Indofood Agri Resources - DBS Research 2016-06-14: Fairly valued

Indofood Agri Resources - DBS Research 2016-06-14: Fairly valued INDOFOOD AGRI RESOURCES LTD 5JS.SI 

Indofood Agri Resources - Fairly valued

  • FY16F/17F earnings adjusted by +13%/-23% on changes in our key assumptions.
  • Including new maturities, IndoAgri guides zero FFB output growth this year on severe El Nino impact.
  • TP lowered to S$0.50 – offering 3% downside potential; HOLD rating maintained.

Earnings recovery priced in. 

  • We believe IndoAgri’s share price recovery YTD has priced in the anticipated jump in earnings this year – thanks to stronger CPO prices and improvements in Edible Oils & Fats EBITDA margins, notwithstanding El Nino impact on both its FFB and sugar output. 
  • Our HOLD call on the counter is maintained.

Production growth guidance lowered. 

  • We understand the group’s South Sumatra estates were hard hit by El Nino, with overall FFB output 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 February 2016, the group guides for zero FFB output growth this year. 
  • We expect IndoAgri to recognise 14,300 ha of new maturities this year, which should mitigate the drop in FFB yields.

FY16F/17F earnings, TP revised. 

  • We adjusted the group’s FFB yields to impute lower long-term FFB output volume, premised on slower yield recovery over the next two years. 
  • We recommend investors to take profit on any near-term strength, as rising internal CPO requirement means IndoAgri would increasingly source third-party CPO over the next two years.


  • Having imputed the above changes, our DCF-based TP (FY17F base year) is adjusted slightly to S$0.50/share (WACC 11.7%, Rf 8.1%, Rm 15.0%, β 1.1x, TG 3%). 
  • We lowered Indonesian risk-free rate to 8.1% from 8.8% previously.

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/ 2016-06-14
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.50 Down 0.54