• Indofood Agri Resources (IndoAgri) (UNRATED) released its 3QFY17 results last Friday. The group's results were above consensus estimates of a net profit of Rp680.056bil for FY17F. IndoAgri's core net profit rose from Rp50bil in 9MFY16 to Rp553bil in 9MFY17 as revenue expanded by 19%.

• IndoAgri recorded higher plantation earnings and profit turnarounds in the sugar joint venture in Brazil and sugar associate in the Philippines. The 23% YoY increase in plantation EBITDA in 9MFY17 was underpinned by a 12% rise in FFB nucleus production and 10% improvement in CPO price. On a negative note, the EBITDA of the edible oil and fats division fell by 45% YoY in 9MFY17 as margin shrank from 4% to 2%.

• IndoAgri expects to achieve a FFB nucleus production growth of 10% in FY17F (9MFY17: 12%). The group reckons that its FFB output in 4QFY17 would be lower than 4QFY16 as the recovery from El Nino has already occurred in 9MFY17. Weather conditions are normal at IndoAgri's oil palm estates in Indonesia.

• There is no guidance on the group's FFB production for FY18F yet. However, IndoAgri opines that industry production growth in Indonesia in 2018F would be lower than 2017F due to a slower increase in new mature areas. The highest level of new plantings of oil palm took place in 2007 and subsequently, new plantings in Indonesia have declined. FFB production in Indonesia may also be affected by replanting of old oil palm trees in North and Central Sumatra. IndoAgri noticed that most of its oil palm seeds have been sold for replanting purposes recently as opposed to new plantings previously.

• IndoAgri believes that CPO prices are well supported until 1Q2018. The yield recovery from El Nino had already taken place in 9M2017. As such, CPO production is expected to ease in November and December 2017. CPO stockpiles are low in Indonesia currently. The group reckons that average CPO price in 4Q2017 would be higher than 4Q2016.

• IndoAgri plans to replant about 3,000ha in FY17F. The group's replanting policy is not based on the age of the oil palm tree. Instead, the selection of areas to be replanted is based on FFB yield and the height of the tree. If the oil palm trees achieve an average FFB yield of less than 16 tonnes/ha and if the trees are more than 6 metres, then they would most likely be replanted. IndoAgri replanted about 1,800ha of oil palm trees in 9MFY17.

• Cost of production is expected to rise by 5% in FY17F (FY16: Rp4,300/kg (RM1,339/tonne)). IndoAgri recorded a production cost of Rp4,733/kg (RM1,543/tonne) in 9MFY17, which was 5% higher than 9MFY16. The group is expected to provide the outlook on fertiliser price in its next conference call in 1QFY18.

• As for the minimum wage in Indonesia, IndoAgri is of the view that the rate of increase in 2018F would be lower than 8% in 2017E. Normally, Jakarta would announce its new minimum wage in November and this would be followed by the provinces.

• IndoAgri believes that sugar prices would rise from April 2018 onwards. This is due to a drop in production in Brazil as millers switch to producing ethanol instead of raw sugar. Ethanol production has taken priority over raw sugar as the selling prices are higher. Production of raw sugar in October 2017 in Brazil was the lowest in five years.

• The weak EBITDA margin in the edible oil and fats division (mainly cooking oil and margarine products) in 9MFY17 was due to an oversupply of stearin, which is used to produce margarine. This had resulted in low prices of margarine and stiff competition between margarine producers in Indonesia. We understand that previously, most of the stearin was used in the biodiesel market. Due to the softness in the biodiesel industry in Indonesia, the supply of stearin has gone into the margarine market.

Source: AmInvest Research - 30 Oct 2017