Indofood Agri Resources - DBS Research 2016-05-03: Limited upside

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INDOFOOD AGRI RESOURCES LTD 5JS.SI 

Indofood Agri Resources - Limited upside

• 1Q16 underlying net profit below expectations on annualised basis
• Output growth guidance reduced to flat this year
• FY16F/17F earnings revised -1% / +2%
• Rating cut to HOLD on limited upside potential

1Q16 underlying pretax ahead of expectations. 

• Excluding fair value changes on biological assets (Rp84.0bn gain) and translation FX gains (Rp120.9bn), IndoAgri booked a 1Q16 net loss (before NCI) of Rp68.1bn (declining from Rp92.5bn net profit in 1Q15). 
• Reported earnings came in at Rp95.0bn (up from Rp4bn in 1Q15). 
• The poor performance was attributable to weaker EBITDA contribution from the Plantations segment, which tumbled 28% y-o-y to Rp341.0bn.

Production growth guidance lowered. 

• We understand South Sumatra estates were hard hit by El Nino, with FFB production dropping by 20% q-o-q due to not only last year’s dry weather; but also heavy rains, which hampered fruit evacuation in 1Q16. 
• Based on the fruit census undertaken in Feb-16, the group now lowered its production growth guidance to zero from 0-5%. 
• We expect IndoAgri to recognise 14.3k ha of new maturities this year, which should mitigate the drop in FFB yields.

FY16F/17F earnings revised by -1%/+2%. 

• We adjusted IndoAgri’s y-o-y own FFB output growth to 0.9% from 2.8%. This resulted in only a small change in our CPO production forecast of 1m MT. Yet, to account for the strong Edible Oils & Fats volume, we raised the group’s refined CPO volume growth to 7.5% (from 5%) – thus necessitating increased outside CPO purchases. With no further potential upside, we downgrade our rating to HOLD. Notwithstanding potentially higher output in 2H16 and higher anticipated CPO ASP in subsequent quarters, we believe these are mostly priced in.

Valuation:

• Having imputed the above changes, our DCF-based TP (FY17F base year) is adjusted slightly to S$0.54/share ((WACC 12.6%, Rf 8.8%, Rm 15.7% β 1.2x, TG 3%).

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 its share price higher than our fair value, and vice versa.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-05-03

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