Hopes fade for Indofood Agri Resources' earnings recovery in 2H

Production predicted to decline 5%.

According to CIMB, it came away from its 2Q results briefing with a more cautious outlook as it lowered its FY13 production guidance to account for the poor weather and social issues. This, coupled with the subdued selling prices and higher costs, will continue to put pressure on 2H earnings.

Here's more:

The group now expects its FY13 production to decline by 5% instead of its previous guidance of 5-10% growth. As a result, we lower our EPS by 36-41% for FY13-15. However, our recently downgraded target price(15% discount to SOP) which hasalready taken into consideration the weak results, remains intact.

Maintain Underperform with the poor earnings as key de-rating catalysts.

We attended Indofood Agri's 2Q results briefing and the key takeaways are: 1) 1H FFB yields were below expectation due to poor weather, logistics and social issues.

As such, the group now expects its FY13 FFB production to decline by5% vs. its previous guidance of 5-10%growth; 2) it expects its newly acquired 50% stake in sugar assets in Brazil to break even in 2H as the estimated cost of production for raw sugar of 14-15 UScts per lb is below the current sugar prices of 17UScts/lb;

3) it expects stronger sugar contribution from its Indonesian operation in 2H and 4) it projects a 10-15% rise in the unit cost of palm products in FY13, which is higher than its previous guidance of 5-10% due to weaker yields.

What We Think

We are surprised to learn that the social issues in some parts of Indonesia are starting to impact theproductivity of some of its estates, which partly explains the poorer yields.

Poor weather and a low biological cycle in its Riau estates were the other reasons for the weaker yields which led to the reduced production guidance.

The weaker yields reduce the profitability of the group's estates compared topeers. The only bright spot is the expectation of better 2H earningsfrom its sugar unit.