AALI - Hampered by lower production

• AALI’s 1H22 net profit grew 24.6% YoY to Rp809.3bn (-32.6% QoQ in 2Q22) 

• We expect AALI to book revenue and net profit of Rp24.7tn and Rp1.92tn in 2022, respectively 

• We reiterate our “BUY” call with 24% upside potential on a 12-month view on strong ASP 

Slightly below estimate AALI's net profit grew 24.6% YoY in 1H22 to Rp809.31bn (-32.6% QoQ in 2Q22), accounting for 42.3% of our FY estimate. Meanwhile, the company's revenue came in at Rp10.96tn in 1H22, increasing 1.2% YoY (-33.4% QoQ in 2Q22) or representing 44.4% of our FY forecast. Nevertheless, GPM fell from 20.4% in 1H21 to 16.6% in 1H22 (18.8% in 2Q22) as COGS escalated by 6.11% YoY in 1H22 to Rp9.14tn on the back of higher raw materials used. Meanwhile, operating expenses were up 13.1% YoY in 1H22 due to higher G&A from salaries. This led to contracted OPM from 15.2% in 1H21 to 10.8% in 1H22 (11.4% in 2Q22). Furthermore, AALI recorded finance cost of Rp197.7bn in 1H22. The company booked part of loss in share of JV of Rp45.84bn in 1H22 reversing from gain of Rp5.04bn last year. Its net gearing was at 1.3% in 1H22, or controllable in our view. Soft top line performance impacted by challenging weather AALI soft revenue growth in 1H22 was largely caused by declined CPO revenue due to shrinking sales volume by 30.3% YoY to 634,000 MT. Nevertheless, ASP increased significantly by 46.2% YoY to Rp15,023 per MT in 1H22, compared to Rp10.274 last year, driven by strong demands coupled with tight supply on the back of challenging weather. Lower sales volume was accompanied by sluggish production volume which tumbled 15.8% YoY to 638,000 MT in 1H22. Furthermore, PK and derivatives sales increased 38.7% YoY. ASP expected to remain at high level YoY We expect AALI's revenue of Rp24.7tn in 2022, relatively flattish YoY as we anticipate sales volume to decline to 1,45mn ton, impacted by slow production in 1H22. Meanwhile, we expect CPO price hikes to decelerate in 2H22 as oil prices tends to lower while The Fed goes ahead with its aggresive tightening stance. In addition, China's slow economic recovery following its strict covid-19 policy could mean decreased CPO demands coupled with higher supply . Despite that, we expect ASP is likely to remain at high level YoY at Rp14,850/MT this year, balanced by higher demands as the government maintains its biodiesel policy, Diwali festival in India and expected dry season of rapeseed producing countries and reduction in Malaysia’s production given fewer workers. Reiterate BUY on the back of robust balance sheet We maintain our BUY recommendation with a DCF based price of Rp11,150/ share. The stock is currently traded at a 2022F PER of 11.2x and EV/EBITDA of 3.9x. We note several paramount catalysts, namely 1) our expectation of persistently high ASP throughout 2022, in line with strong demands from domestic and overseas; 2) robust balance sheet and 3) replanting program to boost productivity. Nevertheless, we highlight a number of downside risks to our recommendation, including 1) higher supply of edible oil as Ukraine resumes deliveries; 2) challenging weather; 3) aggressive monetary tightening and 4) possible change in government policy.