By: CIPTADANA(KI)ASTRA AGRO LESTARI – TP 18,100/sh (BUY)
》9M16 core earnings missed as output lagged
Astra Agro delivered a lower-than-expected performance with revenue seen declining to Rp9.59 tn (-7.3% YoY) in 9M16 while core earnings (exclude forex gain) dropped to Rp 853.1 bn (-22.6% YoY). The decline in revenue were mostly due to lower sales volume from both CPO (-11.7% YoY) and its refined products (-23.7% YoY), despite a relatively stronger ASP for both products which grew by +5% and +11.7% YoY to Rp 7,590 and Rp 9,006/kg, respectively. Gross profit seen lower accordingly to Rp 2.1 tn (-7.6% YoY) with relatively stable gross margin at 22% while operating profit stood strongly at Rp1.36 tn (-1.8% YoY), thanks to its much lower selling expenses.
》Cut our FY16F earnings projection but expect further improvement in 4Q16
Given the lackluster performance up to 9M16, we decided to trim down our revenue and bottom line by 6% and 12%, respectively, for this year as we expect lower CPO output to 1.49 mn ton (-13.3% YoY), assuming FFB yield of 18.5 ton/ha. On the flip side, we cheer that 3Q16 has shown some modest improvement on QoQ basis in both FFB and CPO output and we continue to expect further uptick in production throughout the 4Q16 as El Nino impact has practically eased coupled with peak crop season in October. On top of that, we also expect ASP to remain favorable for the rest of this year, considering that China will start to build up its edible oil inventory prior to Chinese New Year celebration on late January next year.
》Much healthier balance sheet
Upon receiving close to Rp4 tn proceeds from rights issue, AALI’s total debt has declined by half to Rp3.57 tn in 3Q16, which reflects a drop in debt-to-equity ratio to 0.21x from 0.63x in the beginning of the year. With such dramatic change in capital structure, we reckon that AALI would be less affected by fluctuation in exchange rates going forward as the company now has lower dollar-dominated loans. Lower debt would also translate into lower financial expenses which enable them to accelerate deleveraging program organically.
》Counting on output to boost earnings
Going into next year, we continue to count on stronger production to boost revenue by 28% YoY to Rp16.0 tn in which earnings can further improve to Rp 1.98 tn (+34.5% YoY). We expect CPO production to increase to 400k tons (+22.5% YoY) next year supported by higher 3rd party fruit contribution. We also do not see any sign of severe La nina to hamper the overall palm oil output next year.
》Increase TP to 18,100 a share
We reiterate our Buy recommendation with DCF-based TP of 18,100 a share, reflecting a sweet upside of 16% as we believe the current share price has not fully recovered from previous jitters of rights issue and output disruptions. We also expect AALI to boost its downstream business by increasing its current low refinery utilization rate of 50% to 70% to enjoy higher margins as compared to upstream CPO.