Indofood Agri Resources (IFAR.SI)

Return Potential: 65%

Misunderstood plantation stock; initiate with Buy, on Conviction List

Source of opportunity

Despite its low-margin downstream cooking oil business, we believe IFAR

could be a net beneficiary of rising CPO prices as it passes on most of the

higher costs to consumers while its upstream plantations enjoy higher profit

margins. We also believe that its proposed acquisition of LSIP could surprise

the market on the upside in terms of potential cost savings and EPS accretion.

The stock is down 60% over the last 7 months, and is 20% below its initial

listing price of S$1.25. We see this as a potential buying opportunity. We

initiate coverage with a Buy rating and add the stock to our Conviction List.

Catalyst

1) Rising CPO prices ? every 5% increase in CPO prices boosts FY08E EPS

by 12%, and subsequent quarterly earnings may validate IFAR?s positive

earnings correlation to CPO prices, 2) Earnings upgrades - our FY08E-09E

EPS includes the potential LSIP acquisition (based on a 64.4% stake) and are

22-30% above consensus. 3) Potential cost savings at LSIP ? we estimate

that every 10% decline in costs could enhance IFAR?s 2008E EPS by 7%.

Valuation

Our 12-month target price is S$1.65, based on 14X 2008E P/E, consistent

with our target multiple for Indonesian plantations stocks AALI and LSIP.

IFAR?s trading range since listing is 8X-19X, while AALI and LSIP have

been trading within the 7X-15X range over the last two years.

Key risks

CPO price drop, high gearing, potential fund raising for planned LSIP acquisition.

Impact on related securities

IFAR comprises 41% of Indofood?s (INDF) SOTP, where it is valued at 14X

2008E P/E. A further 10% increase in IFAR?s market value with no holding