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.

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