Astra Agro Lestari (Neutral) - Relatively unattractive - MACQUARIE

Event
§ We maintain our Neutral recommendation on Astra Agro Lestari (AALI) and reduce our price target to Rp22,650 from Rp25,740 earlier.

Impact
§ We now have a less optimistic view on plantation stocks: We are not bearish on the plantations sector, but are less bullish than before, as prices have risen strongly since last August and we believe that CPO supply is set to recover this year, which could weaken prices beyond 2Q11. We are therefore recommending investors to take profits on select plantation stocks.
§ More sensitive to CPO price changes: AALI is a pure upstream focused CPO play, which makes its earnings quite sensitive to changes in CPO prices. Every 1% change in our CPO price assumptions for 2011 changes our AALI earnings by 1.8% (vs.0.5-1.5% for its peers). In a scenario of weakening CPO prices, AALI's earnings would likely decline faster than its peers.
§ Valuations relatively unattractive: Despite our forecast of an 11% decline in CPO prices for 2012, we expect AALI's earnings to grow slightly due to strong production growth. However, we expect its closest peer, London Sumatra (LSIP IJ, CP: Rp11,800, OP, TP: Rp14,650) to grow its earnings even faster - by 5% in 2012 (see Fig 1). Also, AALI's valuation is unattractive relative to Lonsum, as it trades at a 20% premium to Lonsum on a PER basis.

Earnings and target price revision
§ We have raised our earnings estimates by 5%, 27% and 14% for 2010E, 2011E and 2012E respectively on higher CPO price assumptions. However, we have reduced our price target to Rp22,650 from Rp25,740 previously, based on a revised target multiple of 13x (19x previously), a 20% discount to our target PER for its Malaysian peers. We have reduced our target multiple for all plantation stocks including AALI, as we believe the market would be unwilling to pay a significant premium for earnings based on near-peak CPO prices.

Price catalyst
§ 12-month price target: Rp22,650 based on a PER methodology.
§ Catalyst: Higher CPO prices over the next 12 months

Action and recommendation
§ We maintain our Neutral recommendation on AALI. Given our less optimistic view on plantation stocks in general, AALI's high sensitivity to CPO prices and 20% valuation premium to London Sumatra, AALI is not our preferred play within the Indonesian plantation market