• Indofood Agri (IFAR) booked net losses of Rp27bn in 2Q18. 
• Upstream division failed to lift earnings, amid still weak edible oil and fats division. 
• Earnings to turn positive in 3Q18, but likely to stay weak this year. 
• We have a HOLD rating with Target Price of S$0.24. 

What’s New 

Our Quick Take: Core net losses of Rp27bn in 2Q18.

Indofood Agri (IFAR) booked core net losses of Rp27bn, sending 1H18 core earnings to Rp54bn, below expectations. 

Upstream profitability contracted q-o-q due to lower top-line performance, on lower-than-expected quarterly sales volume and ASP trend of Palm Kernel (PK) despite the still robust quarterly CPO ASP and sales volume performance. 

Meanwhile, IFAR downstream division still posted weak profitability performance. As other non-operating expenses such as SG&A and financing cost were relatively flat q-o-q, earnings turned red. 

Upstream division top line and profitability affected by inventory build-up, PK prices.

Indofood Agri Resources reported upstream division EBITDA of Rp452bn (-51% y-o-y, -11% q-o-q), implying EBITDA margin of 22.5% (1Q18: 27% ). 

2Q18 upstream division's performance was affected by PK sales volume and ASP of 36,000 MT (-20% y-o-y, -16% q-o-q) and Rp5,845/kg (+flat y-o-y, -16% q-o-q) respectively. Lower sales volume was likely affected by inventory build-up and sales timing – deferred sales volume to next quarters for more favorable prices. 

CPO ASP reached Rp8,083/kg (flat y-o-y, +3% q-o-q) in 2Q18, weakening IDR trend against USD buffered up Indonesia domestic palm oil prices. Meanwhile, CPO sales volume reached 184k MT (-10% y-o-y, +8% q-o-q). 

All in all, upstream revenue reached only Rp2tr (-10% y-o-y, flat q-o-q). 

Downstream division improved slightly, driven by higher volumes and top-line performance.

Indofood Agri Resources' edible oil and fats division EBITDA reached Rp77bn (+17% y-o-y, +48% q-o-q) rebounding from its previous low base, due to improving downstream top-line performance of Rp2.6tr (+5% y-o-y, +14% q-o-q). However, the downstream division still insufficient to lift up Indofood Agri Resources' earnings performance, due to the still low single-digit EBITDA margin of 2.9% in 2Q18.

Source: DBS Research - 27 Jul 2018