Indofood Agri Resources (IFAR SP) - DBS Research 2018-04-30: Performance Affected By Plantation Division

Indofood Agri Resources (IFAR SP) - DBS Vickers 2018-04-30: Performance Affected By Plantation Division INDOFOOD AGRI RESOURCES LTD. 5JS.SI

Indofood Agri Resources (IFAR SP) - Performance Affected By Plantation Division

  • Core net profit of Rp81bn was slightly below our expectation.
  • Top line performance affected by weaker ASP and output from plantation division.
  • Earnings performance will gain momentum in 2Q and onwards.
  • Maintain HOLD with unchanged Target Price of S$0.36 for now.



What’s New


Core net profit affected by weak plantation division.

  • Indofood Agri (IFAR) booked core net profit of Rp81bn (- 25% y-o-y, -13% q-o-q). The weak 1Q18 was led by the plantation division’s lower revenue and profitability due to seasonal low production and weaker ASP trend y-o-y, despite relatively stable operational cost. 
  • Plantations and edible oil divisions’ EBITDA reached Rp492bn (-49% y-o-y, - 23% q-o-q) and Rp52bn (-36% q-o-q, -34% q-o-q) respectively.

Plantation revenue dropped by 34% y-o-y.

  • Consolidated revenue reached Rp3.2tr (-28% y-o-y, -11% q-o-q), below our forecast on weaker than expected performance from its plantation division. 
  • Plantation division’s revenue reached Rp1.8tr (-34% y-o-y, -28% q-o-q), on weaker CPO and palm kernel (PK) ASP and sales volume. 
  • CPO’s ASP and sales volume reached Rp6,992 per kg (-11% y-o-y, -4% q-o-q) and 171k tons (-25% y-o-y, -24% q-o-q). 
  • Meanwhile, PK’s ASP and sales volume reached Rp6,992 per kg (-20% y-o-y, -11% q-o-q) and 43k tons (-25% y-o-y, -16% q-o-q) respectively.

The weaker CPO and PK sales volume was driven by soft output in 1Q18.

  • Fresh fruits bunches (FFB) output reached 878k tons (-13% y-o-y, -14% q-o-q) on seasonal low production in 1Q18, and implies nucleus FFB yield of 3.3 tons per hectare (1Q17: 3.6 tons per hectare). 
  • Lower FFB output led to lower CPO and PK output of 184k tons and 44k tons respectively.


Outlook


Limited profitability expansion 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 earnings growth.

  • IFAR’s 1Q18 performance was affected by seasonal low CPO output in the 1Q of the year. Similar to its other upstream peers, we believe IFAR’s upstream plantation division production and earnings ratio will normalise to 40: 60 for 1H : 2H of this year, due to normalising output and expectation of stronger CPO price performance for the rest of this year.
  • Moreover, improving downstream market may provide room for IFAR to fix its downstream division’s profitability. In the meantime, IFAR's performance will be supported by its profitable upstream plantation division, such as London Sumatra (LSIP IJ, BUY, Target Price Rp1,780).


Valuation

  • We maintain our DCF-based Target Price (FY18F base year) at S$0.36, assuming WACC and terminal growth rate of 11.6% and 3% respectively. 
  • Maintain HOLD.





William Simadiputra DBS Vickers | Rui Wen LIM DBS Vickers | http://www.dbsvickers.com/ 2018-04-30
SGX Stock Analyst Report HOLD Maintain HOLD 0.360 Same 0.360



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