Sampoerna Agro Lestari (SGRO): Well lubricated
- Slight increase in 2016 FFB production assumption on rising mature areas causing...: For 2016's harvested production of palm fresh fruit bunches (FFB), we expect 2% y-y growth to 1.88mn tons, before rising to 1.97mn tons in 2017, mainly supported by increased mature areas. However, we expect its 2016 FFB yield to fall to 15.4 tons/ ha, down 7.2% y-y, due to continued unfavorable El Nino impact. Note that in 2015, FFB reached 1.85mn tons, up 22% y-y, on higher mature areas in Kalimantan and Sumatra. This note marks a transfer of analyst coverage.
- ... modestly higher 2016 volumes: In 2016, we expect sales volumes to reach around 364k tons, up 3% y-y, held back El Nino related production disruption, although we assume 10% higher y-y 2016 ASP of IDR7,700/kg, which should help overall sales. Last year, SGRO experienced increased 2015 CPO production to 388k tons, up 21% y-y, with higher sales volumes of 353k tons, up 8.4% y-y. On its 2015 CPO revenue of IDR2.5tn, which was down 9% y-y, the culprit was a 16% y-y drop in ASP to IDR7,030/kg.
- Mandatory biodiesel mix (B20) program to provide some tailwinds: The 2016 government program for a mandatory 20% (up 5pp from 2015) biodiesel mix for diesel fuel should provide a cushion on the demand side of the equation by improving demand domestically. On the supply side, production growth should still be limited given the after-effects from last year’s harsh weather conditions.
Outlook: Capped by limited growth in 2016 production
For this year, we now expect a lower production yield, resulting in slight 1.4% y-y production growth to 393k tons, as we expect the impact of El Nino to affect global commodity production, including palm oil. Despite increases in mature areas in Kalimantan and Sumatra, we expect El Nino to hamper 2016 production growth to only 1.4% y-y. Therefore, we only slightly raise our 2016 revenue forecast by around 3% (Exhibit 5) despite increased average IDR/USD exchange rate assumption from IDR13,455/1USD in 2015 to IDR13,800/USD in 2016. On earnings, we now expect SGRO to book 2016 net profit of IDR280bn, up 13% y-y, helped by our expectation of higher CPO prices, which should result in improved slight margin recoveries across the board.
Recommendation: Retain HOLD but raise TP to IDR1,980 on higher peer valuation
Helped by positive sentiment on higher oil and CPO prices, SGRO's share price has experienced 12% ytd market outperformance (exhibit 4), rallying more than 90% from its bottom at IDR1,010 just 6 months ago. With the sector having performed well, we raise SGRO's 12M TP to IDR1,980 (from IDR1,800), based on a 2016F PE of 13.4x (previously 2016F PE of 12.4x), still at some 50% discount to its Malaysian peers (exhibit 7), warranted due to its illiquid status. Given 1.3% downside to our new TP, SGRO is a HOLD at best. Risks to our call are lower- or higher-than-expected CPO prices and production.$SGRO