IFAR offers an ideal mix of upside growth potential with some downside risks protection. As a majority owner of LSIP (with LSIP contributing around 40% of IFAR's 2Q09E operating income), we believe IFAR is well positioned to benefit from LSIP's stronger cost management and improving outlook, which provide upside growth potentials. Its exposure to the branded consumer products segment provides IFAR with some downside protections. This is evident from IFAR's ability to pass on highercost of CPO in 2008A and maintain its higher selling price throughout 1H09 without any meaningful impact on sales volume. IFAR's robust fundamentals are evident from its sterling performance in 1H09. We increase our FY09EFY11E earning estimates of IFAR by 20.5%-31.2%.
Despite a 6% MoM drop in Malaysian CPO inventory in July 2009, higher 3Q09E CPO output may lead to higher inventory by end 3Q09E. Investors looking to pick better entry points may consider waiting until the negative catalyst of higher inventories materialises in 3Q09E. However, the rapid re-rating of the Indonesian market may lead investors to overlook the short-term negative catalysts in favour of the longer-term outlook.
IFAR's valuations remain attractive, trading at the second lowest 2010E P/E of all CPO plays under our coverage. We maintain our OUTPERFORM rating on IFAR and increase our target price to SG$2.45 (from SG$1.15), given higher earning estimates and stronger IDR (as IFAR's earnings are quoted in IDR, while its share price is quoted in SGD). Our new target price is based on 16x 2010E P/E, comparable to AALI.
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