Indofood Agri Resources— strong recovery

Indofood Agri (IFAR) reported Q2 pre-ex net profit of Rp405bn, bringing H1 net profit to Rp740bn, which is 77% of our full-year forecast or 71% of consensus. H1 pre-ex pre-tax profit was more in line with our forecast, at 52% of our full-year forecast. Exceptional items included Rp593bn for fair value gain on plantation assets and Rp240bn for forex gains.

Plantation EBIT accounted for almost all group EBIT as cooking oil and fats earnings fell on higher raw material and commodities division was adversely affected by a strong Rupiah compared with a weak US$. Plantation EBIT was up 41% QoQ on 24% QoQ higher CPO average selling price and 11% QoQ growth in production.

IFAR is optimistic about the H209 industry outlook on lower fertiliser costs (expected to be 30% lower compared with 2008), stronger production (H2 production to be 55% of full-year crop), and continued firm demand for CPO that could support the current cost, insurance and freight (CIF) price of around Rp7,200/tonne (US$730/t, RM2,540/t).

Our price target is based on a sum-of-the-parts valuation, where we value the plantations division on a DCF assuming a long-term CPO price of US$570/tonne and a WACC of 14%. For every 10% change in our 2009 CPO price assumption of US$555/tonne, 2009E EPS increases 20%.

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Indofood Agri Resources - 1H09: sterling performance

IFAR reported a sterling performance in 1H09. Excluding biological asset revaluations, 1H09E net income came at Rp645 bn, 65% of our old FY09E forecasts and 59% of consensus forecasts, with 2Q09 net income going up by 68.5% QoQ.

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.

Indofood Agri Resources - Re-rating likely to continue

We upgrade our recommendation on Indofood Agri Resources (IFAR) to Outperform from Underperform and raise our 12-month price target to S$1.11 (from S$0.49 previously) based on our new CPO price assumptions. IFAR is our top pick among the Indonesian plantation plays.

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.

Indofood Agri Resources: A good start to the year

Better than expected earnings. Net profit came in at Rp240.2b (+644.8% q-o-q, -24.0% y-o-y). Annualised, it is ahead of expectation primarily due to lower-than-expected costs and realized gains from the utilization of low-priced CPO inventory.

Seasonally lower volume not as bad as expected. 1Q09 CPO sales volume fell 14% q-o-q, while palm kernel sales volume fell 20%. However, margarine and cooking oil sales volumes recovered by 24% and 2% q-o-q, respectively. Margarine volume was driven by demand from industrial clients and a pick up in exports to China.

Maintain Buy, TP raised. We raised FY09F and FY10F EPS by 24.7% and 2%, respectively, after imputing lower costs, higher CPO production volume, and reduced new planting this year (the group indicated that it might accelerate new planting activities but unlikely to match last year's). These changes affected our DCF valuation (WACC 12.4%; terminal growth 3%), which now yields a fair value of S$1.10 (vs S$1.00 previously).

Strong growth potential. Out of its 54,114 immature hectareage, c.30,000 hectares are expected to mature between now and 2010, and the rest in 2011. This means that over the next five years IndoAgri's volume growth will accelerate from 5.2% assumed for this year.

Indofood Agri Resources - Valuations attractive versus peers

We are raising our target price for Indofood Agri Resources (IFAR) to S$0.90 from S$0.72 previously on the back of higher sector valuations, The sector has seen a significant re-rating with CPO prices rising by 18% in the past month, and up 67% from its October 2008 low. Firmer CPO prices also gives us impetus to raise our ahead-of-consensus earnings forecast, but we shall defer on this until further validation from its 1Q reporting, scheduled for 29th April.

CPO has traded at an average of Rm. 1,940 per tonne year-to-date, and is ahead of our FY09 assumption of Rm 1,800. On this basis, we had factored in a 35% decline in cooking oil average selling prices. If CPO prices remain firm, this assumption will prove too conservative. IFAR has this year reduced its cooking oil prices by just 10%, and has also absorbed half of a 10% re-instatement of value added tax.

IFAR had indicated in its last briefing that cost of production is likely to come down to around US$230 per tonne, versus US$250 per tonne in FY08, mainly from lower fertilizer and fuel prices. IFAR will be completing its tender for its 2Q fertiliser purchases in the next few weeks, and we expect fertiliser costs to remain low, in line with weak crude oil prices.

IFAR has also indicated that there is no material impact to sales from the Indonesian elections. Furthermore, the trend of migration towards branded cooking oils is still intact, due to the growth of supermarkets. It is also ramping up production on its recently expanded Medan refinery, while its new Jakarta refinery is on track to come on-stream in early 2010.

We are maintaining our FY09 forecast of Rp. 1,071.8b, or an EPS of 10.1cts per share, versus consensus of 8.2cts, with the potential for further upgrades. Our target price is raised to S$0.90, in line with the median of 9.2x for SGX-listed palm oil related companies. We maintain our BUY recommendation.

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.

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).

Indo Agri - Biological asset writedown has no operational impac

Ahead of its FY08 results on 27th February, IFAR recently disclosed that it will be taking a non-cash writedown of Rp663 billion, or around S$85.6m, arising from the changes in fair values of biological assets. The reporting of gain or loss arising from the changes in fair values of biological assets is in accordance with SFRS 41 of the Singapore tax code.

Indo Agri has booked almost Rp. 800bn in gains to biological assets in the last 3 years, in tandem with rising CPO prices. With CPO prices having halved over the past year, it is only expected that IndoAgri’s plantations values should be reversed accordingly. We had adjusted our reported net profit forecast downward to Rp.1,239.3bn for FY08, from Rp. 1,900.3bn previously. There is no change to core net profit forecast (i.e. ex-biological adjustments). This remains at Rp.1,551.3bn for FY08, which is in line with consensus of Rp. 1,561.5bn.

IFAR also affirmed that it will not have to recognise any impairment of goodwill for its 2007 London Sumatra acquisition, after an independent evaluation. However, ahead of the results, we warn that IFAR may need to revalue further downwards its US$ denominated loans, as well as a decline in the value of inventory. In 3Q IFAR made such downward adjustments of Rp. 27bn and Rp.65bn respectively.

Looking further ahead, we have reduced our assumption of average CPO prices for FY09 at Rm. 1,800 per tonne versus Rp. 2,100 previously, and bringing it in line with our assumption for Malaysian palm oil companies. Prices have stabilised around this level since the beginning of the year, and we now expect it to persist, given the current economic climate. Correspondingly, we have cut our assumption for cooking oil prices by a further 20% - IFAR had already cut its prices by 15% earlier in the year.

FY09 forecast is therefore cut to Rp. 1,071.8bn, indicating a YoY 30% decline in core earnings. With share values across the sector remaining weak, we peg fair value at 10.5x, in line with peer valuations. This yields a fair value of S$0.99, representing 80% upside to its current price. We maintain our Buy recommendation.