Wilmar - It’s All About China

The continuous strength in China’s consumer spending would drive Wilmar International’s (Wilmar) growth and increase our optimism towards its prospects in China, leading us to upgrade its earnings forecasts and target price. We raise our target price from S$4.80 to S$6.50, based on a PE of 15x 2010 revised EPS of S$0.43. Maintain BUY.

Earnings revision. We raise our earnings forecasts for 2009-11 by an average of 33% to factor in higher sales volume and better margins for its soybean crushing and consumer pack in China.

Higher profit margin sustainable. Wilmar enjoys a higher and sustainable profit margin than its competitor due to its proximity to retailers and customers (transportation cost savings) and control on logistics to minimise leakages to a third party as well as business integration to maximise profit from its extensive marketing network. All these factors are likely to lead to at least US$40/tonne of cost savings for its downstream processing business.

Value creation from downstream listing. Unlocking value from the listing of its China operation in Hong Kong could potentially reap a special dividend of S$0.24/ share, assuming a 40% payout from the proceeds of the initial public offering (IPO). A listing in Hong Kong will pave the way for a China listing, which would further open up the domestic market for Wilmar, being a locally incorporated company.

Maintain BUY with a target price of S$6.50. Our new 12-month target price of S$6.50 is based on 15x 2010 PE and in line with Malaysia’s big-cap plantation stocks.

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Indofood Agri - Powering ahead in 2Q09

Better 2Q09 prospects. 2Q09 CPO prices rebounded by 31.7% q-o-q; and at the same time, FFB yields are also expected to recover from tree stress q-o-q. We expect IndoAgri’s 2Q09 revenues to reflect these developments. We also estimate IndoAgri to book unrealised FX gains of c.Rp124bn in 2Q09 (from unrealised FX losses of Rp178bn in 1Q09), as the Rupiah exchange rate to the USD has strengthened from Rp11,575 as at 31 March to Rp10,208 as at 30 June.

09F-10F EPS adjusted by +0.6% and –3.9%, TP raised to S$1.75. We revised our earnings forecasts to reflect changes in IndoAgri’s volume growth estimates, cost structure, and selling prices. While these changes resulted in only minor EPS adjustments through to 2011F, the impact is more pronounced from 2012F onwards (vis-àvis our previous forecasts). Combined with a reduction in Indonesian risk free rate to 9.5% (from 10% previously), we raised the counter’s TP to S$1.75.

Integration is paying off. As we expect IndoAgri’s downstream business to be fully sufficient by 2013F and its sugar plantation and refinery to contribute meaningfully by 2012F, the group should continue to deliver double-digit growth from 2011F through 2016F. Given this prospect, we believe IndoAgri would be more than able to service and repay its debts. We forecast the group’s net gearing to settle at 37.1% by the end of this year; while interest coverage should remain at a comfortable 5.8x.

Wilmar International - Riding on the China euphoria

According to the South China Morning Post, Wilmar has chosen to list its China subsidiary on the Hong Kong market instead of Shanghai. The offering is expected by 1H 2010, and aims to raise US$3-4 bn. This suggests that Wilmar’s China subsidiary is valued up to US$14 bn. As its China business posted net profits of about US$630 mn in FY08, this suggests that Wilmar is aiming to list its China operations at a historical 2008 P/E of 22x. This is significantly higher than China market P/E averages of 17x in 2008 and 16x in 2009.

We estimate that 55% of Wilmar’s earnings are from China; of which two-thirds of the Chinese profits are derived from oilseed crushing and the remaining one-third from the consumer product division.

We believe that Wilmar’s China business should command a blended P/E of 19x, and its non-China business a P/E of 14x. This puts the new target price at SG$5.04 (revised up from SG$4.54). We maintain our NEUTRAL rating on Wilmar.

Golden Agri-Resources: Ex-Right Fair Value of S$0.35

Trading of rights and warrants. Golden Agri Resources (GAR) will begin to trade its rights shares (up to 1,764m) on 27 Jul and the warrants (up to 705m) on 28 Jul. As a recap, GAR initiated a rights cum free warrant issue to raise S$311m net proceeds to "pro-actively strengthen the balance sheet, financial flexibility and competitive position" of the group to support its growth, both internally and externally. After the issue, we note that its net gearing will drop from 9.1% as at end 2008 to just 2.1%.

