Asiatic Development 3QFY08 : Darkest before dawn
• Slightly above expectations. Asiatic’s 9M08 annualised net profits came in 6.7% above house expectations and 7.4% above street estimates. During the quarter, revenue and earnings saw y-o-y growth but naturally saw a q-o-q contraction given the steep drop in CPO prices during the quarter coupled with the group’s tendency not to sell forward. FFB production saw growth of 4% for the 9M08 and the Group believes
that they will be able to achieve up to 23mt/ha by year end from their current hectarage of roughly 66,000ha. Also, average selling price of CPO for the quarter was RM2,865 and YTD RM3,240 hence the full year should
average at RM2,800 (RM1,600 over 4Q08) which is below our RM3,000 full year estimate. Hence, we adjusted FY08 net profit down by 6.8%.
• On costs. The Group indicated that average production cost for the year ex sales taxes and kernel credits is roughly RM1,000 which is within our estimates. Recall that Asiatic had locked in their fertiliser costs for all of FY08 hence the achievement of a lower than industry cost of production. Looking forward, with basket fertilizer costs averaging at RM1,450 compared to expects that costs of production could average at RM1,200 in FY09 and is holding back on lock in currently as costs of certain fertiliser components (like ammonia, phosphate and urea) have come off 20-30%. We see thinner margins inevitable for all plantation players at this point.
• Still planting aggressively. Asiatic continues to power ahead with their planting scheme and expects some 20,000ha to be accomplished in Indonesia next year hence growing hectarage by a good 30%. A small
amount of debt is expected to be introduced onto the balance sheet going forward given the terms of the Indonesian JV’s for a combination of debt/equity funding but with Asiatic’s strong cash position, we do not see much concerns here. To note, the Group has a planned capex of RM350m for FY09 or more if they decide to further fast track planting in recently confirmed Kapuas, Kalimantan. Capex for FY10 and FY11 is also
expected to be similar given planting in Kalimantan. To note, planting costs per hectare stands at RM14,000. As for replanting, Asiatic will be privy to the Government’s replanting incentives and would save some
RM1m on replanting 1,000ha going forward.
• Upgrade to BUY, TP RM4.10. Despite dampened market
sentiment on Asiatic, we believe that CPO prices will be able to recover over the coming 12 months and hence see a good deal of upside to the stock. We maintain our RM2,300 FY09/10 average price assumption for now and any potential adjustments downwards by us will be capped at RM2,000. We also change our valuation methodology from PE to DCF given the group’s pure planter business model.