Indofood Agri Resources: Higher MI to be a drag on earnings (DMG)

(BUY, S$1.275, TP S$2.03)

Indofood Agri’s (IFAR) 2Q11 earnings was in line with our expectations at IDR309.1b (+31.3% YoY) on the back of higher ASPs and sales volume for palm products. However, we revise FY11 and FY12 earnings downwards by 10.4% and 24% respectively, on the back of higher minority interest (MI), partially offset by higher revenue from a strong production recovery. One re-rating catalyst would be earnings accretive acquisitions post PT SIMP’s listing. Valuations remain attractive at 8.9x prospective P/E, versus its peers at low to mid teens. Maintain BUY with a lower TP of S$2.03, based on 15x FY11/FY12 blended EPS and a CPO price assumption of RM3,200/tonne in FY11.

2Q results within expectations. 2Q11 earnings (+31.3% YoY) came in within our expectations at IDR309b, attributable mainly to a 53.6% increase in sales with higher ASPs and sales volume of palm products, as well as higher oil seed sales.

Upping our CPO and edible oils and fats sales volume estimates. 2Q11 FFB nucleus production was strong, with YoY growth hitting 14.2% (12.8% in 1Q11), on the back of a production recovery in its South Sumatra estates and Kalimantan estates. With no adverse weather year-to-date and 2H11 production is still expected to be stronger than 1H11 (55%:45%), we upped our FY11 CPO production by 7.9% to 847k tonnes.

M&A the next catalyst. IFAR remains committed to spend S$230m acquiring new agri businesses on IFAR’s level (both upstream and/or downstream activities and outside Indonesia since PT SIMP has the right of first refusal within Indonesia). Potential targets are likely to be brownfield projects, located along the equatorial region and are involved in palm, sugar or rubber.

Lowering earnings on higher minority interest. While our FY11 and FY12 PAT was up 12.4% and 4.9% respectively after raising our revenue forecast mainly on the back of higher CPO production volume, we have increased MI by 63.1% and 69.2% for FY11 and FY12 respectively. 2Q11’s MI came in above our original estimates (+204.4% YoY). This resulted in lower FY11 and FY12 earnings of IDR1.4t (-10.4% from previous estimates) and IDR1.3t (-24%) respectively.