Indonesia -Sector outlook

Still fruitful
We raise our 2011 production forecast to 4.53m tons on account of record 2011 harvests. Indonesian planters on aggregate are on track to deliver 12% YoY production growth. We also lower our 2012 CPO price forecast to RM3,000, from RM3,400. The sector remains compelling on a LT basis, with near term support from tight veg oil S&D globally. Passage of QE3 is a further positive catalyst on the horizon. Indonesian planters are now trading on 11x 2012 PER, vs 13x historically. We like GGR SP and AALI IJ.

2011: reaping a record harvest
􀂉 Normalizing weather patterns and favourable biological tree cycle have contributed
to a record harvest in 2011.
􀂉 In 1H11, our Indo planters produced 2m tons CPO in aggregate, +31% YoY.
􀂉 Supernormal growth rates are difficult to sustain through YE11 given a strong
2H10, however we see room for further production upside to earnings forecast.
􀂉 We upgrade our FY11 production outlook to 4.53m tons (from 4.45m previously),
implying 12% YoY aggregate volume growth across the sector.

2012: RM3,000/ton CPO outlook
􀂉 We adopt a 2012CPO price outlook of RM3,000/ton (down from RM3,400).
􀂉 This corresponds to a domestic selling discount of 15% based on Indonesia’s revised export tax scheme, and implies ASP of Rp7,305/kg (-9%).
􀂉 Despite a downward revision to our CPO price outlook, we still anticipate a Every
RM200 rise to our price outlook drives an incremental 8-19% rise in 2012 earnings,
or 11% earnings growth across the sector.

Sector view remains in tact
􀂉 LT sector outlook remains compelling, with demand underpinned by population
growth, rising GDP per capita in emerging economies (greater protein consumption), and biofuel mandates.
􀂉 In the ST, we expect CPO prices to stay above RM3,000, supported by supply
constraints and tight stock to usage ratios of global vegetable oils.
􀂉 Passage of QE3 would be a catalyst for soft commodity prices and sector re-rating.
Stock picks
􀂉 Having underperformed in 2011, aggregate market cap is trading on 11x 2012
earnings, vs 13.3x 5-yr historical PER for the Indonesian plantation sector.
􀂉 We continue to prefer GGR SP (BUY, TP S$0.85) as the most liquid proxy to the
sector. We also like AALI IJ (O-PF, TP Rp25,800) where strong CF generation and a
65% DPO implies a 6% dividend yield.

Revising up production in 2011
Normalizing weather patterns and favourable biological tree cycle have contributed to volume gains in 2011. In 1H11, our Indo planters produced 2 m tons CPO in aggregate, or 31% more than in 1H10.

While supernormal growth rates are difficult to sustain through YE11 given a
strong 2H10, we see room for further production upside to earnings forecast.
We upgrade our FY11 production outlook to 4.53m tons (from 4.45m previously), implying 12% YoY aggregate volume growth across the sector.

RM3,000/ton CPO outlook
We revise our CPO price outlook to better align ourselves with in-house strategists’ views on global macro headwinds. For 2012 and 2013, we incorporate an average CPO price of RM3,000/ton, from RM3,400/ton previously.

For Indonesian producers who are subject to a progressive export tax scheme, this corresponds to a 15% export tax rate in 2012 and 16.5% export tax rate in 2013.

In composite, we lower our domestic ASP to Rp7,305/kg in 2012 (-9% from Rp8,035/kg previously), and Rp7,056/kg in 2013 (-11% from 7,901/kg before).

LT sector outlook remains compelling, with demand underpinned by population growth, rising GDP per capita in emerging economies (greater protein consumption), and biofuel mandates. In the ST, we expect CPO prices to stay above RM3,000, supported by supply constraints and tight stock to usage ratios of global vegetable oils. Passage of QE3 would be a catalyst for soft commodity prices and sector re-rating.

Valuations
Having underperformed in 2011, aggregate market cap is trading on 11x 2012 earnings, vs 13.3x 5-yr historical PER for the Indonesian plantation sector. We continue to prefer GGR SP (BUY, TP S$0.85) as the most liquid proxy to the sector. We also like AALI IJ (O-PF, TP Rp25,800) where strong CF generation and a 65% DPO implies a 6% dividend yield.

source: CLSA dated 11 September 2011