Forward sales created high base effect in 4Q08. A check with management revealed that 4Q08’s asp for CPO was IDR6,644/kg, versus IDR4,843/kg in 1Q09, despite spot prices trending upwards since Jan 09. Apparently, the 4Q08 CPO’s asp benefitted mainly from the higher priced forward sales FR did in early FY08. Around 30% of 4Q08’s sales volume were locked in at prices significantly higher than spot.
FX losses drove financial expenses up. Financial expenses was up significantly YoY, reaching IDR111.4b in 1Q09. This significant increase is mainly due to translation losses of IDR46.4b arising from foreign exchange translation of US$ notes with the weakening of the IDR. In addition, there was incremental marked-to-market losses of IDR24.6b incurred on a cross currency swap that FR entered into in Nov 07, to swap both the principal and interest payments of its IDR bond into US$ liabilities.
Low cost of production to be maintained. Looking forward, management has guided that they expect to continue maintaining a relatively low cost of production of US$200/tonne. Maintain fair value of S$0.42. We are maintaining our CPO price assumption of RM1,900/tonne for FY09. Using a P/E of 10x forward earnings, our fair value for FR is S$0.42. With the stock trading at S$0.605, we maintain our SELL call on the stock from a valuation perspective.
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