Indofood Agri Resources Ltd: Buy (Upgraded): Broadly in line; upgrade to OUTPERFORM from Neutral

Broadly in line; upgrade to OUTPERFORM from Neutral. FY10 core net profit (excluding biological assets and forex gains) of Rp1,145bn was 5% above our expectation but 5% below consensus. The positive variance came from higher CPO prices achieved. No final dividend was declared, contrary to our expectation. We are keeping our earnings forecasts and target price of S$3.00 (16x forward P/E or 10% premium to our market target). We also introduce FY13 numbers. However, we upgrade the stock to Outperform on account of its attractive valuations against peers and diversified crop exposure. Its share price has declined 22% to underperform the STI by 14% since we downgraded the stock to Neutral on 9 Dec 10. We see re-rating catalysts from a potential listing of its subsidiary PT SIMP, and stronger-than-expected output and sugar earnings. Key surprises. Edible oils and fats posted a profit of Rp44bn in 4Q10 against a loss of Rp63bn a year ago due to the absence of a Rp55bn charge for rebates owing to its distributors. The other surprise was a Rp309bn gain from changes in the fair value of biological assets due to new planting areas. Another positive was the good progress made in new plantings, at 8,608 ha in 4Q10, bringing total planted area to 15,041 ha for the full year.

Positive outlook. The group expects a 5-10% increase in CPO production for 2011 and indicated that weather at its estates has improved slightly. Cost of production is expected to rise slightly due to higher fertiliser and labour costs. It has been able to pass on higher feedstock costs to consumers in Indonesia by raising cooking-oil selling prices by another 5% in Feb 11 following two increases of 7% each in Nov and Dec 10. It also expects its sugar division to contribute more meaningfully in the latter part of 2011 with the new sugar refinery coming on stream. On the proposed listing of its 90%-owned PT SIMP which owns all of its operating assets including the stake in Lonsum, the group indicated that: 1) PT SIMP will remain a subsidiary of the group after the listing; 2) it plans to maintain the listing status of Indo Agri; and 3) the listing will be in the best interests of shareholders but more details can only be revealed when the group has received regulatory approvals. We view this, and the recent sale of treasury shares as well as an 8% stake in Lonsum, as part of its plans to unlock value for shareholders which would be positive in the mid-term.

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