Indofood Agri Resources - DBS Research 2019-08-02: Downstream Division Fails To Lift Earnings

INDOFOOD AGRI RESOURCES LTD. (SGX:5JS) | SGinvestors.io INDOFOOD AGRI RESOURCES LTD. (SGX:5JS)

Indofood Agri Resources - Downstream Division Fails To Lift Earnings

  • INDOFOOD AGRI RESOURCES LTD. (SGX:5JS)'s FY19-20F earnings cut by 73%/35% following downward earnings revision for LSIP.
  • Lower CPO price does not translate into higher refining margins.
  • Privatisation attempt may be the only share price catalyst.
  • Maintain HOLD and lower Target Price to S$0.29.



Net losses widened in 2Q19.

  • INDOFOOD AGRI RESOURCES LTD. (SGX:5JS)'s net losses widened to Rp217bn from previous quarter’s Rp58bn loss, triggered by lower downstream profitability amid the low CPO price environment, and dragged by its upstream division’s exposure to the still low CPO prices.
  • We cut our FY19/20F earnings by 73%/35%, partially driven by London Sumatra (LSIP)’s downward earnings revision of 53%/40%.


Where we differ: Road to privatisation collapsed, back to square one.

  • We believe share price upside for Indofood Agri Resources post the collapsed privatisation attempt is limited. There is little room to expand profitability in FY19 even during the current low CPO price environment, albeit we still hope that downstream margins can improve in 2H19 and beyond. That is if Indofood Agri Resources is able to seize the opportunity of low CPO prices currently to minimise its input cost.


2Q19: Net losses widened due to weaker than expected downstream division

  • Net losses widened in 2Q19. Indofood Agri Resources’s net losses widened to Rp217bn from previous quarter’s Rp58bn loss, triggered by absence of an improvement in downstream profitability amid the low CPO price environment, and also dragged by its upstream division’s exposure to the still low CPO prices.

Downstream EBITDA margin dropped to 3.6% in 2Q19.

  • The lower than expected EBITDA performance of Rp89bn (-80% y-o-y,-57% q-o-q) from its downstream division was trigger for the weaker than expected earnings performance in the quarter. Downstream EBITDA margin dropped to 5.4% in 2Q19, albeit CPO price was relatively stable q-o-q in the period.

Meanwhile, upstream performance was affected by weak sales volume.

  • Indofood Agri Resources’s upstream division, similar to LSIP, was affected by lower than expected sales volume expansion on a q-o-q basis due to inventory buildup, and weak output performance in 2Q19. CPO and PK sales volume reached 176k MT (-4% y-o-y, -18% q-o-q) and 43k MT (+19% y-o-y, -9% q-o-q) respectively, despite relatively stable ASP for CPO and PK on a q-o-q basis at Rp6,616/kg (-15% y-o-y, +2% q-o-q) and Rp3,536/kg (-38% y-o-y, -7% q-o-q) respectively.
  • The output performance may have been affected by the dry weather in the period due to the absence of meaningful rainfall around Kalimantan and Sumatra. Albeit no El Nino alert so far, we have still seen some output disruption in 2Q19 nucleus FFB and CPO output of 721k MT (-4% y-o-y, - 3% q-o-q) and 184k MT (-8% y-o-y, -4% q-o-q).


Outlook :


Share price may stay around current level in the hope of another privatisation attempt

  • We believe share price upside for Indofood Agri Resources post the collapsed privatisation attempt is limited. There is little room to expand profitability in FY19 even in the current low CPO price environment. We cut FY19/20F earnings by 73%/35%, partially driven by LSIP’s downward earnings revision of 53%/40%.
  • We still hope that downstream margins can improve, especially if Indofood Agri Resources is able to seize the opportunity of low CPO prices currently to minimise its input cost.


Potential catalyst:


Improving downstream division market, or new privatisation attempt at favourable price.

  • An improving downstream market may help increase the profitability of Indofood Agri Resources’s downstream division.
  • Another share price catalyst is an attempt to restart the privatisation exercise at a better price.


Recommendation


We maintain our HOLD rating with lower Target Price of S$0.29 per share.

  • We are keeping our HOLD rating for now, as we assume there is potential margin expansion if CPO prices stay at the current level at around US$470-500 per MT, which is in line with our FY19 CPO price forecast of US$500 per MT. Moreover, Indofood Agri Resources is currently is trading at 0.4x P/B right now, which looks attractive albeit its poor earnings performance.
  • Our lowered Target Price is mainly driven by the lower earnings forecast due to lower earnings from its upstream division.





William Simadiputra DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2019-08-02
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.29 UP 0.190



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