Feb 28, 2016 10:31:37
Astra Agro Lestari ($AALI)
Value-Destructive Rights Issue

We were surprised with AALI’s weak 4Q15 performance. Its plan to conduct a pre-emptive rights issue of IDR4trn would be value destructive as AALI intends to use the proceeds to repay its bank loan, which has an effective interest rate of just around 2%. We fine-tune our forecasts and downgrade to NEUTRAL with a IDR14,850 TP based on 12.5x target P/E. Using the current market cap and rights issue information, its theoretical ex-rights price is around IDR14,850. We expect an overhang on the stock until the rights issue has been settled.

* Delayed selling of CPO stock to lock in better prices in 1Q16. AALI’s inventory in 4Q15 increased by IDR426bn because it delayed selling some CPO in 4Q15 to lock in better prices in 1Q16. This strategy is likely to have worked quite well as it has since cleared the excess inventory in 1Q16 during the CPO price recovery.

* Value-destructive rights issue. All the proceeds of the rights issue would be used to settle its existing debt. AALI’s bank loan escalated from IDR2.7trn in FY13 to IDR7.7trn in FY15, which was mostly used to fund its refineries and new planting. As of 31 Dec 2015, effective interest expense on AALI’s debt was around 2% (all its debt are in USD). We believe the rights issue would be value destructive, given that the cost of equity is more expensive than the cost of debt. Using current market cap and the information on the rights issue, its theoretical ex-rights price would be around IDR14,850. We expect there to be an overhang until the rights issue has been completed.

* Trimming forecasts.We fine tune our earnings forecasts by 18.1% and - 26.2% for 2016-2017 to incorporate weak 4Q15 earnings. We have yet to factor in the impact of the rights issue in our forecasts until AALI’s EGM on 11 Apr, where management would seek approval for it.

* Downgrade to NEUTRAL with TP of IDR14,850. Our downgrade is based on two factors: i) weak 4Q15 performance, and ii) value destructive rights issue. Our TP of IDR14,850 is based on P/E target of 12.5x FY16F EPS, which implies EV/ha of USD10,475 - within the range of Indonesia listed planters of USD7,000-26,000.