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Indofood Agri’s Profits Slashed By Half: What You Need to Know

Indofood Agri Resources (SGX: 5JS) is one of the largest integrated agribusiness groups in Indonesia. It has interests in the whole value chain within the palm oil industry, ranging from the cultivation of oil palm plantations to the branding and distribution of consumer products found in the supermarket that’s derived from oil palm, such as edible oils and fats.

On Friday, Indofood Agri had just released its full-year results for 2013, a year where it first ventured outside of Indonesia. The company had made an investment in the sugar industry through some moves: 1) the acquisition of a 50% stake in Brazil-based sugar and ethanol producer CMAA (Companhia Mineira de Acucar e Alcool Participacoes), and; 2) getting a minority stake in one of Philippines’ largest sugar producers, Roxas Holdings.

Performance for the year

The company has plantations that grow four different kinds of crops, namely rubber, sugar cane, cocoa & tea, and oil palm.

Oil palm’s the main crop for Indofood Agri and as of 31 Dec 2013, the company’s oil palm plantations have a total planted area of 239,921 hectares, up 3.9% from the end of 2012. The average age of the company’s oil palm crop is now 12 years, which can be considered to be a prime age for the crop.

So while Indofood Agri’s oil palm plantations grew in size, its other plantations had shrunk, resulting in the company’s total planted area for all crops to be 276,709 hectares as of 31 Dec 2013, up only 3% compared to a year ago.

Meanwhile, the company’s production rate has also dropped. For instance, the production rate of fresh fruit bunches (FFB) had decreased by 2.6% to 2.895 million tonnes due to lower production in Sumatra, Indonesia. The company’s crude palm oil (CPO) production also decreased by 8% to 810,000 metric tonnes as the group cut down on FFB purchases from external parties.

Moving on to Indofood Agri’s financials, the company’s revenues for the year had declined by 4% year-on-year to Rp 13,820 billion “mainly due to lower edible oils sales”. EBITDA (earnings before interest, taxes, depreciation and amortization) had dropped 19% to Rp 2,614 billion as the production of CPO was under pressure for the year, in addition to “lower [average selling prices] for key plantation crops and branded edible oil product; and higher production costs from rising wages and newly matured plantations.” Furthermore, the price of rubber continues its downward fall, resulting in a much lower profit contribution from the particular crop for the whole company.

All told, Indofood Agri was only able to book a net profit of Rp 959 billion, down 49% from a year ago.

Although the balance sheet for the company remains strong, the net debt to equity ratio did worsen from 0.08x to 0.22x. Indofood Agri’s cash holdings on its balance sheet were also down 24% to Rp 3,803 billion as the company had to spend more cash on its business acquisitions and investment activities.

The company had recommended a first and final dividend to be paid for 2013, but further details would only be announced “before the end of March 2014”.

Expansion plans

In 2013, Indofood Agri had managed to achieve new planting for nucleus oil palm of 9,791 hectares and for 2014, it would continue to focus on new plantings of oil palm.

Within its sugar interest, Indofood Agri has a focus on expanding its sugar production organically. In March 2013, the company also acquired a 79.7% stake in MPM, which owns 73,330 hectares of forest plantation concessions in East Kalimantan, Indonesia, through a subsidiary; that’s in addition to the previously-mentioned acquisitions of CMAA and Roxas Holdings.

Foolish Take

Although Indofood Agri is facing a setback judging from the drastic fall in profits, the company’s management remains confident in the long-term future of its businesses. With the growing affluence within Asia, management’s of the view that demand for basic consumer goods like oil palm and rubber will continue to enjoy good growth.

Indofood Agri Resources closed at S$ 0.87per share on Friday and is valued around 20 times trailing earnings.

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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 Stanley Lim doesn’t own shares in any companies mentioned.