CPO prices stabilizing after recent slide. The recent slide in CPO prices from an average of US$693 per ton in 2Q09 to around US$595 in Jul was due to the fall in crude oil prices below US$60/barrel as well as worries that the global economic recovery could be a long-drawn affair. This has also resulted in a fall in GAR's share price but it comes as no surprise as the group - being one of the largest palm oil producers in the world) - is susceptible to these fluctuations. While CPO prices have rebounded slightly over the past few days, the outlook for the CPO market remains hazy - supply is widely expected to rise in 2H0 while demand remains uncertain. Nevertheless, we do not expect CPO prices to fall below US$500/ton and should average around US$550-570/ton in 2H09.

Expect 2Q09 results to show good QoQ growth. In any case, given that the average CPO prices have improved from US$538/ton in 1Q09 to US$693 in 2Q09, as well as a very poor 1Q09 showing, we expect GAR results to show relatively good QoQ growth. On the topline, we are expecting a QoQ growth of 20%; however it would still be down nearly 40% YoY, given that the average CPO prices back then were around US$1004/ton. While net profit is expected to surge some 198% QoQ, it is likely to be down 82% YoY; again due to the sharply lower CPO prices.

Adjusting fair value to S$0.35. Although we are bumping up our FY09 earnings slightly by 1.7%, it is mainly due to higher interest income (after the rights issue), we are leaving our revenue number unchanged for now. Meanwhile, our ex-right fair value estimate has been adjusted from S$0.40 to S$0.35. Given the limited upside, we retain our HOLD rating. We would be buyers below S$0.30.

Indofood Agri - Considering Issuing bond by Stefanus Darmagiri?

Salim Ivomas Pratama, 90% owned by Indofood Agri Resources (IFAR) is exploring the possibility of issuing rupiah-denominated bonds amounting to about Rp1.0 trillion. The company plans to use the proceeds to refinance its existing debts. However, whether the bond issuance will materialise or not will depend on market conditions.

We believe the bond issuance is meant to refinance the company's short-term loans. This is in line with the company's strategy of increasing the long-term loan portion while reducing the short-term loan portion. As of 1Q09, about 41% of the company's loans were short-term loans and 59% were long-term loans.

Maintain BUY on Indofood Agri Resources.

First Resources: More value in store

More Indian consumption for world＊s cheapest oil. Despite the global recession, Indian consumers are enjoying world market prices for palm and soybean oil, the first time in a long while as they had long been subject to hefty import duties to protect domestic soybean farmers. Indian palm oil consumption is forecast to rise by almost 1 kg /capita this year from 4 kg/capita last year, after which, it may be hard to reduce from the new level.

Time to accumulate. With over 170,000 ha of land bank to fill, the group targets to achieve 10,000 ha of new planting p.a. Given this target, we now extend the group＊s new planting from 2009F until 2013F. Long-term incremental earnings from these expansions translate to higher valuation for the stock to S$0.80 from S$0.70. We see current price weakness as a good entry point to accumulate FR, which is the cheapest in our universe.

Normalized§ production pattern in 2H09. FR management pointed to a potential supply disruption between late August and late September, given a month of fasting in Indonesia and Malaysia, followed by 1-2 weeks of Eid holidays. At the same time, demand should seasonally pick up through October for Deepavali and mid-Autumn festival.

Stronger 2Q09 earnings. We expect the group's profits to rebound in 2Q09, mainly on the back of stronger IDR, which should work to reverse last quarter FX losses. The group had locked in prices between US$450 and US$500 in 2Q09 up from US$450 in 1Q09. Around 15% of its 2H09 volume had been locked in at US$600 (all FOB).

Indofood Agri Resources: A sweeter outlook

Adding growth from sugar plantations. Indofood Agri Resources (IndoAgri) expects to have a meaningful profit contribution from sugar plantations and milling from the end of 2011F. The group expects to have planted 18,600 hectares of sugar cane by then, preceded by commercial operation of its new 8,000 MT/day sugar mill in South Sumatra by mid-2010F. We expect IndoAgri's sugar revenues to top Rp1tn by 2012F ? the second largest revenue item after palm oil ? contributing roughly 9% of total EBITDA.

Price weakness presents buying opportunity. Notwithstanding an anticipated rise in palm oil inventory over the next few months, we believe seasonal weakness in CPO price is temporary. IndoAgri is now attractively priced and yields 17.4% upside given our TP of S$1.35. We reiterate our Buy call on the stock.

