Indofood Agri Resources Ltd. - Is it affected by narrowing CPO price between Indonesia and Malaysia?

21/3/2013 – Indofood Agri Resources' share price has not recovered since reporting a big fall in profit earlier this month.

The palm oil and sugar producer reiterated the same outlook that it provided during Q3 FY12 results.

It says the outlook for palm oil industry remains positive as global demand is likely to be supported by consumption growth from emerging Asian economies like India and China.

The long-term outlook for rubber also remains upbeat, supported by healthy demand from tyre-makers, automotive industries and rubber goods manufacturers in developing markets.

China in particular, is expected to contribute strongly to this demand, given its large population and status as the world’s largest natural rubber consumer.

However, in the medium term rubber demand growth will be driven by global GDP growth.

But CIMB Research says the group aims to raise crude palm oil (CPO) output by 5% to 10% in 2013, as well as sugar production.

This, helped by lower CPO stocks, could partially make up for lower selling prices of rubber and CPO in Q1 FY13, and cost increases of 10% to 15% in FY13 from costlier labour.

The company recently announced earnings for Q4 FY12:

Revenue: +4.3% YoY to IDR3,324 bln
Gross profit: -19.8% to IDR909 bln
Gross margin: 27.4% vs 35.6%
EBITDA: -33% to IDR622 bln
EBITDA margin: 18.7% vs 29.1%
Profit: -64.7% to IDR161 bln
Cash flow from operations: IDR853.9 bln vs IDR822.5 bln

Revenue rose mainly thanks to its sugar operations and higher sales of edible oil products.

But this was offset by lower sales volume of palm products and lower average selling prices (ASP) of plantation crops.

CIMB Research maintained its OUTPERFORM rating with a target price of S$1.40

It says a recovery in CPO prices and a boost from its sugar acquisition are potential catalysts.

Costs are still a problem, but CIMB believes this has been reflected in its valuations.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. How much is the narrowing CPO price between Malaysia and Indonesia going to help?

The price differential between CPO in Malaysia and Indonesia continues to narrow.

This is reflected in IndoAgri’s average selling price of IDR6,227/kg or RM1,974/tonne in Q4 FY12, which was only RM196/tonne lower than the spot price in Malaysia.

In Q3 FY12, the price difference was RM402/tonne.

Question

2. What is the target white sugar level output in FY13?

The group produced 62,000 tonnes of white sugar in FY12, three times more than in FY11, at an average price of IDR9,435 per kg.

Sugar posted an operating profit of IDR171 bln, a turnaround from IDR75 bln losses in the previous year.

Question

3. Will inventories come down in Q1 FY13?

CPO sales volume in Q4 fell 14% YoY, despite a 4% rise in CPO production.

This was a reflection of lower output in South Sumatra due to the dry spell in July-September 2012.

In addition, poor roadwork infrastructure had further dampened sales volume for the quarter.

This may have led to a 32,000 tonne QoQ increase in CPO inventories to 114,000 tonnes at December.

Therefore that makes us wonder whether these inventories would be offloaded in Q1 FY13.

We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.

Sofar, we have not had a reply (which is why you are seeing this message).

Sources & further information

Sources

Statutory disclosure
Press release
Presentation materials
CIMB Research Report

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