Sturdy CPO production in the next few years. We expect FFB production of IFAR to increase at a 3-year CAGR of 9% in 2008-11 as about 40% of its total plantation area is in prime age which can produce the highest yields and another 29% going into mature age. The company increased new planted area for palm oil by 26,346 ha in 2008. Coupled with a slightly improvement in OER and the completion of two new CPO mills in Kalimantan by 3Q09, we expect CPO production to increase at a 3-year CAGR of 10%.
Expect stronger revenue and sustainable margins in 2Q09. We expect IFAR to post stronger revenue in 2Q09 on the back of sturdy CPO prices and higher production volume. Moreover, we believe margins in the plantation division are sustainable thanks to lower fertiliser purchase prices.
The RSPO certification will help it penetrate Europe energy market. Last weekend, London Sumatra Indonesia (LSIP/BUY/Rp4,100), a subsidiary of IFAR, was awarded The Roundtable on Sustainable Palm Oil (RSPO) certification for its four mills and factories located in North Sumatra estates which covers about 50% of LSIP’s annual production. This certification will help the company to push its palm oil products to the European energy players. LSIP may also command a premium selling price of US$10-20/tonne for the CPO under RSPO certification.
Lower-than-expected production and higher demand in 3Q09 may cap price correction. CPO futures declined 6.7% wow to RM2,315/tonne on 19 June due to lower exports of palm oil from Malaysia, higher-than-expected palm oil inventory in Malaysia, and concerns of softer demand from India following aggressive buying from Indian importers. We believe the price correction may be capped by lower-than-expected production and higher demand at end-3Q09 following the festive season in major CPO consumer countries, such as Malaysia, Indonesia, China and India.
We expect net profit to decline 15% yoy to Rp1,056b in 2009 due to lower CPO prices, and increase 25% to Rp1,321b in 2010 on the back of higher CPO prices and production volume. Our CPO price assumptions for 2009 and 2010 are RM2,200/tonne and RM2,600/tonne respectively.
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