Indofood Agri Resources - Fairly valued
Strong earnings outlook priced in.
- Since its acquisition of London Sumatra (Lonsum) in November 2007, Indofood Agri (IndoAgri) has been mostly self-sufficient in its crude palm oil (CPO) requirements, benefitting from higher upstream margin, while still enjoying major downstream market share (c.40-45% in branded cooking oil) in Indonesia.
- While the integrated model allows the group to mitigate volatility in each commodity, it also requires significant capex outlay to develop capacities and markets over the next several years.
- In this report, we cut our rating to HOLD on limited upside potential.
FY16F/17F/18F earnings revised by +5%/+69%/+15%.
- Changes in our forecasts reflected +23%/+42%/+35% revisions to our palm kernel (PK) ASP (in Rupiah terms).
- We expect IndoAgri’s 4Q16 core earnings to sequentially recover – thanks to anticipated recovery in FFB yields, maturing estates and rebound in palm oil prices as well as seasonal sugar contribution.
- Yet, flatter depreciation in Rupiah (vs. previous forecasts) from FY19F works to lower free cash flow (vis-à-vis our previous forecasts), resulting in minor change to our DCF valuation.
Refining margins recovering.
- IndoAgri’s refining margins should recover in line with higher CPO prices, which should help lift RBD Olein, RBD Stearin and PFAD prices – thus minimising the impact of export levies on domestic selling prices.
- Having imputed the above changes, our DCF-based TP (FY17F base year) is adjusted to S$0.57/share (WACC 11.7%, Rf 8.4%, Rm 13.3%, β 1.1x, TG 3%) from S$0.58 previously.
- In view of the limited upside, we downgraded our rating to HOLD.
Key Risks to Our View:
- IndoAgri’s share price is driven by CPO price expectations and to a certain extent by refining margin and sugar prices. There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take fails to live up to our expectations (3.7m MT) next year.
- CPO price could also move higher than forecast if there is significant yield deterioration in South American 1QCY17 soybean crop in the event of a strong La Nina.
- Changes in fund flows towards or out of emerging markets/commodities would also affect valuations of plantation counters.