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.
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