Raising prices. IndoAgri strives to maintain profitability and ? in line with rising CPO prices ? has recently raised its cooking oil selling prices. The group may have a second price increase this month, which will maintain EBITDA margin of between 5 and 10%.

Raising yields. The group has put in place better control on its operations in South Sumatra and replaced Lonsum management. This strengthens our view that further yield improvements are on the way.

Wilmar - Outgrowing its roots

Wilmar is the world’s largest crude-palm-oil refiner, with a 23% market share, and rising. It has delivered wider profit margin than its peers, through strong pricing power, good market insights and economies of scale. We expect 12- 16% YoY profit growth in its refining business from 2010, backed by increasing global demand for edible oils. The company sells its palm oil in bulk and uses its own plantations, which fulfil 8% of its refining-feedstock need, as an effective bargaining chip to lower overall cost.

Wilmar is the largest provider of branded cooking oil in China (44% market share) and benefits from a strong distribution network and production flexibility that stems from having its own crushing business. Market-sharegain will continue as the company has excess crushing capacity in a market where capacity addition is banned and demand is improving. In the longer term, the soybean business will grow with rising consumption of cooking oils in China and meat globally.

Wilmar can leverage its extensive cooking-oil distribution network, which spans 2,560 cities in China, to expand its consumer-product offerings. These currently include cooking oils, flour, rice and bottled water. It can raise funds through the proposed Hong Kong listing of its Chinese assets to realise this growth path. While our base case assumes 7% core EPS growth in 2009 and 20% in 2010, new successful products will trigger additional growth.

Our S$6.00 sum-of-parts-based target price implies 15% upside. The stock has rallied recently but remains attractive versus its merchandising & processing and consumer peers at 13.7x 10CL PE given the company’s dominant market position in almost all of its businesses and strong management team. An increase in free float from shareholder restructuring can result in a higher MSCI weighting and drive a stock rerating.

European 2Q09 Cocoa grind falls short of Olam's expectations

Brussels-based European Cocoa Association (ECA) recently reported that Europe's cocoa grind had fallen 11.3% yoy to 291,763 tonnes in 2Q09. The ECA's statistics cover most of the grinding industry in the European Union and Switzerland, and is a closely watched measure of cocoa demand. The results were below Olam's expectations as one day before the data release, Reuters had interviewed Gerry Manley, managing director of Olam Cocoa, who expected European 2Q09 cocoa grind to fall 8-10% yoy and global grind to be down 6%. Manley, head of Olam's global cocoa operations, attributed the low cocoa grind to falls in demand due to the global recession. He indicated that the financial crisis had been impacting demand from markets like Eastern Europe, and less premium chocolates were being used in markets like US. Manley expects a global cocoa deficit in 2009-10 aided by disappointing mid crop in the world's top producer Ivory Coast.

As mentioned in our recent downgrade note on Olam, the group's volume surge seen in Apr/May 09 was due largely to Chinese re-stocking and has not been sustained. Cotton demand has slightly declined in June, and the outlook is weak. Wool and rubber remain weak due to continued poor consumer spending. Cocoa and dairy, which are said to be recession resistant, are also showing slight weakness.

While the weak demand for cotton, wood, wool and rubber can be explained by the weak global demand for industrial raw materials, it may be a concern to some that the relatively recession-resistant products of cocoa and dairy are also showing signs of weakness. Accordingly, it is logical to wonder whether Olam's other recession-resistant products could see weakness in future.

We reiterate our Sell on Olam for its high valuations and potential disappointments in certain product categories as mentioned above.

Golden Agri-Resources - Signs of production trends turning around

The worst may be over for Golden Agri’s (GAGR) production, which first started deteriorating significantly in Q408. To recap, GAGR’s FFB production declined by 24% YoY in Q408 and 15% YoY in Q109. Although GAGR explained that the contraction was due to weather issues and tree stress, GAGR’s production trends underperformed the sector during this period.

After a troubled Q109, yields and production appear to be improving. Yield started turning positive YoY in April. Yield was still negative YoY in March, although monthly trends were already improving significantly. We expect continued improvement in June/July as the effects of tree stress diminish and as GAGR addresses the bottlenecks and infrastructure problems caused by adverse weather.

