Downside risk to CPO price in the near term: We have raised our market CPO price assumption to US$520/t in CY09 (from US$400/t earlier) due to higher prices in the first four months of the year. However, we believe that CPO prices will weaken from June till end-2009, as supply concerns will likely recede, exports may slow and Malaysian inventories could start rising again.
Soybean supply shortage could lead to higher prices in 2010: We have also raised our price assumption to US$625/t in CY10 from US$450/t earlier, but still below the current price of US$770/t. The change is driven by the current low stock of soybeans in the US, soybean reserve building by China and poor South American production. We believe the world is likely to be dependent on the upcoming US crop for the supply of oilseeds next year and hence, the risk to the price should be on the upside for 2010.
Improved credit market conditions mean debt refinancing should not be an issue: We believe that credit market conditions have improved significantly since our update in February this year and access to debt has not been an issue for plantation companies in Indonesia. This was a major concern for us with regard to IFAR, since 38% of its debt is due for refinancing in 2009 (amounting to about Rp2,380bn) and failure to refinance this would significantly impact the company’s expansion plans.
We have raised our FY09, FY10 and FY11 EPS estimates by 68%, 120% and 84% respectively on higher CPO price assumptions. Our target price is based on 8x June 2010E EPS, a slight discount to AALI’s target PER of 9x due to the company’s small-cap status.
12-month price target: S$1.11 based on a PER methodology. Catalyst: Completion of refinancing of short-term debt by August. We upgrade our recommendation on IFAR to Outperform. IFAR is our top pick in the Indonesian plantations space. At 6x 1-year forward earnings (June), it is the cheapest plantation stock under our coverage. We believe that once the debt refinancing issue is behind us by August 2009, the stock is likely to see a re-rating and trade at PER levels similar to those of its Indonesian peers.
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