Indofood Agri Resources - CIMB Research 2016-10-29: Prefer LSIP for exposure to the group’s estates

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INDOFOOD AGRI RESOURCES LTD. 5JS.SI

Indofood Agri Resources - Prefer LSIP for exposure to the group’s estates

• 9M16 results were in line with our forecasts but below consensus expectations.
• The higher effective tax rate partially offsets the stronger plantation contributions.
• Indofood Agri (IFAR)  now expects its FY16 FFB output to decline by 12%.
• 50%-owned CMAA contributed profit of Rp46bn in 3Q due to stronger sugar prices.
• Maintain Reduce, prefer LSIP within the group’s stable of listed plantation cos.

Returning to profit in 3Q16 and 9M16 

• Indofood Agri (IFAR) posted a core net profit of Rp130bn (excluding forex loss and FV gain on biological assets) in 9MFY16 due to higher plantation and edible oils and fats earnings, as well as lower losses from CMAA (its 50% sugar JV in Brazil). 
• We consider the 9M16 results to be broadly in line as we expect better 4Q earnings due to stronger CPO sales and sugar contributions, as well as lower effective tax rate.

Forex and FV gains on biological assets lift reported earnings 

• The group’s 9M16 reported net profit was higher yoy at Rp284bn due to 
  1. a net forex gain of Rp191bn from translation gain on its US$ debt due to the stronger rupiah against a loss of Rp482bn in 9M15, and 
  2. gains of Rp120bn from changes in fair value (FV) of its biological assets. 
• The FV biological gains were due to the net changes in the FV of agriculture produce arising from the adoption of FRS 41 effective 1 Jan 2016.

Higher PK prices, sugar earnings offset lower output 

• 3Q16/9M16 plantation EBITDA rose 40%/9% yoy as higher ASPs for palm products and sugar contribution offset lower FFB output as well as a 13% rise in cost of production for palm to Rp4,500/kg. 
• 9M16 CPO ASP grew 3% to Rp7,480/kg while sugar contributions rose to RM258bn from Rp166bn in 9M15. 
• Its edible oils and fats (EOF) division recorded a 13% yoy jump in earnings due to stronger sales volumes.

Key takeaways from results teleconference 

• IFAR now expects FFB output to fall by 12% in FY16, against its previous guidance 10- 15% decline in output. The group expects FFB yield to improve more meaningfully in 2HFY17 as FFB yields recovers from the El Nino impact. 
• The group revealed that early indications suggest that FY17’s output could exceed its achievement in FY15. 
• It also revealed the higher effective tax rate was due to non-deductible expenses, write-off of certain tax losses and share of losses of associate and joint venture companies.

Impact of FRS16 and FRS41 accounting changes 

• The group adopted FRS16 and FRS41 with effect from 1 Jan 2016. This led to a 63% rise in depreciation charges in 9M16, and Rp120bn gain from changes in the FV of its biological assets. It has also reduced the group’s total equity by Rp4tr to Rp20tr and raised its net gearing ratio from 0.34x to 0.41x from end-Dec 15 to end-Sep 16.

Maintain Reduce due to rich valuations 

• We maintain our earnings forecasts and SOP-based target price of S$0.44. The stock remains a Reduce due to its less exciting earnings prospects compared to its peers.
• Within the Indofood group stable of listed plantation companies, we prefer London Sumatra (LSIP IJ) due to its higher trading liquidity and strong balance sheet.

Ivy NG Lee Fang CFA CIMB Research | http://research.itradecimb.com/ 2016-10-29

CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 0.44 Same 0.44