Indofood Agri upgraded by Daiwa on depressed valuations, but earnings view gets slashed

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Daiwa upgraded Indofood Agri Resources to Hold from Underperform, saying the around 50 percent drop in the share price over the past year have left it at depressed valuations, but it still slashed its earnings forecasts.

The share price drop was driven mainly by weaker-than-expected earnings, with both fresh fruit bunches (FFB) production and crude palm oil (CPO) selling prices hurting margins in key segments, it said.

“IndoAgri’s valuation multiples appear undemanding at current levels,” it said in a note last week. The shares are trading at 2018 price-to-earnings ration of 8.7 times, below the 10-year historical adjusted mean of 15 times, it noted.

But Daiwa added, “Looking ahead, we think margins could remain under pressure as the company’s key businesses continue to face headwinds in the near term. We see a lack of fundamental rerating catalysts which could drive share price performance, particularly as we remain bearish on CPO prices in 2018.”

It cut its 2018-19 earnings per share forecasts by 42-43 percent on a 10 percent cut to its previous FFB production forecast and on lower operating margin assumptions.

That spurred it to slash its target price to S$0.235 from S$0.40, still based on a target price-to-earnings multiple of 7.5 times.