Indofood Agri Resources: Vulnerable due to refinancing needs - UNDERPERFORM (Macquire)

We downgrade Indofood Agri Resources (IFAR) to Underperform from Neutral, following the recent run-up in the share price, which we believe is unlikely to be sustained. However, we revise our target price to S$0.49 from S$0.41 previously.

About 50% of IFAR’s debt is short-term (amounting to about Rp2,135bn), of which Rp1,415bn relates to IFAR’s acquisition of London Sumatra (Lonsum). We have assumed that IFAR is able to refinance this portion of the debt (due at the end of July 2009). In addition, we estimate that IFAR’s subsidiary, Lonsum, will need to raise an additional US$70m in financing by 2010. If IFAR/Lonsum fails to secure the financing, capex plans (aggregating to Rp2,285bn over 2009/10) would be impacted, which in turn, would impact IFAR’s profits over the medium term.

Operations update
Plantations business

• IFAR’s palm-planted area (nucleus) stood at 173,000ha by end September 2008, which wasexpected to increase to ~185,000ha by the end of 2008. We understand that management’s earlier planted area target of 250,000ha by end 2010 is under review. We estimate that given thefall in CPO price and financing issues, IFAR would now be able to plant only about 200,000ha byend 2010.
  

• Nevertheless, we expect IFAR’s FFB production to increase by an average 10% pa over 2009/10 mainly on account of increase in mature hectarage.
  

• Based on our expectations of declining CPO prices, we expect the EBITDA margin of the plantations business to drop from 51% in 2008 to 30% in 2009/10.
  

Cooking oil business

• About 70% of IFAR’s CPO production is sold internally to its cooking oil division, which in turn, processes it and sells it in the domestic market as branded cooking oil. IFAR is a market leader in the branded cooking oil market in Indonesia with a market share of 48% (note that 18% of cooking oil market in Indonesia is serviced by branded cooking oil).