Indofood Agri Resources - DBS Research 2018-07-27: Earnings Turned Red In 2Q18 

Indofood Agri Resources - DBS Group Research Research 2018-07-27:  earnings Turned Red In 2q18  INDOFOOD AGRI RESOURCES LTD. SGX:5JS

Indofood Agri Resources - Earnings Turned Red In 2Q18 

  • Indofood Agri (IFAR) booked net losses of Rp27bn in 2Q18. 
  • Upstream division failed to lift earnings, amid still weak edible oil and fats division. 
  • Earnings to turn positive in 3Q18, but likely to stay weak this year. 
  • We have a HOLD rating with Target Price of S$0.24. 



What’s New 


Our Quick Take: Core net losses of Rp27bn in 2Q18.

  • Indofood Agri (IFAR) booked core net losses of Rp27bn, sending 1H18 core earnings to Rp54bn, below expectations. 
  • Upstream profitability contracted q-o-q due to lower top-line performance, on lower-than-expected quarterly sales volume and ASP trend of Palm Kernel (PK) despite the still robust quarterly CPO ASP and sales volume performance. 
  • Meanwhile, IFAR downstream division still posted weak profitability performance. As other non-operating expenses such as SG&A and financing cost were relatively flat q-o-q, earnings turned red. 

Upstream division top line and profitability affected by inventory build-up, PK prices.

  • Indofood Agri Resources reported upstream division EBITDA of Rp452bn (-51% y-o-y, -11% q-o-q), implying EBITDA margin of 22.5% (1Q18: 27% ). 
  • 2Q18 upstream division's performance was affected by PK sales volume and ASP of 36,000 MT (-20% y-o-y, -16% q-o-q) and Rp5,845/kg (+flat y-o-y, -16% q-o-q) respectively. Lower sales volume was likely affected by inventory build-up and sales timing – deferred sales volume to next quarters for more favorable prices. 
  • CPO ASP reached Rp8,083/kg (flat y-o-y, +3% q-o-q) in 2Q18, weakening IDR trend against USD buffered up Indonesia domestic palm oil prices. Meanwhile, CPO sales volume reached 184k MT (-10% y-o-y, +8% q-o-q). 
  • All in all, upstream revenue reached only Rp2tr (-10% y-o-y, flat q-o-q). 

Downstream division improved slightly, driven by higher volumes and top-line performance.

  • Indofood Agri Resources' edible oil and fats division EBITDA reached Rp77bn (+17% y-o-y, +48% q-o-q) rebounding from its previous low base, due to improving downstream top-line performance of Rp2.6tr (+5% y-o-y, +14% q-o-q). However, the downstream division still insufficient to lift up Indofood Agri Resources' earnings performance, due to the still low single-digit EBITDA margin of 2.9% in 2Q18.



~ SGinvestors.io ~ Where SG investors share

Outlook


Earnings expected to turn positive in 3Q18, but likely to stay weak this year. 

  • We are expecting earnings to turn positive in the next quarter due to normalising sales volume on inventory release and higher output and sales volume. Management reiterated its expectation of a 10% y-o-y fruit output growth this year, followed by 5-10% CPO output expansion. 
  • SGinvestors.io ~ Where SG investors share
  • Meanwhile, domestic CPO ASP will continue to support performance, as the IDR's weak trend is likely to continue in 3Q18.

Limited profitability expansion in sight. 

  • We expect margin expansion to be insignificant (which is a critical driver to Indofood Agri Resources’ share price). Moreover, in our view, a steady CPO price outlook means that Indofood Agri Resources has limited room to improve its downstream division's profitability performance.


Potential catalyst:

  • SGinvestors.io ~ Where SG investors share
  • Improving downstream division market. Improving downstream market may help Indofood Agri Resources to fix its downstream division’s profitability. 
  • For now, Indofood Agri Resources' performance will be supported by its profitable upstream plantation division, such as LSIP.


Valuation:

  • We keep our earnings forecast for now, which means that our DCF-based target price (FY19F as base year) of S$0.24 remains unchanged. 
  • Our target price is derived by assuming 11.6% WACC and 3% terminal growth rate. Our target price implies 7% share price upside potential; maintain HOLD.





William Simadiputra DBS Group Research Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2018-07-27
SGX Stock Analyst Report HOLD Maintain HOLD 0.240 Same 0.240



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