Indofood Agri Resources

Kim Eng on 1 Mar 2012

Indofood Agri Resources (IFAR SP) – Steady core growth
Previous day closing price: $1.615
Recommendation – HOLD (maintained)
Target price – $1.53 (maintained)

FY11 in line. Indofood Agri’s (IFAR) FY11’s numbers were in line with expectations. It recorded a net profit of Rp.1,489b. Headline 6.3% net profit growth was unexciting due to the reduced stake following PT SIMP’s listing. Operating numbers, however were impressive. Looking ahead, FY12 earnings will be driven by higher CPO prices, a progressive output rise from maturing estates, and growing sugar contributions. However, we believe that its prospects have been factored into IFAR’s price, and we retain our Hold recommendation.

An excellent year. IFAR recorded a 33% growth in revenue to Rp. 12,605b which drove a 26% rise in operating profit. However, final net profit growth of 6% was diluted by a higher level of minority interests due to the lower stake in PT SIMP following the subsidiary’s listing on the Jakarta stock exchange in May 2011. IFAR also recorded a lower non-cash biological gain in FY11 versus FY10. Margins were lower due to greater downstream sales, but these still drove profits higher. Sugar, however, recorded a small operating loss, while in its start-up phase.

Growth across the board. For FY12 we expect IFAR’s increased CPO output from maturing plantations to trickle down, and drive the bottom line. We estimate CPO output to grow by 7% (within management’s guidance) and a modest pickup in CPO prices, due to an expected shortfall in substitutes such as soy. However, fertilizer costs are moving up, and downstream margins may be clipped by an increase of cooking oil from producers incentivized to move downstream due to Indonesia’s export taxes. Sugar will start meaningful contributions in the current year, with the completion of its milling and refining facilities, but is still relatively small versus IFAR’s mainstay palm products.

Fully valued. On balance, we therefore expect a steady 10% improvement in FY12 core net profit. Current PER multiples of its main operating subsidiary PT SIMP is trading in lin with market peers, and the derived SOTP valuation from this indicates that IFAR is fully valued, near our target price of $1.53. We therefore maintain our Hold rating.