Astra Agro Lestari - Production Growth Decelerating Towards Normalcy - Citigroup

Production growth decelerating, but it was expected — For the first five months of the year, we saw AALI delivering strong production performance (+29% YoY). However, based on AALI’s latest June 2011 operating statistics, as shown in Figures 1, 4 and 8, we have started to see the pace of growth slowing, providing a possible indication of growth normalizing. This also suggests that going forward, although we still expect positive growth in 2H (given seasonality where 2H is typically a stronger production period than 1H), we also expect CPO production growth to continue tapering to our growth expectations of 5% YoY (1,168k tons) by year-end, especially if we take into account: a) the low base in 1Q10, b) production recovery in August 2010 and c) October 2010 peak production.

CPO demand should remain firm — Despite our expectations of better production performance in 2H11 vs. 1H11 (on the back of seasonality), we are optimistic that the upcoming festivities (Ramadan/Idul Fitri/Diwali, etc) should help keep CPO demand robust. AALI’s historical performances indicate that in most cases, AALI managed to sell almost 100% of whatever it produced (Fig. 9). We don’t expect the trend to deviate any time soon given a) 80-90% of CPO globally is still for food purposes and b) CPO is still the cheapest edible oil.

CPO price trend — CPO prices slipped by 3% over the last 2.5 weeks to US$1,004/t. The decline in CPO prices is within expectations as we had expected CPO prices to weaken in 2H11 versus 1H11. We maintain our average CPO price assumption of US$1,050/t for 2011, which is still higher than 2010’s average CPO price of US$856/t.

Maintain Buy (TP: Rp29,320) — Higher CPO prices in 2011 (vs. 2010) supported by ongoing improved volume performance (as reflected in its latest production stats), mean we remain optimistic on the outlook for AALI in 2011. Maintain Buy.