We maintain our assumption that production contracts 3% in 2009. We prefer to wait to see if the turnaround in sustainable. However, if we assume production grows by 7% (in line with GAGR’s 5-8% guidance), our 2009 net profit forecast could be lifted by 11%. Aside from production, costs would start improving in Q309 as fertiliser bought at high cost in 2008 would have been drawn down.

Our price target is based on a sum-of-the-parts valuation where the plantations division is valued on a DCF assuming long-term CPO price of US$570/tonne, a WACC of 14%, and long-term growth of 5%.

Wilmar - Integrated and Dominant

With a strong presence in China and dominant palm oil processing capabilities in ASEAN, Wilmar is well positioned to benefit from the growth in Asia. The potential listing of its China business should help investors understand the group’s market positioning and unlock value for shareholders.

The group intends to leverage its strong distribution presence in China to drive growth in other product adjacencies like rice, flour and other consumer food products.Meanwhile the group continues to dominate the consumer pack space, with 45% market share, and maintains the leading share of oil seeds crushing volume in China. Wilmar’s China operations posted a net profit of US$630mn in 2008, making it one of the largest food companies in China.

With 300,00 ha of unplanted land, the group can continue to add to its current planted acreage of 225,000ha, driving volume growth. In addition, processing 40% of the world’s palm oil provides the group significant market intelligence to manage its risks.

Excluding liquid working capital, Wilmar’s gearing is only 0.07x. Following the aggressive expansion over the past couple of years, the pace of capex will likely slow. However the group is likely to pursue M&A opportunities.

The main risk to our price target stems from CPO price fluctuations. We see possible downward price pressure from: 1) a marginal impact from biological tree stress, resulting in higher-than-expected production, particularly from Indonesia; 2) larger- than-expected soybean production in Argentina and Brazil; and 3) more severe demand destruction from a prolonged global economic downturn.

Noble Group - Buy: Commodities Strong; Business Strategically Stronger

Returning to the company post Gloucester Coal deal — Following a period of restriction we are updating our numbers for 1Q09, the Gloucester coal acquisition and the rights issue.

Gloucester; an accretive and energy division catalyst — We think Gloucester will be accretive by c9% for 2010 earnings, based on consensus earnings. The deal will help catalyze value in the coal business. Management forecasts that it will own 20Mtpa of production in three years.

Oil and Gas ambitions in the eyes of management — Expansion and earnings growth remain a focus. Management believes that increasing exposure to oil & gas is paramount. We see two routes; organic resource development (high risk, high reward) or mature asset with life extensions acquisitions as proven in coal.

Revising earnings by -24% and -20% for ‘09E and ‘10E — A reflection of the outlook post the downturn in commodities. This is misleading as we expect a recovery in earnings through 2H09 with a supportive price environment and better medium term outlook following our recent commodity upgrades.

Reiterate our Buy; increasing our target price to S$2.2/s — Near-term trading could be volatile but as a play on China growth with a commodity bent, we think Noble is a name to be accumulating.

Risks near-term around the US$ — The key risk for the trading business is the US$ and if the re-stocking demand is not matched by real demand.

First Resources - Pressured by lower CPO prices

While we are positive on First Resources’ (FR) young age profile of trees and relatively low cost of production versus its peers, we are bearish on CPO prices in view of depressed economic conditions globally potentially affecting demand as well as potentially strong FFB production in the 2H. Hence, we are maintaining our NEUTRAL call, with fair value of S$0.60.

Young age profile of trees. FR’s weighted average age of plantings of 8.3 years is relatively young. In addition, 54.5% of its trees are at peak production age of between eight to 17 years and 14.5% of its trees (out of total planted area of 97,501 ha) are moving into the prime category within the next three years. This implies there is substantial growth to be realised in coming years, with future FFB and CPO production growth supported with minimal increases in costs/capex.
Low cash cost of production. FR has managed to maintain a relatively low cash cost of production of US$200/tonne (for nucleus) for FY08 (in spite of a rising cost environment) as well as in 1Q09. Management has indicated that they would try to maintain this level of production cost for FY09. This low cash cost of production would put them in good stead to weather the harsh operating environment of potentially lower CPO prices in 2H09, tight credit conditions and a slow economic environment.

No significant near term refinancing issues. With the majority of FR’s debt being non current in nature (99.5% of borrowings/debt securities repayable, about IDR2.1t, are non current), there is no refinancing pressure in the short term. This allows management some time before repayment is due, to strengthen its balance sheet and to pay extra attention to financial liquidity and cost management issues.

