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Dismal Quarter For Indofood Agri Resources

IndoAgriLogoIntegrated agribusiness group Indofood Agri Resources (SGX: 5JS) reported its third quarter earnings this morning and saw some pretty poor numbers.

The company cultivates crops such as rubber, sugar cane, cocoa, and tea, with a focus on oil palm. Indofood’s principal business operations on the oil palm crop include: research and development; breeding and cultivation; and milling and refining of crude palm oil (CPO). In addition, the company also does marketing and distribution of cooking oil, margarine, shortening and other derivative products.

Significant proportions (more than 80% in 2012) of Indofood’s sales are derived in Indonesia.

Some basic numbers

For the three months ended 30 Sep, Indofood’s revenue declined 13% year-on-year to Rp3,076b while net profits got slashed by more than half – 52% to be exact – to Rp123b. The company’s earnings per share for the quarter fell by 52% as well to Rp86.

Revenue had dropped due to falling average selling prices for its key plantation crops, and lower product sales for bulk oil and copra-based products.

Profits suffered a worse fate due to rise in expenses. In the quarter, the company faced rising wages, higher production costs (due to lower production yield from newly matured plantations), lower commodity prices, and foreign exchange losses.

There was a bright spot though, as Indofood’s joint venture in Brazil, CMAA, brought in maiden profit contributions of Rp50b during the quarter, which helped to offset some of the rise in expenses that the company faced.

Operational highlights and the balance sheet

The company’s total planted area stands at 312,356 hectares (ha) as of 30 Sep 2013, a 19.7% increase from 260,619 ha a year ago.

In Indonesia, Indofood’s planted area had grown from 260,619 ha a year ago to 270,509 ha. Meanwhile, Indofood’s planted area in Brazil had increased from 34,000 ha on 31 Dec 2012 to 41,847 ha currently. The table below breaks down the details for the planted areas:

Indonesia’s Planted Area (in ha) 30 Sep 2013 30 Sep 2012 Change
Planted Oil Palm 235,134 223,214 5.3%
Planted Rubber 21,052 21,519 -2.2%
Planted Sugar Cane 11,008 12,333 -10.7%
Planted Cocoa & Tea 3,315 3,553 -6.7%
Brazil’s Planted Area (in ha) 30 Sep 2013 31 Dec 2012
Planted Sugar Cane 41,847 34,000 23%

The total planted area for the company would affect its future production and so it’s something that’s worth keeping note of.

The maturity of Indofood’s plantations is also important, as mature areas generally have better production yields. On that front, Indofood’s mature oil palm planted area increased slightly from 175,688 ha a year ago to 176,141 ha.

For the quarter, sales volume for most plantation crops came in lower: CPO’s volume fell 10% year-on-year to 195,000 metric tonnes (mt); palm kernel’s decline was 17% to 46,000 mt; sugar fared slightly better with an 8% drop to 24,000 mt; oil palm seeds fared the worst with a 49% slide to 3,000 mt.

Rubber was the only crop with an increase in sales volume of 2% year-on-year to 4,500 mt

Moving on to Indofood’s balance sheet, it has actually weakened compared to a year ago. Cash on hand decreased from Rp5,210b to Rp3,787b while total debt increased from Rp6,529b to Rp8,431b. Total debt to equity has also ballooned from 29% to 37%, putting the company on a less-stable financial footing.

What’s next for Indofood Agri Resources

Going forward, the company’s focusing on organic expansion of new plantings of oil palm and sugar plantations.

In addition, it’ll also be expanding its CPO production capacity and enhance its supply chain: four oil palm mills are currently under construction in anticipation of higher production in future from its immature plantations.

Indofood’s also stepping up the promotion of its branded products to both modern trade and international markets with new packaging and brand positioning.

The company commented that it’s seeing “sustain[ed] domestic demand growth for palm oil products” in Indonesia. In addition, it also has an “upbeat” long-term outlook for rubber, “supported by healthy demand from tyre-makers, automotive industries and rubber goods manufacturers in developing markets.”

So, what we’re seeing here are some growth initiatives by the company and secular trends in its key products which can hopefully help drive sales going forward.

But it’s not as simple as that. Indofood can scarcely control the prices of its products so its profitability going forward will be intimately tied to the market prices of its key crops.

When CPO prices fall, Indofood’s results will invariably suffer as the crop accounts for a large chunk of its business. That’s what has happened to its industry peer Golden Agri Resources (SGX: E5H) in recent times.

Falling CPO prices since the start of 2011 hasn’t been kind to both Indofood and Golden Agri’s share prices. The former has fallen by close to 70% while the latter’s dropped around 30% or so from 3 Jan 2011 to 29 Oct 2013.

Those are dismal returns for investors, considering the fact that the Straits Times Index (SGX: ^STI) remained flat through that period.

So even if the long-term secular trends for the commodities that Indofood deals with are promising, there’s still the chance of painful shorter-term losses should these commodity prices decline. It’s something that investors in commodity-related companies such as Indofood have to be comfortable with.

Valuation

Indofood opened at S$0.89 a share today. At that price, shares of the agribusiness group are valued at around 25 times trailing earnings and carry a dividend yield of 1% based on its pay-out last year.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.