CIMB ups Asiatic target price, maintains underperform call

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CIMB Research yesterday raised its target price for Asiatic Development Bhd but retained an underperform rating citing unattractive valuations and the possibility of a decline in crude palm oil (CPO) prices when seasonal supply picks up in 3Q09.

“There is no change to our earnings estimates as our CPO price forecasts are intact. However, we are raising our target forward P/E (price earnings) for Asiatic to 12 times from 10 times to account for the recent upgrade in our market view, resulting in a higher target price of RM4 (RM3.30 previously),” CIMB said in a report.

Its new target P/E for Asiatic incorporates a 10% discount (previously 20% discount) to its revised target market P/E of 13.5 times to account for lower share liquidity.

“We continue to project a 59% decline in its FY09 net profit due to lower CPO and palm kernel (PK) selling prices. Year-to-date average CPO price of RM1,912 per tonne is 45% below last year’s average. In our earnings forecasts, we are assuming average CPO prices of RM1,600 per tonne for 2009 and RM1,900 for 2010,” it said.

The average CPO price achieved by Asiatic “should mirror the local spot price” as it continues to sell its palm oil products in the spot market.

“This bodes well for the group as CPO price for 1Q09 averaged RM1,912 per tonne, which is higher than 4Q08’s average CPO price of RM1,600 per tonne but significantly below 1Q08’s average of RM3,465. Asiatic expects CPO to trade at around RM1,900-2,000 per tonne till June 2009,” CIMB said.

“Our earnings forecasts for Asiatic are sensitive to a few major variables, mainly CPO price assumption, fresh fruit bunch yield and production costs. We estimate that every RM100 per tonne change in CPO price assumption would change our net profit forecasts by RM20.1 million (13%) for FY09 and RM21.2 million (8%) for FY10.”

CIMB assumed a 12% reduction in operating costs for FY09 and 10% for FY10. Every further 5% cost reduction from its assumption would boost net profit forecasts by RM12.7 million (8%) for FY09 and RM11.8 million (5%) for FY10.

Asiatic aimed to achieve 20,000ha of new plantings in Indonesia for the current year. The expansion plan was aggressive as it was equivalent to a 30% increase in planted area per annum, CIMB said. Asiatic recorded 6,455ha of new plantings last year.

On Asiatic’s biotech venture (ACGT), CIMB was positive on the venture for the medium term where RM171 million had been invested, of which RM81 million was in 2008. The project will take a few more years before commercialisation.

It also expected Asiatic’s property division to post weaker earnings in the current year as new property launches have been scaled back and year-to-date property sales have been slow due to weaker economy.

Asiatic gained 10 sen to close at RM4.62 yesterday.

This article appeared in The Edge Financial Daily, April 7, 2009.