Indofood Agri Resources - Still Below Expectation

Date: 31/10/2018

Source  :  DBS Vickers
Stock  :  Indofood Agri       Price Target  :  0.19      |      Price Call  :  HOLD
        Last Price  :  0.325      |      Upside/Downside  :  -0.135 (41.54%)

  • Core earnings back in the black at only Rp14bn in 3Q18, below our and consensus estimate. 
  • Downstream division’s EBITDA margin rebounded to 4.6%, but still insufficient to lift overall earnings. 
  • Improvement in earnings is the key share price driver. 
  • Maintain HOLD with lower Target Price of S$0.19. 

Still Below Expectation

  • 3Q18’ core earnings below our expectation. Indofood Agri Resources (IFAR) posted core net profit (reported net profit ex. Forex and BA gain/losses) of Rp14bn (-87% y-o-y) in 3Q18, rebounded from previous quarter’s core net losses of Rp57bn, but still below our and consensus forecast.
  • Downstream division’s EBITDA margin jumped from the 2Q18 low of 2.9% to 4.6%, however still insufficient to lift earnings performance. We cut our FY18 earnings forecast by 44% – we assume IFAR’s earnings will only recover to Rp31bn in 4Q18.

Where We Differ: Limited Margin Expansion in Sight

  • We expect margin expansion ahead to be insignificant (which is a critical driver to Indofood Agri Resources’ share price). Moreover, in our view, a steady CPO price outlook means that IFAR has limited room to improve its downstream division's profitability performance.

Potential Catalyst: Improving Downstream Division Market

  • An improving downstream market may help IFAR’s downstream division’s profitability to improve. For now, IFAR's performance will be supported by its profitable upstream plantation division, i.e. London Sumatra (LSIP).


  • We lowered our DCF-based Target Price (FY19F as base year) of S$0.19, assuming 11.6% WACC and 3% terminal growth rate.
  • Our target price implies 7% share price downside potential and hence, maintain HOLD.

Key Risks to Our View

  • Commodity prices. IFAR’s share price is driven by CPO price expectations and, to a certain extent, by refining margins and sugar prices. There would be downside risk to our CPO price forecast if output expands substantially ahead of industry rojections.

3Q18: Core Earnings Missed Our Estimate

  • Indofood Agri Resources (IFAR) posted core net profit (reported net profit ex. Forex and BA gain/losses) of Rp14bn (-87% y-o-y) in 3Q18, rebounded from previous quarter’s core net loss of Rp57bn, but still missed our expectation on higher than expected noncash charges mainly depreciation expenses (3Q18 Rp464.5bn, +11% y-o-y, +28% q-o-q).
  • Revenue and EBITDA figures were largely in line with our forecast. EBITDA reached Rp700bn (-14% y-o-y, +47.7% q-o-q) – 9M18 EBITDA of Rp1.8tr (-23% y-o-y) accounts for 80% of our FY EBITDA forecast.
  • Core earnings rebounding trend were driven by stronger output from its upstream plantation division which has helped to keep cost low.
  • Upstream division’s EBITDA margin expanded slightly q-o-q to 23.5% in 3Q18 as EBITDA reached Rp525bn (-26% y-o-y, +16% q-o-q). Meanwhile, downstream division’s EBITDA margin rebounded from the 2Q18 low of 2.9% to 4.6% (EBITDA : Rp128bn (+967% y-o-y, +66% q-o-q) however, still insufficient to lift earnings performance.
  • Top line reached Rp3.7tr (flat y-o-y, +10% q-o-q), in line with our and consensus’ forecast.
  • Looking at pre-elimination segmental breakdown, plantation (upstream) and downstream revenue reached Rp2.2tr (-11% y-o-y, +11% q-o-q) and Rp2.8tr (-7% y-o-y, -5% q-o-q) respectively.

Disclosed upstream related products sales volume rebounded q-o-q.

  • Not only tracking the output pattern we discussed later, but also extra sales volume from stockpile liquidation. Crude Palm Oil (CPO) and Palm Kernel (PK) sales volume reached 224k MT (flat y-o-y, +22% q-o-q) and 59k MT (+2% y-o-y, +64% q-o-q) respectively.
  • CPO and PK average selling prices reached Rp6,920/kg (-11% y-o-y, -11% q-o-q) and Rp4,929/kg (-20% y-o-y, -13% q-o-q). Weaker ASP q-o-q was driven by lower benchmark prices, partially offset by the weakening IDR trend against the US dollar.

Operational performance remained robust in 3Q18.

  • Internal fresh fruits bunches (FFB) reached 997k MT (+14% y-o-y, +32% q-o-q), while external fruits purchase followed a similar pattern to London Sumatra, increasing to 342k MT (+38% y-o-y, +58% q-o-q). CPO and PK production volume reached 278k MT (+19% y-o-y, +39% q-o-q) and 67k MT (+18% y-o-y, +37% q-o-q) respectively, following the higher processed FFB.
  • Extraction rate for both remained sublime at 21.9% and 5.6%.

Earnings Forecast

44%/24% earnings revision in FY18-19F accounting for lower downstream profitability performance

  • We cut our FY18 and FY19 earnings forecast by 44% and 24% respectively. Albeit Indofood Agri Resources (IFAR)'s net earnings at this level is very sensitive – slightly recovery on downstream EBITDA margin may significantly improve the net earnings, we believe our assumption is conservative, considering that low CPO price in 3Q18 did not help IFAR to significantly improve its earnings
  • performance. Our new forecast implies IFAR’s earnings will only recover to Rp31bn, with EBITDA of Rp308bn in 4Q18. Our FY18 and FY19 earnings are below consensus due to lower downstream division margin assumption.

Rating and Target Price

Maintain HOLD rating with lower Target Price of S$0.19

  • We maintain our HOLD rating with lower DCF based Target Price of S$0.19. Since our earnings downward revision mainly driven by higher non-cash charges assumption mainly depreciation (FY18/FY19 EBITDA only lowered by 6%), the revision only marginally affected Indofood Agri Resources’ long term FCFF and our DCF based Target Price.
  • Valuation is undemanding at 7.9x FY19 EV/EBITDA, but we hesitate to impute a higher valuation multiple as we remain cautious on the pace of earnings hitting the 2017 level.
  • In the meantime, we prefer Indonesia-listed upstream entity London Sumatra (LSIP IJ, BUY, Target Price Rp1,400) for exposure to Indofood Agri Resources profitable upstream division.

Source: DBS Research - 31 Oct 2018

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