AALI: Growth came from the low-margin generating 3rd parties FFB - Mandiri Sekuritas

AALI’s Jan’11 CPO production grew by 17.3%yoy. The figure seemed to suggest a good achievement, but when we go through to the details, the key driver of growth came from the low-margin generating 3rd parties FFB, which grew by 143.2%yoy. Meanwhile, FFB from Nucleus grew by 11.1%yoy, mainly came from normalized FFB production pattern and newly matured estates of 17,692ha (11.9% of total matured nucleus in FY10) which should result in higher cost per Nucleus’ unit palm products in FY11F by 8.1%yoy. We have been concerned on AALI’s organic growth from new planting because of its limited unplanted Rights to Cultivate. Meanwhile, 63.1% of its planted area (nucleus and plasma) is above 15 years old, declining FFB yield phase. Therefore, we maintain our NEUTRAL recommendation with TP of Rp24,500/share, which implies PER11F of 15.8x.

Volume growth is dominated by low-margin generating 3rd parties’ FFB. Jan’11 CPO production grew by 17.3% yoy. Out of 13,592 ton increase in CPO production in Jan’11, around 9,136 ton came from 3rd parties FFB. Although FFB from 3rd parties is good to boost CPO production volume, it only generates operating margin of around 10% only, which is significantly lower than the processed FFB from the Nucleus.

Higher cost per Nucleus’ unit palm products. Around 17,692ha (11.9% of total matured nucleus in FY10F) is reclassified from immature (all occurred cost is capitalized to balance sheet) to mature (all occurred cost is expensed on income statement). This newly matured and normalized FFB production pattern is the main driver of the Nucleus’ FFB growth of 11.1% yoy in Jan’11 (Remember that in 1H10, there was unusual low FFB production pattern). We estimates Nucleus’ cost per palm product in FY11F to increase by 8.1% yoy because Nucleus’ cost per ha is relatively the same between newly matured estates and estates in t heir pea k production phase, meanwhile FFB yield of newly matured estate only around 9 ton FFB/ha, which is significantly lower than in the peak production phase.

Concern on limited unplanted land bank for organic growth. AALI just planted around 3,500ha in FY10, a small percentage compared with total planted area of 206,549ha. The reason is AALI has limited unplanted land bank. We estimate AALI has limited unplanted Rights to Cultivate of around 15,000 ha, which provides a small space for new planting because not all unplanted area is feasible for planting. AALI itself plans to do new planting of 3,000 ha in FY11F.

Maintain NEUTRAL recommendation on the counter. We maintaining our Neutral recommendation on AALI with TP of Rp24,500/share (WACC of 10.9% and Terminal Growth of 6.0%), which implies PER11F of 15.8x