Feb 29, 2016 14:52:50
Astra Agro Lestari ($AALI): FY15 results disappoint on weak sales and FX losses
- Significant dilution risk from proposed IDR4t rights issue
- Downgrade to SELL; buy $INDF instead

Investment Summary
1) FY15 earnings miss on weak sales and FX losses – Net profit slumped 75% YoY to IDR619b (43% of our FY15E forecast), as revenue fell 20% to IDR13.1t (81% of FY15E), mainly due to weaker selling prices and sales volume for palm products. Earnings were also hurt by IDR580b in forex losses on its USD bank loans.

2) CPO production flat on weak FFB output and yield – As expected, FY15 CPO production was flat (-0.4% YoY) as weak growth in fresh-fruit bunch output (+0.7%) was offset by declines in FFB yield and CPO extraction rate. Palm kernel production was also weak (-0.7% YoY, 95% of our FY15 forecast). CPO average selling price for FY15 was 16% lower YoY in IDR terms, while palm kernel ASP fell 14%.

3) Rights issue poses material dilution risk – AALI has proposed a rights issue to raise up to IDR4t to repay some of its ~US$500m in USD debt and reduce interest costs. We estimate potential EPS dilution of up to 20% from the rights issue.

4) Risk/reward unattractive, downgrade to SELL – The likely dilution from the proposed rights issue has further hurt the stock’s attractiveness, despite the improving CPO price outlook for this year. With production remaining weak, we think the risk/reward profile of the stock is poor at the current price. Downgrade to SELL, with a lower IDR12,400 fair value (13x FY16E PE) to factor in the dilution risk and disappointing FY15 result. Buy Indofood Sukses Makmur ($INDF) instead for cheaper, less volatile exposure to Indonesia consumer staples and potential CPO price upside.

Key Investment Risks
- Upside risks: Significant CPO price gains, better than expected production volume. Downside risks: Sharp drop in CPO prices; significant increase in the value of the rupiah; crop damage due to bad weather, disease or other natural disasters; higher labour and fertiliser costs; weaker-than-expected domestic demand for palm oil; increases in export tax or export bans on palm oil and its derivatives; government restrictions on landbank expansion.