- Indofood Agri Resources Ltd (IFAR) (S$0.98/share, UNRATED) held a conference call in respect of its 2QFY14 results yesterday. In spite of a 135% YoY jump in net profit in 1HFY14, the group’s results were below consensus estimates. IFAR reported a net profit of Rp405.9bil in 1HFY14 on the back of revenues of Rp7.2trillion.

- IFAR’s FFB production growth is expected to be 18% in FY14F. The group’s 23% YoY improvement in FFB output in 1HFY14 was driven by a recovery in FFB yields in South Sumatra and an increase in mature areas in Kalimantan. In 1HFY13, IFAR faced social issues in South Sumatra, which affected harvesting and FFB yields.

- Sumatra accounted for 80% of IFAR’s FFB production in 1HFY14 while Kalimantan accounted for the balance 20%. We understand that rainfall patterns in Kalimantan have been normal.

- In spite of the strong FFB production growth, IFAR’s CPO sales volume slid by 3% YoY in 1HFY14 due to a build-up in inventory. Inventory of CPO was 78,000 tonnes as at end-June 2014 compared with 53,000 tonnes as at end-March 2014. The inventory is expected to be drawn down in 3QFY14 due to the Hari Raya festive period.

- IFAR’s seed sales are expected to decline by 50% YoY in FY14F due to a fall in new plantings in Indonesia. We understand that plantation companies in the country have been facing difficulties in getting licences to plant on their areas. Compensation issues have also taken longer to be resolved.

- Indonesia’s new ruling on value-added tax is not anticipated to affect IFAR significantly. This is because as an integrated company, IFAR would be able to claim the value-added tax on its inputs such as fertiliser.

- The new ruling is still subject to formal adoption by all of the authorities in Indonesia. It is not known when the new ruling would take effect. Recall that under the new ruling, companies that sell FFB as the end-product might not be able to claim the value-added tax on inputs.

- IFAR’s cost of production was Rp4,282/kg (RM1,193/tonne) in 2QFY14 versus Rp4,211/kg (RM1,174/tonne) in 1QFY14. For FY14F, IFAR’s cost of production is expected to be similar to FY13’s Rp3,800/kg (RM1,151/tonne) as higher cost of wages is anticipated to be mitigated by a 10% to 15% fall in fertiliser costs.

Source: AmeSecurities