lower than its 4Q11 figure – about
18% of our full-year forecast.

Plasma products lead to higher cost
Aside from unpredictable production, plasma products also lead to higher cost
as 70-75% of total production costs still come from FFB purchase. Cash cost
per ton, as a consequence, will continue to be relatively higher or at best in
line with its domestic peers. We estimate its cash cost to reach Rp5,635/kg as
per 2012 vs peers average’s Rp5,040/kg.

Re-initiate with U-PF
We believe that its huge exposure on plasma and high dependency on South
Sumatra areas are the key factors behind its volatile and unpredictable
production. Coupled with higher production cost for its plasma products, we
believe its margin will likely to remain inferior compared to its peers. Reinitiate
U-PF with Rp3,700/sh TP, implying 11x 2013 P/E, in-line with its 5-yrs
average P/E.

Indonesia SGRO Final