Indofood Agri Resources: S$0.54 NEUTRAL (TP: S$0.51) - Cooking Oil Selling Price Dropped 10-15%, Lowering Earnings Estimates

Source:DMG

Cooking oil selling prices easing. An update with management uncovers that IFAR’s selling prices of cooking oil and fats in Indonesia has been revised downwards by 10-15% on average, due to the steep decline of CPO price since its highs in mid July. We have adjusted our FY09 valuations to take into account a 10% decline in margarine’s and a 15% decline in cooking oil’s selling prices, from 9M08 average selling prices.

Capex plans under review. During the update, management has said that they are maintaining their target to expand oil palm planted area to 250,000 ha by end 2010. Assuming no new plantings were carried out in 4Q08, this works out to approximately 38,000 ha of new plantings per year in 2009 and 2010. However, in view of the current credit tightening environment, management has also indicated that they are reviewing non-essential capital expenditure currently.

Downgrade to neutral, new fair value of S$0.51. We are maintaining our CPO price assumption of RM1,500/tonne for FY09 (CPO futures for Jan 09 delivery is RM1,675/tonne) and a 10% YoY CPO production growth per management’s guidance. However, taking into account the reduction in selling prices for cooking oil and margarine, FY09 earnings has been revised downwards by 48% to IDR802b. Factoring in a P/E of 7x our FY09F earnings (7x being the average of 10-year historical low P/E valuation for Indonesian and Singapore listed plantation companies), we derive a new target price of S$0.51 (S$1.12 previously) and downgrade our call on the stock to neutral.

source:DMG

The Material provided above is for information only and does not constitute an offer or solicitation to purchase or sell the shares mentioned

Indofood Agri Resources: Lonsum’s scientific breakthrough – DMG report

Patenting the F1 production process. PT PP London Sumatra Indonesia Tbk’s (Lonsum)subsidiary, Sumatra Bioscience (SB), announced yesterday that it has developed a process,reportedly the world’s first, to produce F1 oil palm hybrid seeds, reinforcing our belief in thestrength of their research facility. The European Patent Office has verified SB’s approach to F1oil palm hybrids as the first of its kind and hence, potentially allowing SB to be the first commercial producer of F1 oil palm hybrids.

Yield estimated to triple, boosting competitiveness over rival oils. Based on historic yieldsfrom other F1 hybrid crops in USA, such as corn, oil palm’s conventional yield is estimated tomore than triple, reaching 18.5 tonnes/ha. For illustration, corn’s annual yield in the USAincreased six folds since the 1930s, after using F1 hybrid seeds. Palm oil is currently thecheapest and most productive of all oil crops. The potential increment in yield would boost palmoil’s competitiveness vis-à-vis its rival vegetable oils.

Freeing up precious land. With the ability to generate higher yields, the hybrid seeds will resultin less land required for crop cultivation. This would help alleviate the escalating global foodshortage crisis – the World Bank estimates global demand for food is forecasted to double by2030, with the world’s population expected to grow by an additional three billion by 2050.

More environmentally sustainable. With the rapid growth in palm oil consumption, there havebeen many environmentalists/ organizations lobbying for sustainable palm oil production. Thereis concern that this growth in production has occurred at the expense of irreplaceable tropicalforests in Indonesia and Malaysia. With the reduction in land required for palm oil cultivationmentioned above, this concern can be partly assuaged.

No near term impact on earnings. SB expects to commence commercial production of F1 oilpalm hybrids by 2018. In line with its commercialization plans, SB will invest US$5m in FY09 toexpand its existing R&D facilities.Sensitivity analysis and valuation.

Current CPO spot prices are around RM1,800-1,900/tonne.At this price range, our sensitivity analysis indicates that Indofood Agri’s (IFAR) target pricewould be S$1.48. We are currently using a CPO price assumption of RM2,600/tonne for FY09,obtaining a target price of S$2.65. With IFAR trading at 2.8x FY09 earnings we maintain ourBUY rating.

The Material provided above is for information only and does not constitute an offer or solicitation to purchase or sell the shares mentioned