SINGAPORE (May 2): DBS Group Research is maintaining its “hold” call on Indofood Agri Resources with an unchanged target price of 36 cents on the back of limited profitability expansion in sight.
“Our view is that there is likely to be insignificant margin expansion ahead (which is a critical factor for [Indofood Agri’s] share price),” says lead analyst William Simadiputra in a flash note on Monday.
“Moreover, in our view, steady CPO price outlook means [Indofood Agri] has limited room to improve its downstream division's profitability performance,” he adds.
In the 1Q18 ended March, Indofood Agri saw its earnings drop by close to 71% to Rp 49.8 billion ($4.8 million), on lower sales volume and selling prices of palm products.
1Q18 revenue fell 27.1% to Rp 3.2 trillion as a result of lower sales contribution from its plantation and edible oils & fats (EOF) divisions.
See: IndoAgri's 1Q earnings plunge to $4.8 mil on commodity price declines
“1Q18 performance was affected by seasonal low CPO output in the 1Q of the year,” Simadiputra says.
He adds that, similar to its other upstream peers, Indofood Agri’s earnings could improve due to normalising output and expectation of stronger CPO price performance for the rest of this year.
“Moreover, improving downstream market may provide room for [Indofood Agri] to fix its downstream division’s profitability,” he adds. “In the meantime, [Indofood Agri’s] performance will be supported by its profitable upstream plantation division, such as London Sumatra.”
As at 4.11pm, shares of Indofood Agri are trading 1 cent lower, or down 3.1%, at 31 cents. This implies an estimated price-to-earnings ratio of 9.9 times for FY18.