CAPTURING MARGINS ON EVERY STAGE
A diversified and vertically integrated business model.
- Since its acquisition of London Sumatra (Lonsum) in Nov-07; Indofood Agri (IndoAgri) has been self-sufficient in its CPO requirements, benefitting from higher upstream margin, while still enjoying major downstream market share (c.40-45% in branded cooking oil) in Indonesia.
- IndoAgri ventured into sugarcane estates in 2008 by acquiring Laju Perdana Indah and in 2013, 50% stake in CMAA (Brazil) and 10% stake in RHI (Philippines).
- While this 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 our view.
More sugar investments?
- IndoAgri aims to expand its oil palm estates by 5-10k ha p.a. (dropping from 14-16k ha p.a. in 2010-2013), given strict sustainability goals. Therefore, with c.30-40k ha unplanted reserves remaining for oil palm (net of unplantable land bank), we now expect IndoAgri to focus on expanding its sugarcane estates and refinery capacity in Indonesia instead.
Embedding sustainability in internal operations.
- IndoAgri intends to have all of its own estates RSPO-certified by end- FY16, and its smallholder estates under plasma scheme by end-FY19.
- IndoAgri also targets to have 100% sustainable palm oil sourcing by end-FY20.
- To achieve these aggressive targets, the group has instituted sustainability programmes in its operations.
Valuation:
- We value IndoAgri at S$0.69/share based on DCF methodology (Rf 8.8%, Rm 15.7%, beta 1.1x, WACC 13.8%, TG 3%).
- At its current level, we believe the counter is fairly valued.
- Lacking near-term catalysts, we reiterate our HOLD call.
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. A strong recovery in CPO prices (either data, weather or regulatory-driven) would boost the share price higher than our fair value, and vice versa.
(Ben SANTOSO)
Source: http://www.dbsvickers.com/
