Expect Indo Agri net profit to surge by 122% this year

We expect net profit to surge by 122% this year and remain flattish post 2015. The higher bottom-line growth in 2014 will be driven by:
a) higher CPO prices,
b) normalised CPO production CAGR of 7% in 2013-16, and
c) contribution from its Brazilian sugar operations, Companhia Mineira de Açúcar e Álcool Participações.

Maintain HOLD with a higher target price of S$1.01. Entry price: S$0.78.

• Production recovery post biological tree stress. Indofood Agri Resources’ (IFAR) FFB and CPO production are expected to register a robust 3-year CAGR of 7% and 8% for 2013-16 to 3.59m tonnes and 1.01m tonnes respectively. The stellar CPO production growth is mainly due to:
a) high newly-mature area of 15,041ha, thanks to aggressive new planting in 2010 (accounting for 8.2% of 2014 mature plantation), and
b) FFB yield recovery post biological tree stress to 17.1x in 2014 from 16.3x in 2013.

• Higher contribution from CMAA. Last year, IFAR acquired 50% of Companhia Mineira de Açúcar e Álcool Participações (CMAA) for US$71.7m. As of 1Q14, CMAA has about 45,600ha of sugar cane plantation and a sugarcane processing capacity of 3.8m tonnes. CMAA contributed a loss of about Rp21 b due to seasonality as sugar harvest is at the lowest in the first quarter. We expect CMAA to contribute 7-8% of IFAR’s earnings in 2014-16.

• We upgrade our net profit estimates by 13% and 33% for 2014 and 2015 respectively to factor in higher CPO price assumptions, stronger production growth and higher contributions from subsidiaries.

STOCK IMPACT
• Higher newly-mature areas to boost FFB yield. FFB production is expected to grow at a 3-year CAGR of 8% for 2013-16 on the back of an increase in newly-mature areas and
an uptick in FFB yield from 16.3 tonnes/ha in 2013 to 17.1 tonnes/ha, 17.5 tonnes/ha and 18.3 tonnes/ha in 2014-16 respectively, as a higher portion of oil palm trees move into young prime age of above six years.

EARNINGS REVISION/RISK
• We have remodelled our earnings estimates and raise our earnings forecasts for 2014- 16. We are now expecting net profit of Rp1.16t (EPS: Rp813), Rp1.17t (EPS: Rp819) and Rp1.06b (EPS: Rp742) for 2014-16 respectively.

VALUATION/RECOMMENDATION
• Maintain HOLD with a target price of S$1.01, based on SOTP valuation after implementing a holding company discount of 25%. Entry price is S$0.78, based on -1SD to its 5-year mean PE.