Potentially lower CPO prices in 2H. We are maintaining our CPO price assumption of RM1,900/tonne for FY09 (current CPO prices are hovering around RM2,300/tonne). Using a P/E of 10x FY10F earnings, our fair value for FR is S$0.60. We are maintaining our NEUTRAL call on the stock in view of our bearish outlook for CPO prices.

Olam - Set to regear for M&As and organic growth

Olam, a global supply chain manager, seems poised to ride agricultural demand growth driven by climate change, population growth and urbanization. Its on-the-ground presence coupled with its integration along the supply chain bode well for margin and volume growth. Olam stands to benefit as volume and prices improve. 1% rise in commodity prices or volume would improve estimated earnings around 0.4%.

Olam has addressed the gearing bottleneck via two equity placements totaling S$745mn, improving its adjusted net gearing ratio to 0.6x from a peak of 1.9x in December 2007. The improved gearing enables it to regear for organic growth and M&As which are expected to drive 25% of its future earnings growth. It has managed to secure 15 deals since 2007, totaling US$742mn. Meanwhile, it is reviewing 14 deals. Thus, we can expect more M&A moving forward, in our view.

Most of the concluded M&As are moving Olam up the supply chain. Management indicated future capital deployment will remain on the upstream division, securing volumes at lower cost and hence boosting margins. Up and midstream margins are usually 15-25% higher than downstream. Based on its track record, we expect future assets/business acquisitions to be shareholders’ value accretive. Net contribution margins have improved around 20bps per annum since FY02.

Our PO of S$3, based on a Gordon growth model, equates to a FY10E P/E of 22x (historical band: 8.2x to 38.4x) and P/B of 3.4x (1.1x to 6.6x). Current share price implies an ROE of 20%, 500bps below long term sustainable ROE of 25%. We expect the share price to continue to re-rate upward once management translates M&As into results and also as more M&As are announced.

Wilmar: Eyes HK Listing for China Ops

Eyes HK Listing for China Ops. Wilmar International (Wilmar) has been reported by Reuters as having hired three banks to handle what could be a US$3b flotation of its China business in HK - unnamed sources cited by the newswire said that the IPO is set for a listing late this year or early next year. While the group has declined to comment on the report, it had previously unveiled such plans to list 20-30% of its China operations in either HK or China to tap investor interest in its biggest market and to raise cash for acquisitions. In FY08, its China business turned in revenue of US$14.3b (49% of overall sales) and an estimated US$500m to its bottom line. Assets in China amounted to US$6.5b, or nearly 40% of its total assets.

Limited impact from lower CPO prices. Meanwhile, CPO (crude palm oil) futures in KL have recently hit a 13-week low, with the actively traded Sep contract falling 6.1% last week, unsettled by concerns of more bearish news on the horizon. The most worrying is the further deterioration of the fundamentals for the crop - industry watchers warned that the CPO stockpile could surge going into the high production period as foreign demand has been poor. However, we do not expect lower CPO prices to have much of a negative impact on the group although revenue may fall (mainly due to its palm and lauric business). On the other hand, a significant downstream player such as Wilmar may benefit from lower feedstock prices as it still sources around 60% of its requirements from third party plantation companies. In any case, we note that Wilmar has shown a consistent ability to manage the price fluctuations, often riding out the volatility with aplomb.

Maintain BUY with S$5.64 fair value. The latest news (though unconfirmed by the group) shows that the proposed HK listing of its China operations is on track. Based on its estimated US$500m bottom-line contribution, we believe that the US$3b flotation is not an issue, assuming a valuation of 20x and a divestment of 30%. However, we will hold off adjusting our numbers until we get more information about the structure and form of the proposed listing. Nevertheless, we are bumping up our valuations slightly from 18x blended FY09/10 PER to 18.5x, deriving a fair value of S$5.78. Maintain our BUY rating.

Indofood Agri Resources - Planting targets lowered as net gearing climbs

IFAR’s share price has more than doubled from S$0.60/share in Mar 2009 Following the doubling of Indofood Agri’s (IFAR) share price since March 2009, we think its valuation is unattractive and we downgrade its rating from Buy to Sell. Overall, we are negative on the plantations sector as we believe there is downside to CPO price in H209 due to an improvement in the supply/inventory situation.

