• Indofood Agri Resources (IndoAgri) (UNRATED) released its FY17 results yesterday, which were within consensus estimates. IndoAgri reported a core net profit of Rp640bil in FY17, which was 37% YoY higher. Revenue rose by 9% YoY to Rp15.8 trillion in FY17. The group's FFB production (nucleus) only rose by 4% in FY17 as in the 4Q, FFB output fell by 13% YoY. Average CPO price increased by 7% YoY to Rp8,217/kg (RM2,641/tonne) in FY17.

• IndoAgri's FY17 FFB production growth was mainly driven by a 12% YoY increase in Kalimantan. This helped offset zero FFB growth in Riau and a small 3% expansion in Sumatra. Kalimantan accounted for 20% of IndoAgri's FFB production in FY17 while Riau and North Sumatra accounted for another 60%. South Sumatra made up the balance 20% of IndoAgri's FFB output in FY17.

• IndoAgri is expecting an FFB output growth of 5% to 10% in FY18F while CPO production is estimated to rise by 5%. CPO production growth is envisaged to be slower than the increase in FFB in FY18F due to a drop in FFB purchases. We understand that some of the smallholders have been selling their FFB to other mills or building their own palm oil mills.

• Cost of CPO production is expected to increase in FY18F mainly due to an 8% to 10% rise in labour costs. This is in line with the average minimum wage hike of more than 8% in FY18F. IndoAgri's cost of production rose by 12% to Rp4,800/kg (RM1,543/tonne) in FY17 dragged by a higher volume of fertiliser application. IndoAgri applies about 8-9 kg of fertiliser per palm per year currently. Fertiliser price was flat in FY17.

• Weather conditions at IndoAgri's oil palm estates have been normal in February. There were heavy rains in Kalimantan and South Sumatra in 4QFY17. Rainfall amounted to more than 400mm per month at some of IndoAgri's oil palm estates in Kalimantan and South Sumatra. The heavy rainfall continued through early January but has normalised in February.

• IndoAgri reckons that CPO prices in 1QFY18 should be similar to 4QFY17 as there is no surplus of palm oil in the global market. Palm inventory in Indonesia is at a comfortable level presently. IndoAgri estimates Indonesia's palm inventory to be 3.2mil to 3.4mil tonnes as at end-December 2017.

• Replanting target is 3,000ha in North Sumatra in FY18F (FY17: 2,000ha). IndoAgri replants oil palm trees when their FFB yields fall to 15 tonnes per ha or less.

Source: AmInvest Research - 1 Mar 2018