Indofood Agri Resources: Raising CPO price assumptions

CPO prices raised on tighter supply of soybeans. While we still expect palm oil prices to moderate in 2H09 in line with seasonally higher production, the drop may be lower than previously expected ? due to lower than expected Argentine soybean production. Higher forecast soybean prices and tight palm oil stock/usage ratio hence prompted us to raise our FY09F and FY10F CPO prices to RM2,300 and RM2,300 from RM1,900 and RM2,000, respectively.

FY09F and FY10F EPS raised by 7.3% and 11.6%. With CPO price upgrades, we raised the group's cooking oil and margarine prices by more moderate rates of 9-14.8%, as fully passing on raw material increases may bear consequences on IndoAgri's market share. The group's cost of third party CPO purchases would, nevertheless, increase proportionately to CPO prices. Along with cuts in Lonsum's seed sales, IndoAgri's FY09 and FY10 EPS forecasts were, hence, raised by 7.3% and 11.6%, respectively.

Buy call maintained, TP raised to S$1.35. The above changes were reflected in our revised valuation (based on DCF, WACC 12.5% and terminal growth rate 3%), which now yields a fair value of S$1.35. We continue to like IndoAgri's dominance in the Indonesian edible oil market and decent own CPO volume growth potential, which should continue to augment its downstream margins going forward. Maintain Buy.

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