• Core net loss of Rp212bn despite rebound in refining margin.
• ASP hit INDOFOOD AGRI RESOURCES LTD. (SGX:5JS)’s upstream division – the earnings backbone.
• Still prefer Indofood Agri Resources’ upstream division LSIP.
• Maintain HOLD with unchanged Target Price of S$0.19.

Core Net Loss of Rp212bn in 4Q18

• Core net loss widened to Rp212bn in 4Q18 due to weaker-than-expected upstream division and still weak refining business performance. Upstream EBITDA margin reached only 3.7% in 4Q18 (3Q18 EBITDA margin was 23.4%) although downstream EBITDA expanded to 10% in 4Q18 (3Q18 refining margin was 4.6%) due to lower input cost.
• We are keeping our overall FY19 forecast unchanged as the net change over higher refining margin is offset by lower upstream division, including London Sumatra (LSIP)’s earnings performance in the period.

Where We Differ: Limited Margin Expansion in Sight

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

Potential Catalyst: Improving Downstream Division Market

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

Valuation

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

Key Risks to Our View

• Commodity prices. Indofood Agri Resources’ 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 projections.

What's New - Still in the Red

Core net loss of Rp212bn in 4Q18.

• Indofood Agri Resources’ core net loss widened to Rp212bn in 4Q18 due to weaker-than-expected upstream division and still weak refining business performance.
• Upstream EBITDA margin reached only 3.7% in 4Q18 (3Q18 EBITDA margin was 23.4%) although downstream EBITDA expanded to 10% in 4Q18 (3Q18 refining margin was 4.6%) due to lower input cost.

Retaining our FY19 forecast for now – expecting refining margin to expand, and offset lower earnings forecast

• We are keeping our overall FY19 forecast unchanged as the net change over higher refining margin is offset by lower upstream division, including London Sumatra (LSIP)’s earnings performance in the period. We expect the refining margin to help Indofood Agri Resources achieve positive earnings this year.
• Our forecast implies FY19 EBITDA margin of 5%, which is lower than the 4Q18 figure on the back of our CPO price recovery assumption which means higher input cost for Indofood Agri Resources’ refining division but it still will be higher versus the 2018 quarters' average due to the expansion of Surabaya refinery capacity to 300,000 MT which adds volume and scalability to the division.

Rating and target price: Maintain HOLD rating with unchanged Target Price of S$0.19

• As we are maintaining our overall earnings forecast beyond FY20, we have left our rating and target price unchanged at this point. Although Indofood Agri Resources’ share price performance and valuation multiple look undemanding, we remain cautious on how Indofood Agri Resources’ can turn around its earnings momentum at least to the 2017 level before it can justify a higher valuation multiple.
• In the meantime, we prefer its profitable upstream division which we believe to have the best exposure via ownership of its Indonesia-listed upstream entity London Sumatra (LSIP IJ).

Source: DBS Research - 01 Mar 2019