LSIP - Banking on recovery

 LSIP’s 1H22 net profit grew 9.5% YoY to Rp548.8bn (-19.9% QoQ in 2Q22) 

 We expect LSIP to book revenue and net profit of Rp4.2tn and Rp958bn in 2022, respectively 

 We reiterate our “BUY” call with 35% upside potential on a 12-month view on strong ASP Strong YoY performance despite below expected QoQ result LSIP booked a net profit of Rp548.8bn in 1H22, growing 9.5% YoY (-19.9% QoQ). This accounts 57.3% of our FY estimate. Meanwhile, its revenue came in at Rp2,05tn in 1H22 or dropped 6.0% YoY (+67.6% QoQ), represents 48.4% of our forecast. Gross margin expanded from 34.7% in 1H21 to 41.0% in 1H22 as COGS tumbled 15.1% YoY. LSIP's operating expenses increased 29.7% YoY in 1H22 as a result from loss on impairment of bearer plants, that was partly offset by incomes of royalty from land usages. This brought LSIP's operating margin to increase from 28.0% in 1H21 to 31.8% in 1H22. On the other side, finance income edged up 30.8% YoY to Rp34.9bn in 1H22 thanks to higher cash balance. On balance sheet front, LSIP maintained its net cash position in 1H22. Dragged by the impact of challenging weather The company's lower revenue in 1H22 was mainly caused by soft sales volume that shrunk 36.1% YoY in to 108,000 MT due to unsupportive weather at the beginning of 2022 amid replanting efforts that hampered CPO production, declining 23% YoY to 127,000 MT. This was also in line with lower FFB production by 21% YoY to 587,000 MT in 1H22. However, on quarterly basis, CPO sales volume was up 127.3% in 2Q22 in line with increased production. In contrast, CPO ASP soared 45.9% YoY to MYR4,413.2/MT, although it was relatively stable QoQ. Furthermore, PK ASP also increased 34.8% YoY to MYR3,081/MT (-27.0% QoQ). Nevertheless, PK sales volume plunged 34.0% YoY to 31,000 MT, in line with lower production volume by 21.0% YoY in 1H22. Counting on strong demands We expect LSIP's revenue and net profit of Rp4.2tn and Rp958bn in 2022, respectively. However, we assume CPO sales volume to lower to 230,000 MT in line with reduced production as the impact of challenging weather in 1Q22 still looms. Meanwhile, we expect CPO ASP to be higher YoY at MYR 4,100/MT as demands are expected to remain strong in the wake of Diwali festival and anticipated dry season in rapeseed producing countries in 3Q-4Q. In addition, government also plans to upgrade biodiesel policy to B35 or B40 in near future. However, we note that supply of sunflower oil from Ukraine is likely to increase as Russia eases sea blockade that may limit CPO price hikes. Furthermore, we are bullish that government's policy to revert DMO-DPO CPO policy and possibility to extend BPDKS levy free will generally benefit producers. Reiterate BUY on the back of strong ASP and robust balance sheet We maintain our BUY call with a lower DCF-based price target of Rp1,610/share. The stock is currently traded at a 2022F PER of 11.5x and EV/EBITDA of 3.8x. We highlight several paramount catalysts, namely 1) continued replanting progam that will increase productivity in the long run; 2) higher ASP YoY in line with strong global demand and tight supply amid recovery; and 3) robust balance sheet and 4) high energy prices. Meanwhile, we note several downside risks to our recommendation, including 1) higher supplies of edible oil that may help bring down CPO price; 2) challenging weather; and 3) aggresive monetary tightening.