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
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Rui Wen LIM
DBS Research
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https://www.dbsvickers.com/
2018-07-27
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