INDOFOOD AGRI RESOURCES LTD. (SGX:5JS)
Indofood Agri Resources - Still No Signs Of Bottoming Out
- Profitability of downstream division remains the wild card.
- Cut earnings on new FX and lower margin assumptions.
- Prefer its upstream division (via listed LSIP).
- Maintain HOLD with Target Price of S$0.21.
Target Price maintained at S$0.21, maintain HOLD rating.
- We had earlier accounted for the unexpected losses in 2Q18, and lower profitability contribution from sugar business in 2H18, and ex. LSIP plantation division in FY18 and FY19. We now conservatively lower FY19F/20F earnings by 3%/11% on new FX and input commodities cost assumption.
- Moving forward, we see some scope of a rebound in earnings in 2019, albeit limited due to the still low profitability from Indofood Agri Resources (IFAR)’s edible oils and fats segment.
Where We Differ: Limited margin expansion in sight.
- We expect margin expansion to be insignificant (which is a critical driver to Indofood Agri’s share price). Moreover, in our view, a steady CPO price outlook means that Indofood Agri has limited room to improve its downstream division's profitability performance.
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Potential catalyst: Improving downstream division market.
- An improving downstream market may help Indofood Agri to fix its downstream division’s profitability. For now, Indofood Agri’s performance will be supported by its profitable upstream plantation division, such as LSIP (PT Perusahaan Perkebunan London Sumatra Indonesia Tbk).
Valuation:
- We maintain our DCF-based Target Price (FY19F as base year) to S$0.21, assuming 11.6% WACC and 3% terminal growth rate.
- Our target price implies 1% share price upside potential maintain HOLD.
Balance Sheet:
High capex.
- We expect Indofood Agri to incur capex of Rp1.9-2.0tr p.a. over the next three years – principally to maintain its immature estates and to expand its palm oil milling capacity as maturity rates ramp up.
- Based on our forecast, total interest-bearing debt will reach Rp9,572bn by end-FY18F – of which 30% is USD-denominated. This translates into a net debt-to-total equity ratio of 40%. FY18F blended borrowing cost is estimated at 7.6% and interest cover at 2.4x.
- At end-June 2018, Indofood Agri’s 4- quarter rolling cash conversion cycle stood at 53 days (vs. 44.3 days at end-December 2017) in 2Q18 – representing higher receivable days and lower payable days.
Stable free cash flow.
- We expect Indofood Agri to still generate positive free cash flow of Rp113bn and Rp203bn in FY19F and FY20F – thanks to anticipated FFB yield recovery and rising output from maturing estates, despite the slightly lower CPO and PK ASP outlook.
Share Price Drivers:
Execution is key.
- Historically, Indofood Agri’s quarterly results have, more often than not, underperformed consensus forecasts since 2013 (based on Bloomberg data). The counter’s P/BV ratio has likewise been below 1.0x since 2013 – thus underperforming its own subsidiary, LSIP. For this reason, we believe execution is key to its share price performance.
Key Risks:
Volatility in CPO prices and USD exchange rates.
- Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from the expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels.
- Likewise, volatility in USD would affect profitability of planters in general.
Setback in expansion plans.
- Our forecast is based on assumed hectarage for new planting and replanting. Any setback on these plans would negatively affect our valuation due to slower volume growth.
Regulatory changes.
- Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact demand for CPO/refined oils.
Market sentiment.
- Changes in fund flows in or out of emerging markets would affect valuations of plantation counters.
Weather.
- Changes in rainfall patterns (caused by either El Nino or La Nina) would affect FFB yields with some lag time.
William Simadiputra
DBS Group Research
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Rui Wen LIM
DBS Research
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https://www.dbsvickers.com/
2018-10-10
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