Indofood Agri Resources – Raising TP to S$2.10 – maintain BUY

IFAR reported 2Q09 results that were slightly ahead of our expectations. On a YoY basis, net profit fell 4.4% to Rp. 682.4b; stripping out its biological revaluation of Rp. 593.2bn, we estimate net earnings declined by 27%. On a sequential basis, however, core net profit rose 23%. Revenue declined by 30% to Rp. 2.3b, but was up 15% sequentially, in line with CPO price trends.

IFAR also recorded a Rp. 240bn forex gain on the back of the strength in the Rupiah, which mainly pertained to its US dollar denominated loans. For its core business, gross margins did see a decline to 33.5% versus 1Q09’s 41.2%. IFAR also saw sequential strength on CPO prices, which rose 24%. IFAR was also able to raise average selling prices by between 5-10% over 1Q.

Going forward, IFAR has raised its ASPs by a further 5% in July, and this is expected to hold steady for the next 2 months. More importantly, we expect sales volumes to increase through the second half of the year, in line with seasonal factors, as cooking oil consumption is expected to increaser through the festival seasons. IFAR’s cost of production is also expected to decline on lower fertiliser and fuel costs.

On a longer-term outlook, the fundamental demand for palm products remains strong, both in Indonesia and globally. IFAR’s leading position in the Indonesian branded cooking oil market makes it a prime beneficiary of this. We are adjusting our FY09 core net profit forecast upward by 7% to Rp. 1,144.5b, or an EPS of S$0.115. This is still 6% ahead of consensus estimate.

We are raising our target price to S$2.10 from S$1.35, based on a re-rating of palm related stocks to around 18x on the back of higher CPO prices. We also maintain our Buy recommendation.

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