Astra Agro, a potential div yield play - CLSA

Plantation analyst Di Shui downgrades Astra Agro Lestari (AALI IJ) slightly to Outperform (from a BUY). Despite a very strong 1Q11 production number (record), our analyst lowers her recommendation on the back of valuation.

The TP is now Rp26,350, suggesting 16% upside. TP is derived from a sector P/E of 14.4x AALI is poised for 43% earning growth in FY11. A limited growth profile and modest capex needs in FY11 could mean higher future div payouts.

With parent Astra Int’l (ASII IJ) needs the cash to subscribe to UNTR’s US$700mn rights issue (ASII owns 59.5% of UNTR), the chance is good that ASII will upstream the cash from its subsidiaries. Assuming AALI to pay 100% div payout out of FY10 earnings, we are looking at 5.6% div yield. On top of that, AALI’s balance sheet is debt free with cash holdings of over US$140mn. Special dividend is not impossible.

Key points from the report:
· Off to a strong start in 2011: 1Q CPO production +26% YoY, ASP likely rose >20% from FY10.
· We forecast 43% EPS growth in FY11 on the back of higher production (+7% YoY) and ASP (+16% YoY).
· We like the dividend angle. Historically paid out 65% of earnings.
· However, limited capex needs, US$140m net cash B/S, and a rights issue for sister company UNTR IJ could drive higher payout near term.
· 65% payout on FY10 earnings implies 3.7% dividend yield, 100% payout 5.6%.
· AALI further has Rp6.2tn (US$715mn) in retained earnings, which could be allocated for special dividends of up to Rp3,926/share or a 17.3% yield (unlikely, but who knows).
· Valuation: the stock is currently trading on 12.4x '11 P/E and implied EV/planted ha of US$20,202, or compelling 18% and 33% discount to M'sian peers.
· Our TP is derived from a sector P/E of 14.4x and offers 16% upside. OUTPERFORM.