Indofood Agri hit by weaker plantation earnings

Stronger contribution from the downstream division could not cover the drop in plantation profits, says CIMB.

CIMB noted:

2Q12 core net profit fell 3% yoy as weaker plantation earnings overwhelmed stronger earnings from edible oils and fats. The main surprise was higher operating costs from its plantation division, which we suspect could have emanated from the new sugar mill commissioned in 2H11.

The group also explained that the higher costs were partly due to higher purchases of third parties’ fruits. As a result, 2Q plantation earnings fell 16% despite the 5% improvement in CPO sales volume and ASP for CPO in 2Q.

We were also mildly surprised that the refining margin of the edible oils and fats division slipped from 8% in 1Q to 3% in 2Q, probably due to rising competition from new refineries.

We expect a better 2H performance due to 1) seasonally stronger palm production in 2H, 2) stronger sales volume for cooking oils and fats due to the Ramadan festival in 3Q, and 3) maiden earnings contribution from its sugar business.

However, these factors may be partially offset by higher cost of production for its estates and weaker refining margins.