Indofood Agri Resources - DBS Research 2018-10-31: Still Below Expectation

INDOFOOD AGRI RESOURCES LTD. (SGX:5JS)

Indofood Agri Resources - Still Below Expectation

Core earnings back in the black at only Rp14bn in 3Q18, below our and consensus estimate.
Downstream division’s EBITDA margin rebounded to 4.6%, but still insufficient to lift overall earnings.
Improvement in earnings is the key share price driver.
Maintain HOLD with lower Target Price of S$0.19.

3Q18’ core earnings below our expectation. Indofood Agri Resources (IFAR) posted core net profit (reported net profit ex. Forex and BA gain/losses) of Rp14bn (-87% y-o-y) in 3Q18, rebounded from previous quarter’s core net losses of Rp57bn, but still below our and consensus forecast.
Downstream division’s EBITDA margin jumped from the 2Q18 low of 2.9% to 4.6%, however still insufficient to lift earnings performance. We cut our FY18 earnings forecast by 44% – we assume IFAR’s earnings will only recover to Rp31bn in 4Q18.

We expect margin expansion ahead 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 IFAR has limited room to improve its downstream division's profitability performance.

An improving downstream market may help IFAR’s downstream division’s profitability to improve. For now, IFAR's performance will be supported by its profitable upstream plantation division, i.e. London Sumatra (LSIP).

We lowered our DCF-based Target Price (FY19F as base year) of S$0.19, assuming 11.6% WACC and 3% terminal growth rate.
Our target price implies 7% share price downside potential and hence, maintain HOLD.

Commodity prices. IFAR’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 forecast if output expands substantially ahead of industry rojections.

Not only tracking the output pattern we discussed later, but also extra sales volume from stockpile liquidation. Crude Palm Oil (CPO) and Palm Kernel (PK) sales volume reached 224k MT (flat y-o-y, +22% q-o-q) and 59k MT (+2% y-o-y, +64% q-o-q) respectively.
CPO and PK average selling prices reached Rp6,920/kg (-11% y-o-y, -11% q-o-q) and Rp4,929/kg (-20% y-o-y, -13% q-o-q). Weaker ASP q-o-q was driven by lower benchmark prices, partially offset by the weakening IDR trend against the US dollar.

Internal fresh fruits bunches (FFB) reached 997k MT (+14% y-o-y, +32% q-o-q), while external fruits purchase followed a similar pattern to London Sumatra, increasing to 342k MT (+38% y-o-y, +58% q-o-q). CPO and PK production volume reached 278k MT (+19% y-o-y, +39% q-o-q) and 67k MT (+18% y-o-y, +37% q-o-q) respectively, following the higher processed FFB.
Extraction rate for both remained sublime at 21.9% and 5.6%.

We cut our FY18 and FY19 earnings forecast by 44% and 24% respectively. Albeit Indofood Agri Resources (IFAR)'s net earnings at this level is very sensitive – slightly recovery on downstream EBITDA margin may significantly improve the net earnings, we believe our assumption is conservative, considering that low CPO price in 3Q18 did not help IFAR to significantly improve its earnings
performance. Our new forecast implies IFAR’s earnings will only recover to Rp31bn, with EBITDA of Rp308bn in 4Q18. Our FY18 and FY19 earnings are below consensus due to lower downstream division margin assumption.

We maintain our HOLD rating with lower DCF based Target Price of S$0.19. Since our earnings downward revision mainly driven by higher non-cash charges assumption mainly depreciation (FY18/FY19 EBITDA only lowered by 6%), the revision only marginally affected Indofood Agri Resources’ long term FCFF and our DCF based Target Price.
Valuation is undemanding at 7.9x FY19 EV/EBITDA, but we hesitate to impute a higher valuation multiple as we remain cautious on the pace of earnings hitting the 2017 level.
In the meantime, we prefer Indonesia-listed upstream entity London Sumatra (LSIP IJ, BUY, Target Price Rp1,400) for exposure to Indofood Agri Resources profitable upstream division.

William Simadiputra DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2018-10-31

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.19 DOWN 0.210