RESEARCH ALERT-CLSA downgrades Astra Agro to 'underperform'

JAKARTA, July 28 (Reuters) - Following is a list of Indonesian stock price target changes and rating changes.

COMPANY RIC BROKER RATING (PVS) TARGET PRICE (PVS) Astra Agro CLSA U-PF (O-PF) 20,000 RPH (27,500)



BROKER STATEMENT ON ASTRA AGRO LESTARI:

We are increasingly concern over the aging trees of Astra Agro that will cap volume growth in the next five years. Production yield fell from 10 ton/ha in 6M09 to 8.59 tons in 6M10, sharper than peers. The change of focus from expansion to intensification/replanting will also limit growth potential. We have downgraded our earnings by 20 percent to reflect the lower yield, higher costs, and higher FFB purchase price. Target price is lowered from Rp27,500 to Rp20,000 and downgrade it from OPF to UPF.

Nearly half (43 percent) of Astra Agro palm oil trees will enter replanting cycle in the next five years against 25 percent of new crops coming to maturity. This will limit production growth despite higher yield of newly mature crops. We expect Astra Agro's FFB production from nucleus (internal production) to grow at a low Cagr of 1.2 percent in 2009-2014. Production growth will remain subdue in the next decade, assuming Astra Agro to plant about 10k hectares per annum of which largely will be replanting program. Production of FFB from nucleus estates will only starts to increase in 2022 due to the age profile.

Earnings in 2Q10 will be significantly higher than 1Q10 given the 17.6 percent increase in internal FFB production (nucleus), stable CPO price (+1.3 percent qoq), and higher kernel price (+18 percent qoq). The numbers implied that revenues in 2Q10 will be about Rp156bn higher. Assuming production costs remain relatively flat, earnings should grow by 40-50 percent qoq as revenues increase will be fully reflected in bottom line.

The tail winds, demand-supply and oil support, remain key drivers for CPO price. Demand remains strong as income in emerging economies continue to rise and high demand in festive seasons are upon us. We continue to look for higher CPO price in 2H10 and watching closely the soybean development in current US planting season. Inventory drawdown continues in both palm oil and soybean, reflecting tight demand supply situation despite good soybean harvest in South America.

Astra Agro is a well run company with strong balance sheet and good corporate governance. However, the lack of production growth means CPO price will be the sole earnings driver while the stock trade at premium to Indo peers. We prefer London Sumatra .



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