Indofood Agri Resources - DBS Research 2017-03-02: Strong earnings outlook priced in

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INDOFOOD AGRI RESOURCES LTD. 5JS.SI

Indofood Agri Resources - Strong earnings outlook priced in

• Excluding one-offs, 4Q16 PAT was ahead of expectations.
• Outperformance was driven by lower-than-expected costs.
• FY17F/18F earnings relatively unchanged.

Maintain HOLD on 8% upside to revised TP.

• Improving earnings outlook. We expect the group’s FY17 earnings to recover meaningfully – thanks to anticipated recovery in FFB yields, maturing estates and relatively stable palm oil prices. In this report, we reiterated our HOLD rating on the stock.

4Q16 PAT slightly ahead of expectations. 

• Excluding fair value changes on biological assets (Rp98.6bn gain) and one-off recognition of Rp107bn in damage claim, IndoAgri booked 4Q16 PAT (before non-controlling interests) of Rp417.3bn – ahead of Rp384.4bn we had anticipated – principally on the back of lower-than-expected cost of sales and G&A – offset by higher tax expense. 
• Having imputed FY16 results, we leave IndoAgri’s FY17F and FY18F earnings relatively unchanged, as slightly better ASP is offset by lower expected contribution from Associates.

Expanding refinery capacity. 

• We expect the group’s FY17F Edible Oils & Fats segment to maintain its current EBITDA margin on continued shift towards branded packaged cooking oil, launch of new products and expansion of capacity to cater to expanding demand. The group is due to increase its refinery capacity towards 1.7m MT p.a. by end of 2017.

Valuation

• Having imputed the above changes, our DCF-based TP (FY17F base year) is adjusted to S$0.56/share (WACC 11.6%; TG 3%) from S$0.57 previously. 
• Our new TP hence offers 8% 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 (3.1m MT) next year. 
• CPO price could also move higher than forecast if there is significant yield deterioration in South American 1QCY17 soybean crop. 
• 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/ 2017-03-02

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.560 Down 0.570