Indofood Agri Resources - DBS Research 2015-10-30: Expect sequential recovery

Indofood Agri Resources - DBS Research 2015-10-30: Expect sequential recovery INDOFOOD AGRI RESOURCES LTD. 5JS.SI 

Indofood Agri Resources - Expect sequential recovery 

  • Indofood Agri's (IndoAgri) 3Q15 underlying net profit of Rp129bn (ex translation FX losses) was below Rp215bn expected 
  • Timing of sales recognition caused weaker top line; partly offset by lower-than-expected costs 
  • FY15F/16F earnings adjusted 156%/18% higher on lower costs; TP raised to S$0.52 
  • No near-term catalysts; despite forecast earnings jump (from low base). HOLD rating is maintained.


Another disappointing quarter. 

  • IndoAgri reported a 3Q15 net loss of Rp154bn – below Rp38bn expected. Sugar sales volume was half of our forecast due to timing issues (as at end of Sep-15 the group still had c.27k MT of undelivered inventory).
  • Earnings were also weighed down by 4% y-o-y drop in CPO sales volume, 16% yo-y lower CPO ASP; Rp322bn in FX losses, and losses from CMAA JV. This brought 9M15 earnings to a Rp117bn net loss. 
  • Excluding translation FX losses, IndoAgri booked 3Q15 underlying earnings of Rp129bn (-49% y-o-y) – below Rp215bn expected. 
  • But costs were notably lower than expected, helping to raise 3Q15 GPM to 25.1% from 21.8% in 2Q15. 

Expect sequential earnings recovery. 

  • Imputing recent CPO price recovery, lower-than-expected costs, more sugar sales, and reversal in FX losses, we expect IndoAgri to book sequential 4Q15 earnings recovery. 
  • Upkeep and harvesting costs are likewise lowered by 6%, offset by slightly higher selling expenses to cover for new downstream product launches. 
  • All in, we adjusted FY15F/16F earnings by 156%/18% higher. 
  • In keeping with USD/IDR year-end exchange rate of Rp14,470 (based on DBS Bank's in-house forecast), we expect muted FX gains in 4Q15 relative to current level. 

Dry weather impact in 1H16. 

  • The group lowered CY15 FFB output guidance to 3.3m MT from 3.4m MT – on severe dry weather YTD. 
  • Within its geographic presence, North Sumatra (20% of output) had significantly reduced rainfall throughout the year. Riau and South Sumatra estates have also been under stress since May/Jun-15; and Kalimantan estates since Jul-15. 
  • We understand yields may drop by c.20% y-o-y in 1Q16, although CY16 output may be less affected – depending on 2H16 recovery. Lower yield is also expected in CY17 due to the lagged impact of this year’s rainfall deficit. 
  • IndoAgri’s South Sumatra sugar estates may also see 10-15MT/ha of yield losses – subject to rainfall in 1H16. 

No near-term catalysts. 

  • We raised our DCF estimate by 13% to S$0.52 and maintain our HOLD rating. 
  • We believe prospective drop in output, export levies, and export taxes would continue to weigh on earnings – despite potential recovery in 1Q16 CPO prices on reduced global inventory.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2015-10-30
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.52 Up 0.47