Kencana Agri: Fast forward

2QFY09 earnings slightly weaker than anticipated. Kencana posted a 399.2% q-o-q jump in 2Q09 net profit to US$2.5m, mainly due to recovery in FFB (Fresh Fruit Bunch) yields. Annualized, this was nevertheless slightly lower than our projection as the recovery in yields was not as sharp as we had anticipated. The group expanded by 1,227 ha in 1H09 (1,886 ha YTD) faster than expected and is targeting to plant of 5,000 ha p.a. from 10F onwards.

New TP yields 24% upside. We reduced our expectations of the group's 09F and 10F FFB yield by 11.4% and 7.9%, respectively, as we believe our previous targets were aggressive relative to what they had achieved in 1H09. This resulted in 6.6% and 12.4% cuts in 09F and 10F earnings. However, faster-than-expected expansion this year and sustained target thereafter would result in a higher net profit from15F onwards. Using DCF (WACC 13.8%, terminal growth rate 3%), this raised our TP to S$0.40.

Going international. The group's recent JV with Louis Dreyfus Commodities (LDC) to build a deep-water port in Balikpapan (capable of accommodating large-size vessels) is expected to extend Kencana＊s markets and reduce costs. The group has bought (through the issuance of shares) US$2.0m worth of land for the JV. It is expected to be fully operational by end of 2010F.

Rating upgraded to Buy. We are encouraged by the group＊s expansion target, now that it is able to secure funding for its capex plans. We believe the group should sustain double-digit growth over at least the next five years.

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