Indofood Agri Resources - DBS Research 2016-10-24: Improving earnings outlook

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INDOFOOD AGRI RESOURCES LTD. 5JS.SI

Indofood Agri Resources - Improving earnings outlook

Improving earnings outlook. 

• Following two quarters of losses, we expect the group’s 2H16 earnings to recover meaningfully – thanks to anticipated recovery in FFB yields, maturing estates and relatively stable palm oil prices. 
• In this report, we upgraded our call to BUY. Better seasonal sugar contribution, FFB output and stable prices bode well for sequential jump in earnings, in our view.

FY16F/17F/18F earnings revised by +7%/-24%/+28%. 

• Changes in our forecasts mainly reflected -4%/-2%/+5% revisions to our CPO ASP (in Rupiah terms, before export levy). 
• We also adjusted FY17F/18F CPO output 3%/2% lower as we expect milder yield recovery than previously anticipated. This is offset by a weaker Rupiah (and commensurate translation FX losses) and 6-16% better sugar prices than our previous forecasts. 
• Our DCF valuation is thus lifted to reflect higher free cash flow generation.

Refining margins to recover in 2H16. 

• We expect the group’s refining margins to recover in line with higher CPO prices, which should help lift RBD Olein, RBD Stearin and PFAD prices – thus minimising the burden on export levies on domestic selling prices. 
• Expansion in 2H16 edible oil volume should likewise boost FY16F Edible Oils & Fats EBITDA margin to 7% from 5% in 1H16, based on our estimation.

Valuation

• Having imputed the above changes, our DCF-based TP (FY17F base year) is raised to S$0.58/share (WACC 12.8%, Rf 8.1%, Rm 15.0%, β 1.3x, TG 3%) from S$0.48 previously. 
• Our new TP hence offers 29% potential upside from current level.

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. There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take fails to live up to our expectations (3.7m MT) next year. 
• CPO price could also move higher than forecast if there is significant yield deterioration in South American 1QCY17 soybean crop in the event of a strong La Nina. 
• Changes in fund flows towards or out of emerging markets/commodities would also affect valuations of plantation counters.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-10-24

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