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Tuesday, September 15, 2015

Indofood Agri Resources Ltd - Prefer exposure in the subsidiar

 ● We have cut our profit estimates for Indofood Agri (IFAR) by 3- 21% in FY15-16 as we revise down our Ringgit and Rupiah/USD exchange rate assumptions. We have kept our CPO price forecasts at RM2,250/t in 2015 and RM2,400/t in 2016.
Our 2016 price forecasts have incorporated a moderate El Niño that will negatively impact production but boost prices up, thus benefitting the producers. There could be upside to our 2016 assumptions should a very strong El Niño hit. Full report.
We have not incorporated the new accounting rule on biological assets to our IFAR estimates. It seems management will opt for a one-off equity write-down and higher depreciation. While it potentially reduces FY16 profits, we believe net gearing (now 0.3x) should be at a manageable level despite the equity write-off.
Based on our revised estimates and 11.5x FY16 P/E, we arrive at our S$0.49 TP (from $0.63). We believe IFAR has rightly traded at a discount to its subsidiary LSIP, which is net cash, purer upstream and has higher beta to palm oil prices. We upgrade IFAR to NEUTRAL.
Estimates revision. We have cut our profit estimates for Indofood Agri (IFAR) by 3-21% in FY15-16 as we revise our average Ringgit/USD to RM3.9 in 2015 and RM4.5 in 2016 (from RM3.7), and Rupiah/USD to Rp13,400 in 2015 and Rp14,900 in 2016 (from Rp13,000). We have kept our RM2,250/t CPO price forecast in 2015 and RM2,400/t in 2016.
Hot, hot, hot El Niño. The confirmed El Niño phenomenon is now the strongest since 1997-98, according to Australia Bureau of Meteorology. Our 2016 palm oil price forecasts have incorporated a moderate El Niño that will negatively impact production and boost prices. There could be upside to our assumptions in 2016 should a very strong El Niño hit. Currently, there is dryness in Sabah, Sarawak, Johor and Pahang in Malaysia. Meanwhile in Indonesia, South Sumatra and Kalimantan are looking drier.
Based on our channel checks, North Sumatra and Riau regions saw higher rainfall pattern compared to other regions in Indonesia. SIMP's palm plantation is 70% located in South Sumatra, Kalimantan and Java which are impacted more by the dry weather at present.
Accounting changes impact. We have not revised our estimates on the new accounting treatment changes to biological assets as management is still in discussion with auditors. It seems management will opt for a one-off write-down of the accumulated biological asset gains in the equity. We should be expecting higher depreciation in the P&L too, arising from the depreciation of the bearer plant. While it potentially reduces FY16 profits, we believe net gearing should be at a manageable level despite the equity write-off. Current IFAR net gearing stands at 0.3x.


Technical Analysis

NEUTRAL for now. Based on our revised estimates and 11.5x FY16 P/E, we arrive at our revised target price of S$0.49 for IFAR. We believe IFAR has rightly traded at a discount to its subsidiary LSIP. This is given LSIP's net cash position, purer upstream operations, and bigger market cap and stock liquidity. We believe the stock has corrected ahead; we now have a NEUTRAL rating (from U) on IFAR. (Read Report)

Source : Credit Suisse Asia Pacific Equity Research

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