IFAR has one of the highest geared balance sheets in the sector; with net debt of Rp4.6bn (US$453m) and net gearing of 0.41x as at March 2009, which is up from 0.35x in December 2008. Despite the gearing, we estimate EBIT interest cover to be 5.1x in 2009 which is still reasonable in our view. We also note that IFAR has scaled down its planting programme from a target of 20,000 ha pa last year.

The US$/S$ strengthened against the Rupiah since March 2009. Accordingly, we raise our EPS forecast for 2009/10/11 by 15% from S$0.081/S$0.083/S$0.084 to S$0.092/S$0.095/S$0.097. The key changes are: 1) higher Rp/US$ rate of Rp 10.5k from Rp9.8k; 2) higher Rp/S$ rate of Rp7.1k from Rp6.6k. Despite our EPS estimate raises, we believe valuations are unattractive.

Our price target is based on our sum-of-the-parts valuation where plantations are valued on a DCF assuming long-term CPO price of US$570/tonne, a WACC of 14%, and long-term growth of 5%. At our price target, the implied EV/mature hectare and 2010E PE are US$10.5k/hectare and 11x earnings, respectively.

Following a doubling of its share price since March 2009, we downgrade Indofood Agri’s rating from Buy to Sell. In our view, valuations are not attractive and our downgraded rating is also in line with our negative view on the plantations sector.

Olam - Positives reflected in the price; downgrade to Sell

Olam has outperformed the STI following its recent placement to Temasek (273m new shares at S$1.60) and the acquisition of SK Foods (US$39m). We believe much of the good news has been discounted after the share price surge. At 23x FY10E PER, 3.3x P/B, and 11.4x EV/EBITDA, Olam is not only trading at a sizeable premium to its peers, but it is expensive versus its own trading history. Sell.

We believe Olam’s share price strength comes largely from the hope of M&A activities and potential contributions from Temasek. This anticipation, we feel, has been overplayed, and the earnings dilution/contribution disconnect (i.e., immediate EPS dilution from the placement vs. the earnings lag from new acquisitions) shows that much has been discounted with the high valuations. M&A, while exciting, could raise overall risk as the number of moving parts increases.

Our recent company visit indicates that the volume surge seen by the group in April/May ‘09 was due largely to Chinese re-stocking and has not been sustained. Cotton demand has slightly declined in June, and the outlook is weak. Wool and rubber remain weak due to continued poor consumer spending. Cocoa and dairy, which are said to be recession-resistant, are also showing slight weakness.

Our target price of S$2.00 is based on the Gordon Growth method and has been raised after factoring in the recent share placement. Assumptions: ROE of 19%, a long-term growth rate of 3% and COE of 10%. Upside risks include better-than-expected volumes in its products, market share gains and new products.

Wilmar International Limited - Positive datapoints underline our bullish view

It's not just the weather!: The ENSO Index remains in negative territory, hitting -10 in May-2009, pointing towards an increasing likelihood of an El Nino which the Australian Weather Bureau put at over 50%. While weather risk premium provides upside catalyst for CPO price, we reiterate that our positive view on CPO is not solely underlined by the weather alone.

Bullish signal from USDA report: The USDA report released yesterday was positive for soybean. Soybean plantings rose less than market expectations with acreage estimate of 77.48 million acres. The increase, though larger than reported in March, is not sufficiently large to obviate ongoing concerns over inventory stress, as highlighted by J.P. Morgan Global Soft Commodity Strategy team. The positive signal for soybean price is also expected to be supportive for CPO price.

Upcoming monthly CPO inventory data: The June monthly CPO inventory data for Malaysia is expected to be released on 10 July 2009 and is likely to show continued rise from 1.36 million MT in May-2009 to 1.6 million MT by Sep-2009 on the back of higher production season and gradual reversal of tree stress cycle. We have pointed out in our Plantations sector note on 22 June 2009 that this rise is largely priced–in given the over 20% fall in CPO price since May, and further reiterated the limited downside risks to CPO price on firmer crude oil price, tight soybean supply and rising weather risk premium (Plantations sector Alert on 29 June 2009).

