Indofood Agri Resources - 2Q09: Results above expectations; expect sturdy margin in 2H09

2Q09 core net profit jumped 78% qoq due to higher CPO ASP. We expect margin to remain stable in 2H09. We raise our target price to S$2.00 on higher margin assumption and a stronger rupiah against the US dollar.

Strong 2Q09 earnings on higher ASPs and forex gains. Indofood Agri Resources (IFAR) posted strong 2Q09 core net profit (excluding changes in fair value of biological assets), which increased 78% qoq to Rp427b. This was mainly attributable to higher crude palm oil (CPO) average selling prices (ASP) (+24% qoq) offset by lower CPO sales volume (-3% qoq), as well as forex gains of Rp240.2b in 2Q09 vs a loss of Rp94.8b in 1Q09.

1H09 core net profit, however, declined 21% yoy. Results are above our expectation as 1H09 core net profit represents 63% of our previous forecast. EBITDA margin improvement in 2Q09. EBITDA increased 31% qoq in 2Q09 on stronger revenue while cost held steady. Therefore, EBITDA margin improved to 37% in 2Q09 from 33% in 1Q09.

Sturdy CPO production ahead. As about 40% of plantation area is in the prime age and can produce high yield, and another 29% is expected to become mature area of about 54,789ha, we expect fresh fruit bunch (FFB) production to increase at a three-year CAGR of 9% in 2008-11.

Expect stronger revenue and sustainable margins in 2H09. We expect IFAR to post robust revenue growth in 2H09 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. Fertiliser prices ytd have fallen 30% compared with that in 2008. And IFAR’s current fertiliser price is 10% lower than in 1Q09.

Maintain BUY. As we have lifted our earning forecasts, we therefore raise our target price from S$1.45 to S$2.00, based on 12x 2010F PE for mid-cap and integrated plantation players.

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Indofood - Misperception and earnings growth – strong stock drivers

The misperception of Indofood’s earnings quality and growth suggests significant upside. Importantly, the noodle business, and not CPO, will drive future profits, accounting for two-thirds of NPAT. We raise our earnings estimates by 27% and 32% for FY09 and FY10, respectively, putting us at 36% ahead of the Street.

We believe there is material upside to our estimates as they are based on a modest 2% increase in noodle prices, a wheat price that is 15% higher than spot and an assumption of no debt paid down.

We believe that Indofood’s earnings are relatively insulated from the volatility in commodity prices. Indofood is 3x less volatile than pure CPO plays. A 10% increase in wheat prices can be offset by a < 2% increase in the price of noodles.

As Indofood is trading at 10.6X FY10 (7.1X ex-IFAR), we find it attractive. We raise our target price to Rp3,500, implying FY10 P/E of 14.7X and 11.7X ex-IFAR, a material discount to regional peers’ 15.2X. The implied valuation does not appear to be too demanding given the stability of the company’s earnings, and because it is one of the best proxies to domestic consumption. Risks: rupiah volatility and rising wheat prices.

Indofood Agri Resources - Outsized good results

Indofood Agri Resources (IndoAgri) reported 2Q FY09 results before the market opened on 14 August. Net profits declined 3.9% YoY, down 19.3% YoY if one excludes the effect of a non-cash bio-asset revaluation gain.
The lower YoY revenues were primarily due to lower prices, which were partly offset by higher volumes produced.

After taking into consideration two distorting items (ie, bio-asset revaluation and forex gains for a US dollar-denominated balance sheet/revenue cross-hedge), the results were slightly better than our expectation. As a result, we have raised our FY09 adjusted net-profit forecast (excluding bio-asset revaluation) by 9.6%. Our new adjusted net-profit forecasts are now in line with Bloomberg consensus. Including the bio-asset revaluation, we have raised our FY09 net profit forecast by 50.9%. No major surprises were announced at the company’s analyst briefing.

Our six-month quantitative-model-derived target price is S$1.08. The downside reflects our assumption that IndoAgri’s stock price will follow the crude palm oil (CPO) price lower to our projected target level of US$525/tonne by 31 December 2009 from its current level of around US$700/tonne.

We have a Sell rating on IndoAgri, based on our view that CPO prices may decline by year-end. This anti-consensus view is based on our thesis that global CPO supply will rise HoH in 2H09 due a recovery from impaired yields from ‘tree stress’ and the seasonal peak growing season.

Agri-Resources - Supportive 2Q09 Results

Stay OW: We maintain our PT for Indofood Agri-Resources’ (IFAR) at S$1.90 per share as we are keep our EPS estimates essentially unchanged. IFAR’s share price is now discounting a CPO (crude palm oil) price of US$770/T vs. our F2010 estimate of US$800/T, we estimate. At our PT, IFAR would trade at F2010 P/E of 11x, which we view as attractive against a sector average of 14x.

Supportive 2Q09 Results; EPS Unchanged. IFAR’s 2Q09 plantation profits grew 40% Q/Q, offsetting the lower profits from non-plantation divisions. The net impact is neutral to our estimates. Given positive company guidance, we expect better non-plantation profits in 2H09.

CPO Stocks Remain Tight: We believe the CPO price will remain firm in the near term. Indonesian FFB (fresh fruit bunch) yields recovered in 2Q09, but we continue to see tightness in global CPO stock levels in the near term for two reasons: 1) yield stress is not over in Malaysia as we see a yield recovery for Malaysia only in 2010; and 2) CPO export demand remains robust.

10% Upside: Our 2009-11 EPS estimates are 18% above consensus on our higher CPO price assumption. Long term, IFAR is one of top two picks within our CPO coverage; KL Kepong (KLKK.KL, OW, RM13.40) being the other. However, short term, we prefer Golden Agri-Resources (GAGR.SI, OW, S$0.48; +20% upside) and KLK (+19% upside) given their superior share price upside. Near-term catalysts: 1) Consensus earnings upgrade; 2) firm CPO price trend going into Ramadan festival; and 3) good 3Q09 results in November 2009.

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.

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.

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.

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.

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.

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.

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.

Indofood Agri Resources: Raising CPO price assumptions

CPO prices raised on tighter supply of soybeans. While we still expect palm oil prices to moderate in 2H09 in line with seasonally higher production, the drop may be lower than previously expected ? due to lower than expected Argentine soybean production. Higher forecast soybean prices and tight palm oil stock/usage ratio hence prompted us to raise our FY09F and FY10F CPO prices to RM2,300 and RM2,300 from RM1,900 and RM2,000, respectively.

FY09F and FY10F EPS raised by 7.3% and 11.6%. With CPO price upgrades, we raised the group's cooking oil and margarine prices by more moderate rates of 9-14.8%, as fully passing on raw material increases may bear consequences on IndoAgri's market share. The group's cost of third party CPO purchases would, nevertheless, increase proportionately to CPO prices. Along with cuts in Lonsum's seed sales, IndoAgri's FY09 and FY10 EPS forecasts were, hence, raised by 7.3% and 11.6%, respectively.

Buy call maintained, TP raised to S$1.35. The above changes were reflected in our revised valuation (based on DCF, WACC 12.5% and terminal growth rate 3%), which now yields a fair value of S$1.35. We continue to like IndoAgri's dominance in the Indonesian edible oil market and decent own CPO volume growth potential, which should continue to augment its downstream margins going forward. Maintain Buy.