CLSA INDO: plantation - fertile year, Gozco's good upside

Plenty of questions on whether export tax (currently 20%) in January has depressed domestic CPO prices. Plantation analyst Di Shui looked at this question. The answer is not by much…

Let’s use Astra Agro Lestari (AALI IJ)'s regular auction rates as sanity check. Their last listed selling price on January 25th is US$1,173. On the same day, Malaysian CPO Board's cash CPO price was listed at US$1,244. This would be a US$70/ton spread, or <6% difference. Buyers must have been absorbing some of these tax charges.

This spread could even be narrower. Malaysian price is the price producers would get if they were to physically deliver stock to Malaysia (so plus transport/insurance).

Starting from Feb 2011, CPO export tax will be raised from 20% to 25%, following higher CPO price reference (local CPO business association is currently lobbying against it). Note that 25% is already the max tier, so that there is every incentive to delay exports. This may result in less supply and higher CPO prices going forward.

On the bigger picture, Indonesian players are poised to book higher gains than Malaysian peers on the back of volume recovery/growth. Indo plantation companies have younger age profiles and high exposure to immature estates coming into early maturity. We are likely to see more growth from the Indo plantation sector. Thus we prefer Indo exposure.

On the shorter term issue, 4Q10 earnings, AALI's results preview suggested that sales volume exceeded production volume in 4Q10. London Sumatra (LSIP IJ) and Sampoerna Agro (SGRO IJ) also reported sales volume shortfalls vs. production volumes in 9M10. Likely a mix of hoarding supply in anticipation of higher prices, and selective timing of revenue recognition for a little earnings upside at year end. We are still quite bullish on 4Q10 and 1Q to 1H11 earnings outlook.

We still like AALI and LSIP (they've been hoarding CPO AND rubber).

For investors with the appetite for less liquid stocks, GZCO (please see report attached). Significant upside for Gozco (GZCO IJ). Organic growth + reduced COGS through fertilizer hedge to drive earnings in FY11. Unplanted to planted landbank ratio of 3:1. Even its planted area is still 40% immature. Plenty of growth potential. With a FY2011 PE of only 11x earnings, our TP of Rp520 implies 28% upside.