Positive implications on Wilmar: These fundamentally positive datapoints continue to be strong catalysts for Wilmar. We have pointed out in our initiation note - Wilmar International Limited: Extended growing season on 22 June 2009 that a 10% increase in our CPO forecast would increase our net profit estimate for Wilmar by about 5.4%, as prices for refined products rise in tandem, and a high degree of cost pass-through could be achieved by the company. Separately, a steady uptrend in soybean price should also be slightly positive for Wilmar, as we note that the company does take its own view on commodity prices, although it hedges its soybean feedstock prices. The time interval between the import of soybean and the eventual sale of soybean meals/oil could boost margins for its oilseeds and grains business as prices move up. Evidently, oilseeds & grains PBT/MT improved to US$71.02 in 1Q08 in line with higher soybean and soybean products prices along with improvements in crushing margins. We reiterate our OW on Wilmar.

Indofood Agri Resources - Sturdy production in the next few years

Higher CPO prices in 2Q09 despite recent CPO price correction. Despite the recent price weakness, CPO prices (FOB Malaysia) still increased a significant 33% qoq to about RM2,575/tonne (for the quarter ending 19 Jun 09).

Sturdy CPO production in the next few years. We expect FFB production of IFAR to increase at a 3-year CAGR of 9% in 2008-11 as about 40% of its total plantation area is in prime age which can produce the highest yields and another 29% going into mature age. The company increased new planted area for palm oil by 26,346 ha in 2008. Coupled with a slightly improvement in OER and the completion of two new CPO mills in Kalimantan by 3Q09, we expect CPO production to increase at a 3-year CAGR of 10%.

Expect stronger revenue and sustainable margins in 2Q09. We expect IFAR to post stronger revenue in 2Q09 on the back of sturdy CPO prices and higher production volume. Moreover, we believe margins in the plantation division are sustainable thanks to lower fertiliser purchase prices.

The RSPO certification will help it penetrate Europe energy market. Last weekend, London Sumatra Indonesia (LSIP/BUY/Rp4,100), a subsidiary of IFAR, was awarded The Roundtable on Sustainable Palm Oil (RSPO) certification for its four mills and factories located in North Sumatra estates which covers about 50% of LSIP’s annual production. This certification will help the company to push its palm oil products to the European energy players. LSIP may also command a premium selling price of US$10-20/tonne for the CPO under RSPO certification.

Lower-than-expected production and higher demand in 3Q09 may cap price correction. CPO futures declined 6.7% wow to RM2,315/tonne on 19 June due to lower exports of palm oil from Malaysia, higher-than-expected palm oil inventory in Malaysia, and concerns of softer demand from India following aggressive buying from Indian importers. We believe the price correction may be capped by lower-than-expected production and higher demand at end-3Q09 following the festive season in major CPO consumer countries, such as Malaysia, Indonesia, China and India.

We expect net profit to decline 15% yoy to Rp1,056b in 2009 due to lower CPO prices, and increase 25% to Rp1,321b in 2010 on the back of higher CPO prices and production volume. Our CPO price assumptions for 2009 and 2010 are RM2,200/tonne and RM2,600/tonne respectively.

Olam International - A margin enhancing bid in SK Food’s assets

Olam has been awarded the assets of SK Foods, the second largest US tomato processor (dehydrates) under a Chapter 11 asset sale programme for US$39m. We rate Olam Neutral.

This purchase price is about a third of the assets’ estimated replacement value of US$130m and is in line with Olam’s expansion into food ingredients processing. Olam believes that this business can generate US$200m in revenue and EBITDA margins of 12–13%, ie, more than 2-fold its typical supply chain margin at steady state operations by FY12 or about 5% of the net profit forecast for FY12, with unleveraged ROE likely in the range of 20% plus. We expect FY10 will be near breakeven given limited time to complete contracts with growers & customers this season (legal completion expected in July).

This will expand its range of dehydrates – it already has a presence in garlic (Key Foods Ingredients in 2007) and onion dehydrates (DeFrancesco & Sons, also via a Chapter 11 sale in 2008) in the US. The dehydrates segment represents a value-add expansion for Olam’s nuts, spices and pulses segment (this segment contributed to 18% of Olam's profit pool in 1H09).

While Olam has continued with rather attractive but smaller-sized M&A deals (such as this one for SK Foods), tightness in the long-term credit market means that it has not yet re-embarked on large-scale M&A deals.

