Indo Agri – Numbers still good, despite price declines

Indofood Agri Resources (IFAR) reported a 10% decline in FY08 net earnings to Rp. 795bn, which included the anticipated non-cash loss of Rp. 947 for the revaluation of biological assets, as well as an unrealized Rp. 247bn forex revaluation on its US dollar loan portfolio. Excluding these items, net earnings would have been Rp. 1,487bn, just 4% below our expectation of Rp. 1,551 bn. On a Year on Year basis, net profit excluding biological assets rose 72% to Rp. 1,240 bn.

IFAR’s operational results itself were solid, growing its gross profit by 110% and its turnover by 82%, with increased palm oil sales volume following the full year consolidation of London Sumatra, as well as higher average CPO prices. Gross margin improved to 34.5% from 30.2% in FY07. However, general and administrative expenses grew by a disproportionate 164% to Rp. 659.3bn. This was due to a harmonization of accounting policies between London Sumatra and IFAR, with some items previously recorded under COGS now booked in under general expenses.

IFAR increased its internal supply of CPO to its refineries to 69% of its total requirements, up from 50% last year, with the aim of achieving self sufficiency in the next few years. IFAR expects to increase its CPO production from 714,000 tonnes in FY08 to 800,000 tonnes in the current financial year. This increase is expected to come from its maturing plantations. As for its new planting program, IFAR is taking a more measured approach given the soft CPO prices, with only 5,000 hectares expected to be planted in the earlier part of the year.

IFAR has so far this year reduced its cooking oil prices by 10%, and has also absorbed half of a 10% re-instatement of value added tax for cooking oil, indicating that IFAR’s pricing power remains strong, and continues to enjoy the market leading position for branded cooking oil in Indonesia. However, our FY09 forecast still assumes a 35% reduction in cooking oil average selling prices, in tandem with lower CPO prices. Similarly, we are assuming CPO prices at Rm 1,800 per tonne in FY09, versus the average of around Rm. 2,300 per tonne in FY08. Plantation cost of production is also expected to decline to around US$230 per tonne, versus US$250 per tonne in FY08, primarily from lower fertilizer and fuel prices.

We are maintaining our FY09 forecast of Rp. 1,071.8bn, or a YoY 28% decline in core earnings, primarily on the back of lower CPO and cooking oil prices. IFAR did not declare dividends for FY08. IFAR has maintain ed its gearing at 0.5x, whil interest coverage is a manageable 4.4x. Valuations still look compelling, at a 50% discount to its peer basket, with Price to Book at 0.7x versus its regional peer average at 1.5x. Similarly, IFAR is trading at an FY09 PER of 5.3x versus 10x for its peers. We maintain our Buy recommendation, and have assumed fair value just at IFAR’s book value of S$0.72 per share (which includes its writedown on biological assets).

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