Astra Agro Lestari, a Core Plantation Exposure

Following a sector-wide CPO price upgrade, we raise our earnings projections for AALI by 12.3% for FY14 and introduce our FY15 forecast at IDR3,337bn. Our FV is similarly raised to IDR28,350, based on 18x CY14 earnings (our target P/E for large cap plantations). AALI is our preferred Jakarta plantation stock, being a prudently managed company, the largest and the stock being the most liquid.

Upgrading sector-wide CPO prices
We are upgrading the plantation sector to OVERWEIGHT (from Neutral), as the earnings outlook brightens after two years of contraction. Our CPO price assumptions for CY14 and CY15 is raised to MYR2,700/tonne (IDR9,500) and MYR2,900/tonne (IDR10,200) respectively (from MYR2,600/tonne). We maintain our price assumption for CY13 at MYR2,400/tonne.

Four main factors driving the upgrade
These are: i) a stronger global economy – which means food demand will continue to grow, ii) Indonesia’s lacklustre production growth on the double impact of dry weather in 2012 and 2013, iii) mandatory biodiesel implementation in the world’s two biggest palm oil producing countries, and iv) production cost to remain flattish-to-lower on significantly cheaper fertilisers following the potash cartel breakup in mid-2013.

Forecasts raised
Our CPO price assumption hike has been more drastic in IDR terms due to the currency’s weakness. Nevertheless, our FY14 forecast is raised by a relatively mild 12.3%, as we trim our nucleus production growth forecast to 1% compared to 5% earlier. This is because we expect Indonesia’s overall production growth to be muted in 2014 due to earlier adverse weather.

Maintain BUY
AALI remains a BUY with FV raised to IDR28,350 (from IDR25,245). It is a core plantation stock to own on the Jakarta Exchange. We believe our premium P/E valuation of 18x accorded to AALI is well justified, given that, in a rising palm oil price environment, P/E has expanded beyond 20x.