INDOFOOD AGRI RESOURCES - Down but not out (DMG)

BUY

Price S$1.60

Previous S$2.79

Target S$2.41

We revise Indofood Agri’s (IFAR) FY11 earnings downwards by 13.8%, on the back of a dilution of its stake in 72%-owned (down from 90%) subsidiary, PT Salim Ivomas Pratama (PT SIMP) post listing. The stock had been sold down on concerns over earnings dilution and the implied lower valuation of IFAR with PT SIMP’s listing. However, there are re-rating catalysts in sight, such as earnings accretive acquisitions. Maintain BUY with a lower TP of S$2.41, based on 15x FY11 EPS and a CPO price assumption of RM3,200/tonne.

Overly negative sentiment depressed IFAR’s price. The listing of PT SIMP has created negative sentiment for IFAR, causing its price to be beaten down to a 52-week low of S$1.53 recently (see Figure 2). There are concerns on 1) earnings dilution, 2) the lost of investor interest in IFAR (being the holding company) versus PT SIMP (under which the plantation assets are held) as an entry point into the agri sector and 3) the significantly lower implied valuation of IFAR with PT SIMP’s IPO price of IDR1,100. At IDR1,100, IFAR’s implied valuation is S$1.62 (refer to Figure 1). Every IDR100 movement to PT SIMP’s price indicates a corresponding ~6.2% movement to IFAR’s implied valuation. We think interest in IFAR may increase as arbitrage opportunities between the two may surface from time to time, although this may add volatility to the stock.

M&A activities a potential catalyst. IFAR is committed to spend S$230m acquiring new businesses, likely on IFAR’s level. These are possibly businesses with both upstream and/or downstream activities and may be located outside Indonesia (since PT SIMP has the right of first refusal within Indonesia). We think this is possibly a re-rating catalyst for IFAR and remain positive on the company. In addition, IFAR is likely to declare its maiden dividend payout of ~20% (our estimates) since listing in 2007.

Lowering earnings but valuations looking attractive. We are lowering our FY11 earnings by 13.8% from IDR1.9t to IDR1.6t, on the back of shareholding dilution in PT SIMP post listing. However, valuation is looking inexpensive with IFAR trading at 10x FY11 EPS, against its peers of around mid teens.