Climbing CPO prices in 1Q boosted bottom line. Indofood Agri’s (IFAR) announced its 1Q09 results yesterday. It was above our expectations, with 1Q09 earnings coming in at 30% of our original FY09 earnings forecast. IFAR’s 1Q09 revenue came in just below IDR2t, down 30% YoY from IDR2.8t due to lower selling prices of palm oil, rubber, edible oil products and copra-based products. Average CPO price for 1Q09 was US$577/tonne (CIF Rotterdam) versus US$1,156/tonne in 1Q08. Gross profit margin was affected by lower selling prices of plantation crops and edible oil products, declining from 43.1% in 1Q08 to 41.2% in 1Q09. Consequently, PATMI was down 54.9% YoY from IDR532.2b to IDR240.2b.

CPO prices may remain volatile. With Indonesia’s production peaking in 3Q09 and potentially slower demand with the global downturn (in particular US exports and China’s consumption), there is potential downward pressure on palm oil prices in 2H09.

We raise our earnings and target price, remain NEUTRAL. We have fine-tuned our CPO price assumptions for FY09 from RM1,500/tonne to RM1,650/tonne, in view of the 64.2% jump in CPO price YTD. Taking into consideration the strong contribution and growth momentum of the cooking oil segment, we have raised our FY09 estimated sales volume for margarine from 149k tonnes to 177k tonnes (+18.9%). With the above changes, our FY09F and FY10F earnings are raised to IDR1.04t (+29.3% from our earlier estimates) and IDR1.25t (+33%) respectively. In valuing IFAR, we are using a composite P/E of 10x (up from 7x previously). For IFAR’s cooking oil and fats business, we accord a weightage of 75% (IFAR’s 1Q09 self sufficiency in CPO supply) to Indonesia’s 2003-2008 CAGR for palm oil consumption of 8.2%. For its upstream business, we accord the remaining weightage of 25% to the P/E multiple of 15x. As such, our target price rises to S$0.95 from S$0.51 previously. Maintain NEUTRAL.