• Downstream division has yet to pick up.
• Upstream division will remain as performance backbone.
• Valuation is undemanding at this point.
• Maintain HOLD with Target Price of S$0.24.

Target Price Lowered to S$0.24, Maintain HOLD Rating

Profitability improvement is still not in sight. Although Indofood Agri Resources (IFAR)’s valuation is undemanding, we believe the scope of any re-rating and share price recovery would be very limited, unless CPO price rallies beyond our forecast, which would help to improve its profitability.

At this juncture, we prefer its pure upstream subsidiary, London Sumatra (LSIP).

Where We Differ: Limited Profitability Expansion in Sight

We expect margin expansion to be insignificant (which is a critical driver to IFAR’s 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

Improving downstream market may help IFAR to fix its downstream division’s profitability. For now, IFAR's performance will be supported by its profitable upstream plantation division, such as LSIP.

Valuation

• We lowered our DCF-based Target Price (FY18F as base year) to S$0.24, assuming 11.6% WACC and 3% terminal growth rate.
• Our target price implies 7% share price upside potential; 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 forecasts if output expands substantially ahead of industry projections.

A Look at Company's Listed History – What Drives Its Share Price?

IFAR’s share price performance vs CPO yield performance relative to sector.

Indofood Agri Resources (IFAR)’s share price correlates well with operating profit margin (OPM) performance in general.

CPO prices (in IDR) as a critical factor. 

Palm oil price is the key catalyst for plantation stocks; share price trend generally tracks palm oil spot price. However, the outperformance and underperformance of plantation stocks to CPO price are dictated by the productivity factor i.e. stronger- or weaker- than-expected yields.

IFAR’s share price correlation to CPO prices has broken down in recent years, and we believe OPM is the main driver to share price irrespective of CPO prices, as long as refining margin is positive.

Source: DBS Research - 02 Jul 2018