Indonesia Plantation, Supply tightness, CLSA

We believe palm oil supply will be tight in the near-term as weather
volatility prevails amid lack of new plantings. Particularly for Indo,
production growth of palm oil will likely decelerate to 6% this year from
2011’s 8% as trees enter biological slowdown while domestic demand is
seen rising. As a consequence, we uplift our CPO price assumption to
RM3,300/t this year. Amongst Indo plantation companies, we like LSIP
given its superior profitability and strong production growth potential.


Slower production growth ahead
 New plantings peaked in 2008 before falling into halves or 200-300 ha pa due to
global financial crisis, in addition to implementation of 2-yrs moratorium on new
concession
 Post a strong 12-17% y/y FFB production growth last year, production growth is
likely to slow to 5-10% in 2012 as trees enter 6-9mth biological yield slowdown
 With Malaysia’s flat CPO production, global stocks/usage ratio is likely to stay at a
low 10.6%

Raising our CPO price to RM3,300/t this year
 We have revised up our FY12 CPO forecast to an average RM3,300/t from
previously RM3,000/t on supply constraints
 This translates to Indo ASP of Rp7,960/kg (+4% y/y), after adjusting for tax,
insurance, and freight
 Our sensitivity analysis suggests that a 1% change in CPO price will impact EPS by
1.4-2%, ceteris paribus

Risks: rising costs
 We have seen labour and fertilizer cost increase ~30% last year, which has led to
4-12% Ebit margin compression despite higher CPO prices
 We estimate labour cost to increase to increase by ~15% in Sumatera area and
c.20-25% in Kalimantan area, which might lead to 30-50bps margin decline
 Taking a higher operating cost, we expect earnings to grow by a mere 5-10% for
2012-13CL

Our top pick: London Sumatra (LSIP IJ)
 Valuation multiple on Indo plantation is currently at 20% discount compared to
Malaysia, at par with its 3-yrs average
 Within the sector, we like LSIP on its superior profitability as well as strong
production growth and GZCO as our top small-cap pick

Download file : Indonesia Plantations Sector Final