Indofood Agri remain attractive at 10.6x prospective P/E,

Target S$2.42

Indofood Agri’s (IFAR) 4Q11 core earnings were in line with our expectations at IDR322b, down 25% YoY. This was due to the higher MI upon listing of PT SIMP, higher third-party FFB purchases, higher production costs, partially mitigated by a 7% YoY increase in revenue. One re-rating catalyst would be earnings accretive acquisitions, which could see IFAR spending up to U$400m. We tweaked the contribution from sugar and the edible oil and fats segment and lift our FY12 earnings by 15.1%. Valuations remain attractive at 10.6x prospective P/E, versus its peers at low to mid teens. Maintain BUY with a higher TP of S$2.42, based on mid-cycle P/E of 16x FY12 EPS (previously 15x).

No surprises. Stripping away fair value gains of biological assets and FX gains, 4Q11 earnings was within our expectations. Core earnings in 4Q came in at IDR322b, down 25% YoY, largely attributable to higher MI upon listing of PT SIMP, higher third-party FFB purchases, higher wages and fertiliser costs. 4Q11 revenue was up 6.9% YoY, hitting IDR3.2t on the back of higher sales volume of CPO, partially offset by lower asp of palm products. FY11 core earnings grew 13% YoY to IDR1.4t, up from IDR1.2t a year ago. This was largely on the back of a 32.9% jump in revenue with higher sales of plantation crops and edible oils and fats products, but partially offset by a 3ppt decline in gross margins (due to an increase in volume of FFB purchased from plasma farmers and higher production costs). A dividend of 0.3S¢ per share has been declared.

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Earnings accretive M&A a potential catalyst. If the right deal comes along, IFAR may spend up to U$400m (includes borrowings) acquiring new agri businesses. Potential targets are likely to be brownfield projects, located along the equatorial belt like South America, Africa and Asia and are involved in palm, sugar or rubber.

Lifting earnings estimates. Driven by strong domestic demand for branded cooking oil, sales of the edible oil and fats segment jumped from IDR6.6t in FY10 to IDR9.1t in FY11. On the expected continuation of the strong performance of that segment, we have raised our FY12 earnings forecasts by 15.1%, mainly on the back of higher volumes from edible oil and fats (+17.8%) and an increase in sugar prices (+11.4%). We now expect IFAR’s FY12 and FY13 earnings to come in at IDR1.5t and IDR1.7t respectively.

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