Indofood Agri Resources - DBS Research 2016-02-22: Boosted by upstream segment

INDOFOOD AGRI RESOURCES LTD. 5JS.SI

Indofood Agri Resources - Boosted by upstream segment

FY15/16F/17F earnings adjusted by +26%/+16%/ +74% on changes in our key assumptions
Expect higher 4Q15 earnings q-o-q on translation FX gains, offset by weaker ASP and FFB yields
TP raised to S$0.54 – offering 15% upside potential; upgrade to BUY

We expect IndoAgri’s FY16F and FY17F own FFB yields to drop to 16.8MT/ha and 16.6MT/ha, respectively from 17.6 MT/ha in FY15E, as we impute El Nino impact and dilution from significant jump in new maturities over the same period.
Lower yields notwithstanding, upgrades in our CPO price forecasts now point to 42% EBITDA CAGR over the next two years, as CPO output continues to expand by 4% CAGR through to FY17F.

Since its acquisition of London Sumatra (Lonsum) in Nov-07, IndoAgri has been self-sufficient in its CPO requirements, benefitting from higher upstream margins, while still enjoying sizable downstream market share (c.40-45% in branded cooking oil) in Indonesia.
IndoAgri ventured into sugarcane in FY08 by acquiring Laju Perdana Indah and in FY13, a 50% stake in CMAA (Brazil) and 10% stake in RHI (Philippines).
While this model allows the group to mitigate volatility from each commodity, it requires significant capex outlay to develop capacities and markets over the next several years.

IndoAgri aims to expand its oil palm estates by 5-10k ha p.a. (dropping from 14-16k ha p.a. in 2010-2013) on c.30-40k ha plantable reserves remaining for oil palm with strict sustainability goals.
The group 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.

We employed DCF methodology (FY17F base year) to arrive at IndoAgri’s fair value of S$0.54/share (Rf 8.8%, Rm 15.7%, β 1.2x, WACC 12.6%, TG 3%).

IndoAgri’s share price is linearly driven by CPO prices, partly by refining margins, and to a certain extent, sugar prices.
There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take failed to live up to our expectations (2.5m kl) this year. IndoAgri’s output could also fall below our expectations if there is a significant hit to its FFB yield in the aftermath of FY15 El Nino (vice versa).
Changes in fund flows towards or out of emerging markets/ commodities would also affect valuations of planters.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-02-22

DBS Vickers SGX Stock Analyst Report BUY Upgrade HOLD 0.54 Up 0.52