Attractive valuations, upgrade to Buy: We are upgrading Indofood Agri to Buy (previously Neutral) due to attractive valuations (lowest P/E, P/B and EV/EBITDA in the sector) and strong long-term growth prospects as undeveloped and immature land-bank is 2X current mature area. IFAR’s current share price implies a long-term CPO price of US$430/ton, compared to the current price of US$540/ton and long-term “floor” of US$620/ton (based on biodiesel).

Diminished refinancing risk: We believe that refinancing risk for IFAR has diminished as: 1) CPO prices have likely bottomed, 2) the rupiah debt market is still liquid, and 3) parent PT Indofood successfully raised US$200 mn in new debt in Dec 2008, demonstrating the group’s strong standing with banks.

Although free cash flow in 2009E is minimal (due to capex commitments), IFAR has sufficient cash on its balance sheet to repay about US$52 mn of long-term debt and Rp1.3 tn (US$107 mn) of short- term debt that is due for repayment in 2009E. Previously, we were concerned that cash flow may be further strained if CPO prices fall further, but given that we now believe that CPO prices have bottomed this is now less of a concern.

Initiatives for cost savings and efficiency gains at LSIP continue: Management is already putting in place initiatives to improve efficiency and reduce costs at London Sumatra (LSIP) level (e.g. bringing FFB transport in-house; new oil palm mill in Kalimantan could be ready in 2Q09), but we believe there is still more scope to reduce costs, especially indirect costs, which contribute 24% to LSIP’s COGS. In our view, the CPO price downturn could be a catalyst for management to accelerate permanent cost reductions.

We raise our 12-month target price on IFAR to S$0.70 (from S$0.50 previously) using a higher 7X 2009E P/E multiple (from 5X), a 20% discount to Astra Agro. This reflects the recent re-rating of the Indonesia market (over the last three months the market average P/E has risen from 6.6X to 8.5X) and also diminished funding risk. This is at the low end of the stock’s historical 5X-27X trading range (since listing).

For longer-term investors, we note that conservative “through the cycle” DCF valuations (using CPO price assumptions on parity with GS WTI crude oil price assumptions) indicate a valuation of S$1.25.

Credit risk increases if CPO prices fall below US$250/ton, assuming zero refinancing and if they cut non-committed capex. This compares to the recent trough of US$390/ton, and long-term average of US$440/ton.