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.

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