May 09, 2016 17:37:09
Astra Agro Lestari: A Laggard Play

We think that this is now an opportune time to BUY (upgrading from Neutral). During our Hong Kong marketing rounds, we were frequently asked about the timing to accumulate Astra Agro’s stock. Our TP rises to IDR19,500 TP (from IDR14,850, 21% upside), as we think Astra Agro is a laggard play in the plantation sector. We think it should outperform when the completion of its rights issue eliminates the overhang. Its 1Q16 performance was in line with our/consensus expectations.

¨ Now is the right time to accumulate Astra Agro. During our marketing visit to Hong Kong in April, we were frequently asked about the timing to accumulate Astra Agro Lestari (Astra Agro). Its share price has been lagging (+1.6% YTD vs Jakarta Agri Index: +5.2% YTD and JCI: +5.4% YTD), which we attribute to an overhang arising from its rights issue. We think that it is now a good time to accumulate the counter, as it has disclosed details of its rights issue. For conservative investors, we suggest accumulating shares after the exercise price of its rights issue is announced, ie late May 2016.

¨ Upgrade to BUY with higher IDR19,500 TP. As we think Astra Agro is a laggard plantation sector play, we upgrade our call, with new TP based on a higher target P/E of 16.4x FY16F EPS (its 10-year mean P/E, and from 12.5x). This implies EV/ha of USD12,500, which is within the range of Indonesia-listed planters of USD8,100-26,000. We maintain our assumptions and have not factored the dilution impact of the rights issue into our forecasts. The key risk to our BUY call would be weakening CPO prices.

¨ A 15% discount rate in our rights issue analysis. To get the exercise price in Indonesian rights issues, the average discount to market share price is around 16%. We assume Astra Agro would use a 15% discount for its current rights issue (Figure 4).

¨ In this scenario, its exercise price would be IDR13,685 and its theoretical ex-rights price (TERP) would be IDR15,722, while EPS should be diluted by 7.1% for FY16F and 13.3% for FY17F.

¨ Full-year earnings should be strong. We expect the company to book strong earnings for the current quarter, due to a spike in domestic CPO prices since end-March (average 1Q16 CPO price: IDR6,593/kg vs average price in April: IDR8,630/kg). For every IDR100/kg increase in the domestic CPO price, we expect earnings to increase by 3.9%.

¨ Meanwhile, 1Q16 results were in line. Astra Agro booked core earnings of IDR234bn (+22.1% QoQ, -31.5% YoY), in line with expectations and at 13%/14% of our/consensus full-year estimates respectively. Historically, first-quarter earnings represent 13-31% of full-year earnings (Figure 2).