Indofood Agri Resources - DBS Research 2018-03-01: Still Soft

Indofood Agri Resources - DBS Vickers 2018-03-01: Still Soft INDOFOOD AGRI RESOURCES LTD. 5JS.SI

Indofood Agri Resources - Still Soft

  • Lowered Target Price to S$0.36 –maintain HOLD rating.
  • Still soft performance prompts us to keep our rating.
  • New Target Price on earnings revision ex. LSIP unit.
  • Downstream division margin expansion may be the key wild card in 2018.



Lowered Target Price to S$0.36 while maintaining HOLD rating. 

  • Our lower Target Price is derived from our new earnings forecast. We lowered our 2018/2019 earnings forecasts by 18%/19% on lower margin performance, ex. Lonsum (LSIP) unit. 
  • Indofood Agri Resources (IFAR)’s core NPAT (excluding biological and forex gain/losses) was below our expectation at Rp76.9bn (-65.8% y-o-y, -23% q-o-q), due to lower production from the upstream unit which was insufficient to cover the still soft edible oil and fats earnings performance.
  • Our new earnings forecast imply a flat earnings growth next year, still below consensus’.


Where We Differ: Limited profitability expansion story in sight.

  • We see a likelihood of 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).


Valuation

  • We lowered our DCF-based Target Price (FY18F base year) to S$0.36, 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. Indofood Agri Resources’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 - Undemanding valuation prompting us to keep HOLD rating for now 


Earnings revision: 18%/19% cut for FY18/19 NPAT – new TP at S$0.36.

  • We lowered our 2018/2019 earnings forecasts by 18%/19% on lower margin performance, ex. Lonsum (LSIP) unit. IFAR’s core NPAT (excluding biological and forex gain/losses) was below our expectation at Rp76.9bn (-65.8% y-o-y, -23% q-oq) due to lower production from the upstream unit, which was insufficient to cover the still soft edible oil and fats earnings performance. Our new earnings forecast imply a flat earnings growth next year, still below consensus’.
  • We are keeping our downstream, the edible oil and fat division profitability conservative. We assume the EBITDA margin to stay at 4.5% in 2018. We believe the key earnings driver for this year will remain its upstream division, mainly the LSIP unit. We are keeping our LSIP forecast for now, where we are looking for 11% earnings growth y-o-y in 2018 to Rp846bn.
  • Our lower earnings result in a lower target price of S$0.36 (previously S$0.48). However, we are keeping our HOLD rating as we believe that at the current share price (11x FY18F PE), the market has priced the weaker-than-expected profitability performance in 4Q17. However, on the other hand, we see limited catalyst for earnings growth this year beyond its upstream plantation unit.

4Q17: Plantation division earnings insufficient to offset the weak edible oil and fats division this time 

  • IFAR’s core NPAT (excluding biological and forex gain/losses) was below our and consensus expectations at Rp76.9bn (- 65.8% y-o-y, -23% q-o-q) due to lower production from the upstream unit, which was insufficient to cover the still soft edible oil and fats earnings performance.
  • Revenue came slightly below our forecast at Rp3.6tr (-16% yo-y, -3% q-o-q), on lower overall revenue performance from the plantation-related division due to lower estate productivity in 4Q17, which also affected the edible oil and fats division's revenue performance.
  • Plantation division hit by lower production in 4Q17 due to the weather factor. However, the profitability performance remained strong to keep whole group in profit – this is also seen in LSIP's earnings performance which met our expectation in the period.
  • Plantation division revenue reached Rp2.52tr (-10% y-o-y, flat q-o-q), driven primarily by the CPO sales volume performance of 226,000 MT (-5% y-o-y, +1% q-o-q) with ASP of Rp8,077 per kg (flat y-o-y, -8% q-o-q). The division EBITDA reached Rp635bn (-8% y-o-y, -44% q-o-q) with EBITDA margin at 25.1% in 4Q17, lower vs. the 3Q17 and 4Q16 levels of 28.2% and 46.2% respectively.
  • The overall plantation division performance was affected by the fruit production trend in 4Q17, as seen in the nucleus Fresh Fruits Bunches (FFB) production of 792,000 MT (-13% yo-y, -10% q-o-q), followed by CPO and PK production of 216,000 MT (-17% y-o-y, -7% q-o-q) and 54,000 MT (-16% y-o-y, -5% q-o-q).
  • Meanwhile, the edible oil and fats division revenue reached Rp2.6tr (+5% y-o-y, +6% q-o-q), with rebounded EBITDA performance to Rp79bn (EBITDA margin 3.0%, 5x q-o-q), despite still being 12% weaker on y-o-y basis.




William Simadiputra DBS Vickers | http://www.dbsvickers.com/ 2018-03-01
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.36 Down 0.480



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