AALI Solid Management and Bright Outlook - AAA

± Summary
We re-initiate the coverage of AALI with BUY recommendation at Rp29,295 target price. The important factors that based our BUY recommendation are positive outlook of CPO price and AALI’s well-known good corporate governance and plantation management. Furthermore, AALI’s 1Q11 performance is convincing, with sales and net profit increase by 69.3% and 140% respectively due to both higher ASP and higher sales volume. We use a blended valuation method (DCF, PE and EV/EBITDA) in arriving at our target price which provides about 23% upside potential.

± Convincing 1Q11 Financial Performance
AALI begins 2011 with startling 1Q11 performance with overall sales increase by 69.3%. Most of the increase is contributed by 27.3% higher CPO sales volume and 26.5% increase in ASP to Rp 8,278/kg from Rp6,544/kg. Other products (PKO and palm kernel) contributed to the remaining increase. As such, AALI booked higher gross profit margin and EBIT margin of 38.9% (1Q10: 34.4%) and 33.2% (1Q10: 26.7%) respectively. In turn, 1Q11 net profit increased to Rp682 bn (1Q10: Rp284 bn) or about 140% higher YoY.

± Sustainability
AALI has maintained a strong balance sheet with almost zero debt for quite some time. Compared to other publicly traded CPO companies, AALI currently owns the largest plantation area (263,281 ha) consisted of 77% mature plantation and 78% nucleus. AALI is also well known for its good corporate governance and plantation management. The only concern is that the average age of the trees is slowly shifting from the prime to old age. The average age of the trees now is about 14.2 years old. In dealing with this issue, AALI plans to spend more working capital for replanting and new planting. In 2010, AALI has conducted new planting of 3,577 ha and replanting 3,693 ha. We are sure that with its extensive experience in generating profit in this business, ample cash balance, strong cash flow from operation and unused debt capacity, AALI will have no problem in carrying out this plan.

± Valuation – Bullish
With robust demand on CPO, we expect price to remain strong for quite some time. Using a blended valuation method of DCF, PE and EV/EBITDA, we come out with the result of AALI’s fair value at Rp29,295. In our calculation, WACC is 13.6%, debt portion is 0%, target PE is 16.1x and target EV/EBITDA 9.4x. Since our TP provides 23% upside potential, we thus recommend BUY on the counter.