London Sumatra Plantation; 1Q11 results above expectations; Hold; Rp2,450; TP Rp2,625; LSIP IJ - DBS Vickers

At a Glance
· 1Q11 results were ahead of our and consensus expectations on strong volume growth
· 1Q11 CPO output of c.88k MT was 20% lower q-o-q but 20% higher y-o-y
· The group is in a net cash position of Rp1,591bn at end of Mar11
· Maintain Hold with TP unchanged at Rp 2,625

Comment on Results
London Sumatra (Lonsum) reported 1Q11 net profit of Rp394bn (+0.6% q-o-q, +135% y-o-y) representing 27% of our full year forecast – slightly above our expectations.1Q11 CPO sales volume declined by 13% q-o-q to c.95k MT – in line with expectations. Lonsum reported slightly higher gross margin of 53% (vs. 52% in 4Q10), thanks to lower cost of sales and stronger rubber ASP offset by 24% q-o-q lower rubber sales volume. Lonsum’s seed sales continued to improve, growing 62% q-o-q, implying significant uptick in planting activities in Indonesia during the quarter. The group’s interest income jumped 76% q-o-q to Rp14bn reflecting the group’s growing cash position. As at end of Mar11, Lonsum was debt free and had Rp1,591bn of cash. Trailing cash conversion cycle at end of 1Q11 was estimated at 29 days, from 39 days booked at end of 4Q10 due to shorter inventory days and extended payable days.

Compared to the same period last year, CPO sales volume rose by 38%. Combined with 27% and 75% y-o-y increase in CPO and rubber ASP, respectively, the group’s bottom line rose by 135% y-o-y. We maintain our forecasts for now, pending developments in 2Q11, which we believe may see deceleration in smallholder FFB output growth. We understand the group had expanded by only 14 ha in 1Q11, although we still expect new planting to accelerate in 2H11 to reach our full year target of 5k ha.

Recommendation
We maintain our Hold rating for the company with a TP of Rp2,625, as we believe that there is limited upside potential from the current level. Our TP implies 11x FY11F PE.