Indofood Agri Resources - DBS Research 2017-10-30: Profitability Yet To Pick Up

Indofood Agri Resources - DBS Vickers 2017-10-30: Profitability Yet To Pick Up INDOFOOD AGRI RESOURCES LTD. 5JS.SI

Indofood Agri Resources - Profitability Yet To Pick Up

  • 3Q17 core profit slightly below our expectation.
  • Higher input cost resulted in lower downstream oil margin.
  • Cut CY17/18 earnings by 13%/5%.
  • TP lowered to S$0.48, maintain HOLD rating.

Lowered TP slightly to S$0.48 while maintaining HOLD rating.

  • We lowered our 2017/2018 earnings forecasts by 13%/5% post 3Q17 results announcement, on lower downstream edible oil and fats division margin and higher operating expenses mainly in CY17, despite the nudged-up upstream plantation performance, driven by LSIP’s 7% higher earnings forecasts in 2018/2019. 
  • IFAR’s core NPAT (excl. biological and forex gain/losses) was slightly below our expectation at Rp65.8bn (-53% y-o-y, -48% q-o-q), on lower-than-expected edible oil downstream division, despite the strong performance of its CPO upstream segment, which prompted us to lower our forecast.
  •  Our new earnings forecast imply a flat earnings growth next year, still below consensus’.

Where we differ: Limited profitability expansion story in sight.

  • Our view is that there is likely to be insignificant margin expansion ahead (which is a critical factor for IFAR’s share price). 
  • Moreover, in our view, steady CPO price outlook means IFAR has limited room to improve its downstream division's profitability performance.

Potential catalyst: Improving downstream division market.

  • Improving downstream market may provide room for IFAR to fix its downstream division profitability. In the meantime, IFAR's performance will be supported by its profitable upstream plantation division, such as London Sumatra (LSIP).


  • We lowered our DCF-based TP (FY18F base year) of S$0.48, with WACC and terminal growth rate assumption of 11.6% and 3% respectively. 
  • Our target price implies 1% share price upside potential; maintain HOLD.

Key Risks to Our View

  • Commodities price. IndoAgri’s share price is driven by CPO price expectations and, to a certain extent, by refining margins and sugar prices. There would be downside risk to our CPO price forecasts if the output grow substantially ahead.

WHAT’S NEW- Profitability has yet to pick up 

3Q17 earnings performance: 

  • Slightly below our expectation, still unrecovered downstream margin and higher-than-expected opex dragged performance.
  • Revenue achievement of Rp3.75tr (+5% y-o-y, -10% q-o-q) was on track with our forecast on steady overall average selling price (ASP) across the segment, and in-line sales volume. However, more importantly, IFAR’s EBITDA and core NPAT (excluding biological assets and foreign exchange gains/losses) came slightly below our expectation at Rp766.4bn (-26% y-o-y, +9% q-o-q) and Rp65.8bn (-53% y-o-y, -48% qo-q) respectively. The 3Q17 earnings performance was affected by the lower-than-expected profitability achievement, mainly from the downstream division. Moreover, IFAR's performance was also affected by the higher operating expenses in the period. Selling & distribution costs and General administrative expenses reached Rp172bn (+35% y-o-y, +19% q-o-q) and Rp264bn (+18% y-o-y, +5% q-o-q) respectively.
  • The lower-than-expected edible oil downstream division was one of the key earnings performance overhang, in our view, reflected by its quarterly edible oil EBITDA margin in 3Q17 of 0.5% at Rp12bn. On the other hand, IFAR’s upstream division performed well, despite the higher fertilising application in 3Q17. IFAR reported stable plantation EBITDA margin at 28.2% at Rp712bn. The upstream figures are also reflected in London Sumatra's (LSIP IJ, Buy) earnings performance, which topped our earnings forecast. We believe LSIP is a good indicator of IFAR’s upstream division, as LSIP accounted for 38% of IFAR's total CPO planted area in September 2017.

Overall operational performance was on track with our forecast. 

  • On the upstream plantation division, CPO and palm kernel (PK) production reached 233,000 MT (+6% y-o-y, +26% q-o-q) and 57,000 MT (+8% y-o-y, +33% q-o-q) on track with our forecast on steady yield performance on its nucleus estates, supported by external fruits purchase. IFAR’s robust own estates fruits yield of 4.2 MT per hectare was higher vs. 2Q17’s and 3Q16’s 3.3 MT per hectare and 4.0 MT per hectare respectively.
  • At the sugar division, compared to a year ago, 9M17 EBITDA for sugar was down 53% y-o-y to Rp137bn due to lower volumes and ASP. Sugar sales volume for 3Q17 came in at 24,000 MT, down 25% y-o-y, as sugar cane harvest for 3Q17, which is the peak harvest season, was 374,000 MT (-14% y-o-y) and production was at 32,000 MT (-11% y-o-y). Sugar production was mainly affected by weather conditions in South Sumatra’s plantation where heavier rainfall was seen. ASP for sugar in 2017 was 9,450 Rp/kg (-17% y-o-y), due to price limits on retail sugar (12,500 Rp/kg) put forth by the Indonesian government to control food inflation.

TP lowered to S$0.48, maintain HOLD rating: 

Re-rating catalyst not in the sight; key to watch IFAR’s quarterly profitability performance.

  • We slightly lowered our target price to S$0.48 per share post the earnings revision. Our new discounted cash flow (DCF) target price implies FY18F PE of 11.4x. Although the valuation appears undemanding, we think a potential share price rerating due to profitability recovery story of its downstream edible oil division is still not in sight.
  • We lowered our 2017/2018 earnings by 13%/5%, mainly on lower downstream edible oil and fats division margin and higher operating expenses mainly in CY17, despite the nudged-up upstream plantation performance, mainly driven by LSIP’s 7% higher earnings forecast in 2018/2019 mainly on its strong nucleus fruits output outlook, coupled with stable operational cost outlook.

William Simadiputra DBS Vickers | 2017-10-30
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.48 Down 0.490