We downgrade Indofood Agri Resources (IFAR) to Underperform from Neutral, following the recent run-up in the share price, which we believe is unlikely to be sustained. However, we revise our target price to S$0.49 from S$0.41 previously. Coverage of IFAR is transferred to Sunaina Dhanuka.

We expect CPO prices to remain weak in 2009: Our CPO price assumptions are US$400/t in CY09, US$450/t in CY10 and US$550/t in the long term. We believe that exports of CPO are set to decline in coming months as seasonal demand out of China slows down and Indian traders start to destock the inventory they had built up over the past three months. As a result, we expect pressure on CPO prices to return in the near future, especially when full production resumes in 2Q09 after a seasonally slow 1Q.

IFAR may not benefit from weaker currency: IFAR’s earnings are normally quite sensitive to exchange rate fluctuations (every 1% change in exchange rate changes IFAR’s earnings by 3.8%). However, we believe that in the current economic scenario, gains from a weaker rupiah may not fully materialise. This is because 70% of IFAR’s CPO production is sold internally to its cooking oil division, which in turn processes and sells branded cooking oil domestically. Management has indicated that price cuts are likely in the domestic market in coming months as demand weakens.

Short-term debt remains a concern; capex could be impacted: About 50% of IFAR’s debt is short-term (amounting to about Rp2,135bn), of which Rp1,415bn relates to IFAR’s acquisition of London Sumatra (Lonsum). We have assumed that IFAR is able to refinance this portion of the debt (due at the end of July 2009). In addition, we estimate that IFAR’s subsidiary, Lonsum, will need to raise an additional US$70m in financing by 2010. If IFAR/Lonsum fails to secure the financing, capex plans (aggregating to Rp2,285bn over 2009/10) would be impacted, which in turn, would impact IFAR’s profits over the medium term.

We have revised up our earnings estimates by 5% for FY09E and by 2% for FY10E. 12-month price target: S$0.49 based on a PER methodology. We downgrade our recommendation from Neutral to Underperform, as we expect the CPO price environment to weaken in coming months. In addition, refinancing risk will likely continue to pressure shares in the near term relative to its peers.