Indofood Agri Resources - Buyout Offer at S$0.28/share

Date: 11/04/2019

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

  • Indofood Agri Resources (SGX:5JS) receives buyout offer from parentco PT Indofood Sukses Makmur.
  • Offer at S$0.28/share represents 20% premium over historical VWAP.
  • Parentco has intentions to delist and privatise Indofood Agri Resources.
  • Recommend to accept the offer.

What’s New

Indofood Agri Resources (IFAR) receives buyout offer at S$0.28/share from parentco PT Indofood Sukses Makmur.

  • PT Indofood Sukses Makmur, which currently holds 74.52% of Indofood Agri Resources (SGX:5JS), announced a voluntary conditional cash offer for Indofood Agri Resources’ remaining shares at S$0.28/share, representing 7.7% premium over its last traded price on 5 Apr 2019, and approx. 21.5%, 26.3%, 29.0% and 23.1% over the volume-weighted average price (“VWAP”) per share for the 1-month, 3-month, 6-month and 12-month periods up to and including 5 April 2019 respectively.
  • See Indofood Agri Resources' announcement.

Intention to delist and privatise IFAR based on the offer document.

  • According to PT Indofood Sukses Makmur, the delisting and privatisation of Indofood Agri Resources will allow the parent company to reduce and streamline the number of listed entities under the group structure and provide flexibility for strategic initiatives and/or operational changes to be implemented across the group.

Offer represents 0.4x price-to-book (P/BV) or US$4.4k EV/ha.

  • The proposed offer represents 0.4x P/BV. Adjusting for matured planted area, the proposed offer represents US$4.4k EV/ha, which is at a discount to typical plantations transactions at US$13k EV/ha.
  • We believe that Indofood Agri Resources’ steep discount to its peers is attributed to its shrinking operating profit margins, unlike its peers who have been able to demonstrate an ability to maintain their margins amidst palm oil price movements.

Negative earnings coupled with low trading liquidity.

  • Earnings in two out of the last three quarters had entered negative territory mainly on weak downstream and upstream margins. Trading volume of Indofood Agri Resources has been < 0.1% in the last 12-month period leading up to 5 April 2019.
  • According to PT Indofood Sukses Makmur, the offer gives minority shareholders the “opportunity to realise their entire investment in the Shares at a premium over the prevailing market prices which may not otherwise be readily available to Shareholders given the low trading liquidity of the Shares.”

Recommend to Accept the Offer

  • We recommend to accept the offer, though the offer is at the lower end of acquisition multiples for plantations, for abovementioned reasons. Our last recommendation on Indofood Agri Resources was HOLD (Target Price $0.19/share) as we remain cautious on Indofood Agri Resources’ earnings momentum and its ability to return to pre-2017 earnings levels, although Indofood Agri Resources’ share price performance and valuations were undemanding.
  • We recommend more direct exposure via ownership of its Indonesia-listed upstream entity London Sumatra (LSIP IJ).

Source: DBS Research - 11 Apr 2019

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