Indofood Agri Resources - DBS Research 2017-02-17: Fairly valued

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INDOFOOD AGRI RESOURCES LTD. 5JS.SI

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.

Valuation

• 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.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2017-02-17

DBS Vickers SGX Stock Analyst Report HOLD Downgrade BUY 0.57 Down 0.580