Wednesday 30 July 2014

Indofood Agri Resources

DBS Group Research, July 29
Q2 2014 earnings in line on annualised basis: Excluding translational foreign exchange losses of 91.5 billion rupiah (S$9.78 million), IndoAgri (IFAR) booked Q2 2014 core earnings of Rp316 billion (+377 per cent y-o-y; +228 per cent q-o-q ) - representing 25 per cent of our full year forecast (ex translational foreign exchange gains/losses).
On a pretax level, H1 2014 results represented only 32 per cent of our full year forecast versus 41 per cent historical average) - given the poor Q1 2014 performance.
Despite strong sequential recovery in Q2 2014 edible oils and fats contribution, overall performance was dragged by 22 per cent q-o-q jump in G&A expenses, sequentially lower CPO ASP (average selling price); and a jump in tax rate to 34 per cent from 26 per cent in Q2 2014.
Higher contribution from edible oil and fats division: The group omitted disclosure of segmental Ebitda in its results announcement, but Q2 2014 plantations revenue recorded a 4 per cent sequential decline (+21 per cent y-o-y) to Rp2,332 billion; we suspect marginally higher volumes were offset by lower ASP.
On the other hand, edible oils and fats revenue rebounded sequentially by 28 per cent (+32 per cent y-o-y), as Q2 2014 benefited from the full impact of the about 6 per cent hike in cooking oil and margarine ASPs since April 2014 and the delivery of inventory backlogs in the previous quarter.
Expanding debt, but balance sheet still strong. Net debt to total equity ratio stood at 27 per cent at end of June 2014, up from 25 per cent at end March 2014, on higher debt. IndoAgri had spent about Rp1.5 trillion on capex in H1 2014 vs. our forecast of Rp2.2 trillion for the full year. This excludes announced acquisition of 3.8k ha of sugarcane estates for Rp227billion in July 2014.
Our view: Boost from Q3 2014 earnings may be inadequate to meet our earnings expectations. We expect seasonal contribution from its sugar division to drive IndoAgri's Q3 2014 earnings, in addition to peak harvesting season for palm oil. But, with ramp-up in fertiliser costs and dry conditions re-appearing in East Sumatra, H2 2014 earnings may not meet our current expectations.
Recommendation: Near-term recovery priced in. Our "hold" rating stays for now, pending further analysis and review of our CPO price forecasts. We do not expect a significant recovery in IFAR's share price, given the bearish outlook on near term soya bean prices. We believe the counter has priced in this year's prospective jump in earnings.
HOLD

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