Sampoerna Agro (SGRO IJ), initiating coverage, UPF, TP Rp2875 - CLSA Indo

Our plantation analyst Di Shui initiates her coverage on Sampoerna Agro (SGRO IJ) with an Underperform call. TP is Rp2,875, suggesting 3% downside.

Our TP of Rp2,875 is derived from an adjusted (ex-large cap) Indonesian sector 2011 PE benchmark of 12.5x.

SGRO is a young, mid-sized plantation company with 91k ha planted oil palm plantations in South Sumatra and Kalimantan.

The company has an attractive growth profile. Maturing estates will drive FFB growth of 7% CAGR through 2015, with 95% of production gains coming from nucleus. Given 110k ha of unplanted landbank, SGRO can also expand nucleus plantings by 76% over the next five years.

However…
1. Near term dependence on plasma contribution (56% in 9M10 vs 25% for Indo peers) drives higher production risk.
2. February 2010's sago acquisition represents a distraction for management.
3. Earnings will still benefit from higher CPO prices. But a weak 1H production profile means disproportionate exposure to softer price fundamentals in 2H11. We maintain our US$1,000/ton FY11 CPO price assumption.
4. High volatility in FFB production enhances SGRO’s production risk profile relative to peers.
5. Reduced seed production and sales volume = indicative of weakening demand for the brand? Seed business made up 5% of SGRO’s gross profit in 2010 vs. 12% in 2008.