To that end, we note the most important benefit of Olam's proposed S$438m placement of 273.5m new shares to Temasek is financial – we anticipate that having Temasek as a 13.8% shareholder of Olam could improve its access to long-term debt financing, which we believe is a key factor that could help Olam’s plans to accelerate growth via acquisitions. This will be put forth for shareholders' approval on 29 June.

12-month price target: S$2.10 based on a PER methodology. Catalyst: Enhanced earnings contributions from the various M&A deals completed in the past 2-3 years.

Straits Asia Resources: Improving outlook

Energy markets tightening. Straits Asia Resources Ltd (SAR) has seen its share price more than doubled since its March lows, in tandem with the resurgence of oil prices. The impact of global economic stimulus plans has started to flow into the real economy, leading to tighter energy markets. Improvements in fundamentals bode well for SAR, as firmer coal prices will boost its revenue. Management holds the view that energy markets will continue to tighten in 2H09 and is optimistic that its FY10 output will be priced at more favourable levels than recent spot prices of around US$60 / ton.

FY09 output fully committed. Since our last update, SAR has entered into sales agreements for the remaining 27% of its FY09 output. We estimate a blended ASP of US$85/ton for its FY09 output, slightly lower than our previous US$87 forecast due to recent weak coal prices. Nevertheless, this is still above FY08's ASP of US$70.50/ton, putting the group on track to deliver record earnings in FY09. This is also well above its breakeven cost of approximately US$38/ton. Production volumes have picked up in 2Q09 following a seasonally wet and slow 1Q09, and we expect output to gain momentum from 2H09 onwards on the back of more favourable weather conditions and increased production capacity.

Increased production volumes to propel earnings. SAR has recently installed additional infrastructure at its mines. The enlarged capacity will enable it to produce up to 19mt of coal per year, more than double its targeted FY09 production volume of 9mt. Management targets to ramp up its production to 19mt by FY12, pending the resolution of forestry boundary restrictions at Sebuku. We expect growing production volumes to drive SAR's earnings in FY10 and beyond. A sustained recovery of energy prices will serve as an added boost to its earnings. Nevertheless, we are assuming a moderation of coal prices given that energy prices have fallen way below their peak levels attained in 2008.

Improving outlook; upgrade to BUY. We have adjusted our earnings estimates by -20% to +2% as we lower our FY09 ASP assumption and tweak our cost projections, but raise our ASP assumptions for FY10 and beyond. This lifts our DCF-based fair value estimate to S$2.07 (previously S$1.38). Given the stabilisation of oil prices and the improving outlook for global energy markets, we upgrade SAR to a BUY. Dividend yield remains attractive at 5.2%. Key risks to our assumptions include a reversal of energy prices and refinancing risk.

Indofood Agri Resources - Strong Production Coming Onstream

Strong FFB production growth in the next few years. We expect Indofood Agri Resources’ (IFAR) fresh fruit bunch (FFB) production to increase at a three-year CAGR of 9% in 2008-11. This is because about 40% of its total plantation area is at the prime age that can produce the highest yields and 29% is entering the mature age. Thus, we expect higher FFB production growth of 10% yoy for 2010 than that of 7% yoy for 2009.

RSPO certification will support penetration into European energy market. IFAR’s subsidiary London Sumatra Indonesia (LSIP) was awarded The Roundtable on Sustainable Palm Oil (RSPO) certification for four mills that account for about 50% of LSIP’s annual production. The certification would helpLSIP sell its palm oil products to European energy players or even command a premium selling price of US$10-20/tonne for CPO under RSPO certification.

Lower-than-expected production and higher demand in 3Q09 may cap price correction. CPO futures declined 6.7% wow to RM2,315/tonne on 19 June due to lower exports of palm oil from Malaysia, higher-than-expected palm oil inventory in Malaysia and concern over softer demand from India following aggressive buying from Indian importers. The price correction may be capped by lower-than-expected production and higher demand as at end-3Q09 following the festive seasons in major CPO-consuming countries.

Maintain BUY. We maintain our BUY call with a target price of S$1.45 based on 12x 2010F PE for mid-cap and integrated plantation players. Given our CPO price assumptions of RM2,200/tonne (-23% yoy) and RM2,600/tonne (+18% yoy) for 2009 and 2010 respectively, net profit is expected to fall 15% in 2009 and rise 25% in 2010 on higher CPO prices and production volume. The stock is trading at 2009 and 2010 PE of 12.0x and 9.6x respectively.