Asiatic,The party is over

27 August 2008
2QFY08 RESULTS
UNDERPERFORM Maintained
RM5.45
Target: RM5.80
Mkt.Cap: RM4,122m/US$1,216m

Broadly in line. On an annualised basis, 1H08 core net profit was 14% short of our forecast and 7% below consensus due to seasonally lower production. However, we view these results as being broadly in line as we expect higher production in 2H08 and an average CPO price of RM3,350 per tonne for the full year. Also in line was the 1H08 dividend of 5 sen, higher than last year’s 3.25 sen.

Higher output and price lift 2Q earnings. 2Q08 net profit jumped 53% yoy, thanks to higher CPO price and FFB production. The group achieved a CPO price of RM3,534 per tonne (+47% yoy) in 2Q08, taking the 1H08 average to RM3,473 (+57% yoy). FFB production also increased 8% yoy in 2Q and 7% in 1H. The earnings improvement would have been higher if not for the circa 10% increase in operating costs in 1H stemming mainly from higher fertiliser costs. We gather that total estate costs were RM1,065 for every tonne of CPO produced in 1H08. Higher property sales lifted the group’s property earnings by 28% to RM7.7m in 1H08.

Maintaining earnings forecasts. We are keeping our earnings forecasts for now but highlight that we are reviewing our CPO price forecasts with a downside bias. Given that Asiatic sells all of its CPO on a spot basis, there is downside risk to our earnings forecasts if CPO price does not reverse its recent sharp decline. Each RM100 per tonne decline in CPO price would lower our net profit forecast by RM20m or 5-6%. Our current forecasts are based on average CPO prices of RM3,350 for 2008 and RM3,000 for 2009. On top of the CPO price risk, there is also concern over rising operating costs, which will only fully kick in next year as the group wisely locked in a year of fertiliser requirements at the beginning of this year.

Maintain UNDERPERFORM. We reiterate our UNDERPERFORM rating on the stock with an unchanged target price of RM5.80, which is based on a forward target P/E of 10x. While we continue to rate highly Asiatic’s management, this is outweighed by the weighty issues of weak CPO price and rising operating costs. Key de-rating catalysts are the softening CPO price, lower crude oil price and higher operating costs.