Indofood Agri Resources - Take advantage of mispricing

We initiate coverage of integrated palm oil producer Indofood Agri Resources (IndoAgri) with a Buy rating and target price of S$0.75. Following its 2007 acquisition of London Sumatra (Lonsum), the group is now self-sufficient in its CPO requirements, hence benefiting from high upstream margin, while still enjoying major downstream market share in Indonesia. Growth should be fueled by plantation earnings from its young age profile.

Mispriced. IndoAgri is now trading at forward PE of 5.1x, FY09F PBV of 0.6x, and 62% discount to DCF. We believe concerns surrounding the group’s 58% gearing ratio (FY09F) and lack of dividends have been overblown. We see no reason for 25-50% discount in the group’s EV/planted compared to its Indonesian-listed peers.

Size matters. As one of the leading plantation groups in Indonesia, IndoAgri’s current scale and market share are tough to replicate, if not impossible. Its CPO production is forecast to reach 0.8m MT next year –second only to Astra Agro’s 1m MT and higher than Wilmar’s own production of 0.7m MT. The group has a commanding 45% market share in Indonesia’s branded cooking oil market.

Still growing. IndoAgri’s organic expansion in planted area (having expanded by c.40% of planted area in the last 2 years alone) is expected to continue through 2012. This will contribute to double-digit volume growth well through 2015F.

Down-cycle more than priced in. We set our price target based on 7.0x FY10F PE, as we believe plantation stock’s PE valuation remains in a low-cycle. This yields target price of S$0.75, which implies 50% upside from current level.

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