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Jan 16, 2017 11:04:02

$LSIP 4Q16 Preview; Profit recovery likely to boost shares

4Q16 looking good on higher prices and output
We estimate 4Q16 earnings of c.IDR210b (+32% QoQ, +34% YoY), the best quarter in FY16. This was likely driven by strong CPO and kernel price, and output recovery post El Nino, which should provide ST upside for the stock. This should bring FY16 net profit to c.IDR492b, in line with our forecast of IDR484b. Strong output growth post El Nino and continued recovery in rubber futures should offset our conservative CPO ASP for this year. Reiterate BUY and TP of IDR2,100 based on USD9,000 EV/ha, -0.5SD from its long-term mean in view of the muted CPO price outlook.

Boosted by strong CPO price and FFB output
We estimate 4Q16 nucleus production of c.0.38m tonnes (+17% QoQ, -1% YoY). This was despite the already high base in 3Q16 (+35% QoQ) as trees recovered post the El Nino stress. This should bring 2016 production to c.1.2m tonnes (-15% YoY). We also expect 4Q16 CPO ASP was higher QoQ and YoY, helped by low global stockpile and also higher seasonal demand. We also expect kernel price remained strong (also due to tight supply) and boost earnings in 4Q16.

Positive impact from rubber futures recovery
Rubber futures on the SICOM and TOCOM (Singapore and Tokyo Commodity Exchange) have advanced to a new high since 2013. We expect this recovery to be sustainable due to less global supply and low stockpiles in China (biggest consumer). We believe LSIP’s rubber division earnings drag may turn around and book a profit in 2017.

2017 outlook
CPO price started this year on a high note as stockpile remains low, and it should continue at least until 1Q17. But we remain conservative in our CPO price forecast (2017F: MYR2,400/t) as we believe it will correct in 2H17 as we approach the peak production season. However, we expect strong growth in output and rubber futures recovery to be the main drivers for LSIP, which can offset our conservative CPO ASP for 2017F.

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