AALI:Increasing cost per unit - Mandiri

AALI’s 1Q11 gross margin was the smallest among Indonesian big-cap plantation companies and the increase in its gross margin was also the lowest although the increase in its CPO average selling price is comparable to the others (exhibit 1). The reason is increasing cost per unit, which mainly come from huge proportion of newly mature area and higher cost per ha mature area (exhibit 3 and 8). We expect cost per unit of palm product to keep increasing in FY12F. Meanwhile, we think FFB production should grow lower than 7.0% in years ahead due to huge percentage of its plantation are in declining yield phase (52.7% in 2011). We fined tune our forecasts. We use PE target of 15.0x on EPS FY12F, which led to our target price of Rp23,000/share. We maintain Neutral recommendation on the counter. Our EPS FY12F is lower than consensus by 12.5% because we expect higher cost per unit due to newly mature area of 15,775 ha (9.6% of current nucleus mature area) and increase in cost per ha in FY12F.

Rising cost per unit of palm products. Cost per unit of palm products (CPO and kernel) is increasing in FY11 due to higher cost per ha nucleus mature area (exhibit 3) and newly mature area of 16,700ha (11.3% increase from the end of FY10). If nucleus estate is re-classed from immature to mature, its total operational costs are charged to income statements, which are capitalized to balance sheet during immature stage. The problem is newly mature plantation still produces low FFB yield. Palm products’ production cost of newly mature estates is expensive, around Rp7,400/kg (exhibit 5).

Single-digit growth in FFB production due to unfavorable plantation profile. We think the combination of AALI’s nucleus and plasma’s FFB production should grow lower than 7.0% in years ahead due to huge percentage of its plantation are in declining phase, meanwhile its newly mature areas still produce low FFB yield. Around 139,390ha (52.7% of total) of AALI’s planted area (nucleus and plasma) in 2011 are equivalent or older than 15 years old, declining FFB yield phase (exhibit 9).

New planting is slow. On the Mar11 financial statement, there are 14,297ha unplanted Rights to Cultivate (HGU), however, most of the unplanted landbank is not feasible for new planting and most of them are scattered in different locations. Due to limited unplanted landbank, management decides not to set new planting target in FY11 onwards. The realization of new planting is very slow, only 328ha in 1Q11 (significant lower than 755ha in 1Q10).

Fine tuning forecasts and maintain a Neutral recommendation. We did fine-tuning on our forecasts. We use target PE of 15.0x on FY12F EPS, resulting in target price of Rp23,000/share. We maintain Neutral recommendation.