Indofood Agri Resources - DBS Research 2016-08-15: Potential earnings recovery priced in

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INDOFOOD AGRI RESOURCES LTD. 5JS.SI

Indofood Agri Resources - Potential earnings recovery priced in

• 2Q16 underlying core net loss was weaker than expected.
• FY16F FFB output growth guidance cut further to 10-15% decline from flat previously.
• FY16F/17F earnings cut by 37%/6%.
• HOLD rating maintained. 

Trim positions on any near term upside. 

• We believe Indofood Agri Resources (IndoAgri)’s share price recovery year-to-date has priced in the anticipated jump in earnings next year – thanks to a recovery in FFB (fresh fruit bunch) yields, maturing estates and relatively stable palm oil prices. 
• Our HOLD call on the counter is maintained, as there is no near term catalysts to propel the stock price higher. 
• We recommend that investors take profit on any near-term strength, as rising internal crude palm oil (CPO) requirements means IndoAgri would increasingly source third-party CPO over the next two years.

Production growth guidance lowered - again. 

• Excluding fair value changes on biological assets (Rp11.5bn gain) and FX gains (Rp29.6bn) IndoAgri booked core 2Q16 net loss (after tax) of Rp11.6bn. 
• The poor results were driven by a steep 27% y-o-y drop in 2Q16 own FFB production (-1% q-o-q), sequentially wider losses from both associate (Heliae), and JV (CMAA), as well as sequential 38% deterioration in Edible Oils & Fats EBITDA.

FY16F/17F earnings cut by 37%/6%. 

• The group lowered its FFB growth guidance for the year to between 10% and 15% drop from flat previously. Of this, Lonsum is expected to see the steeper drop. This prompted us to lower IndoAgri’s FY16F and FY17F earnings by 37% and 6%, respectively.

Valuation

• Having imputed the above changes, our DCF-based TP (FY17F base year) is adjusted slightly to S$0.48/share (WACC 11.6%, 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/ 2016-08-15

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.48 Down 0.500