IFAR’s 1H15 core net profit was below expectations as it only made up 33% of our full-year forecast and 20% of consensus. The main culprit was the higherthan-expected losses from CMAA, its 50%-owned sugar JV in Brazil. The group explained that this was due to lower prices for sugar and electricity. We cut our FY15-17 EPS forecasts by 5% to 19% and lower our target price to S$0.59, as we apply a holding company discount of 20%, to our SOP valuation to reflect weak near-term earnings prospects. Our Hold call is unchanged and we prefer SIMP for direct exposure to the group's assets.
2Q impacted by joint venture and forex losses
Indofood Agri's (IFAR) 2Q15 core net profit (excluding forex gain) fell 87% yoy and 71% qoq due to the weaker plantation contributions and higher losses from its joint venture. Plantation earnings fell 19% yoy due to lower ASPs for palm products and higher costs of production. CMAA, its 50%-owned sugar joint venture in Brazil posted higher-than-expected losses of Rp86bn in 2Q due to low sugar and electricity prices in Brazil. The only bright spot was its edible oils and fats division, which posted a 14% yoy rise in 2Q earnings thanks to lower raw feedstock costs. For the 1H15, the group posted a 59% drop in core net profit due mainly to lower average selling prices achieved for its palm products (-13% yoy to Rp7,567kg for CPO) and Rp115bn losses from CMAA.
Key briefing highlights
SIMP maintained its FY15 production guidance of 0-5% and new plantings target of 5,000-8,000ha for palm oil. We also gather the recently-introduced US$50/tonne palm oil levy, coupled with lower international CPO price, led to lower Indonesian CPO prices in July 2015. But the group is positive on the higher domestic sugar prices in Indonesia of Rp8,900/kg for 2015. It also revealed that its estates located in South Sumatra have experienced lower rainfall in recent months.
Maintain Hold, with lower target price of S$0.59
We maintain our Hold call but lower our target price to S$0.59 as we apply a higher 20% holding company discount to SOP to reflect the group’s unexciting near-term earnings prospects and concern that recent amendments to IAS41 or treatment of biological assets accounting policy may lead to higher depreciation and amortisation charges for the group, resulting in weaker earnings in 2016. (Read Report)
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- DBS Group Research
Source : CIMB Research