Asiatic Development ,August 27, 2008

BUY
Price: MYR5.45
12-Month Target Price: MYR7.00
Market Value - Total: MYR4,121.7 mln
Analyst: Siti Rudziah Salikin
Summary: Asiatic Development (Asiatic) is predominantly an oil palm plantation group, with landbank in Malaysia and Indonesia. It also has property development projects in Johor, Melaka and Kedah.

Results Review & Earnings Outlook
Asiatic's 1H08 results were slightly below our expectations. Net profit surged 88.8% YoY to MYR229.2 mln as FFB output in Malaysia grew 7% YoY to 548,677 tons and CPO selling prices averaged higher at MYR3,473/ton as against MYR2,181/ton in 1H07. Pre-tax profit from plantation nearly doubled to MYR287.2 mln and accounted for 95.5% of the total pre-tax profit for the period. Property earnings improved but its contribution to group earnings is small.

Management guidance is for FFB production in 2H to account for less than 55% of the full-year output, implying flat production for 2008 versus our original estimate of a 7.8% YoY growth. Effective tax rate for 2H is also expected to be closer to the statutory tax rate versus our original forecast of 22%.

In spite of the drop in price and its on spot selling practice, Asiatic expects to achieve an average CPO price of MYR3,000/ton in 3Q. Given our view that the price will recover from the current level in 4Q, we believe our projected CPO price of MYR3,200/ton for 2008 is within reach.

We cut our net profit for 2008 by 9.8% after revising our estimated crop production and effective tax rate but still project a strong growth of 28.1% YoY to MYR440.9 mln. We lower our forecast for 2009 by 8.7% to MYR414.1 mln.

Recommendation & Investment Risks
We lower our 12-month target price to MYR7.00 (from MYR10.00) after fine-tuning our numbers and rolling over our valuation to 2009 earnings.

We maintain our Buy recommendation. At 9.3x 2008 earnings, we believe concerns over the CPO price slide have been factored into the share price. We also expect the share price to recover along with our expectations of a pick-up in CPO price in 4Q.

We continue to use DCF to value plantations (to capture potential contributions from its Indonesian ventures) and PER to value the other divisions. Our unchanged DCF assumptions are: (i) the first 14,261 ha in West Kalimantan will be fully planted in 2008-2009; (ii) new plantings of 10,000 ha p.a. for the remaining 84,000 ha starting in 2010; (iii) long-term CPO price of MYR2,500/ton; and (iv) WACC of between 11% and 12.2%.

Risks to our recommendation and target price include: (i) a prolonged weakness in the palm oil price, which could be caused by increased global acreage of oilseeds and mineral oil price volatility; and (ii) delays in clearing the land issues in Indonesia, which will interrupt the progress of the oil palm plantings.