Astra Agro Lestari; Hold - downgrade from Buy-; Rp22,950; TP Rp25,150 prev Rp28,100; AALI IJ: 2Q11 earnings to decelerate - DBS

• CPO output up 16% q-o-q and 27% y-o-y, boosted by larger external FFB purchases
• But 2Q11 earnings expected to edge down 1% q-o-q to Rp640-660b due to higher raw material costs
• FY11F-12F earnings cut by 5-11% on lower expected CPO prices due to stronger IDR
• TP lowered to Rp25,150, downgrade to Hold

1H11 output in line. Astra Agro Lestari (AALI) reported strong growth in 2Q11 CPO output to 319,064 MT (+16% q-o-q, +27% y-o-y). As a result, 1H11 CPO output jumped 26% y-o-y to 594,163 MT, or 50% of our FY11F output.

Third-party FFB purchases remained high. The strong CPO output was driven by a surge in 3rd party FFB purchases in the quarter to 268,826 MT (+31% q-o-q, +83% y-o-y), translating into 1H11 volume of 474,703 MT (+111% y-o-y). As was the case in 1Q11, recovering FFB yields were likely the main driver. We expect this to continue into 2H11led by seasonal uptick and increased maturity profile.
Earnings growth to decelerate. In 2Q11, spot CPO prices received by Indonesian planters averaged Rp7,721/kg (-7% q-o-q). A combination lower q-o-q net CPO ASP and larger external FFB purchases should offset the impact of larger own FFB volumes. Hence, we expect 2Q11 bottom line to be flat at Rp640-660b, but still c.80% stronger y-o-y.

TP cut to Rp25,150. DBS Bank recently revised its forecast FX rates, calling for slightly weaker MYR in the near term, but stronger IDR and MYR over the long term. Hence, we nudged up near-term CPO prices, and nudged down long-term CPO prices. And accordingly, we cut FY11-13F earnings by 5-11% due to a stronger IDR. Given limited 10% upside potential, we downgrade AALI to HOLD from Buy.