SINGAPORE (Apr 12): DBS Group Research recommends that shareholders of Indofood Agri Resources (IFAR) accept the 28 cents per share offer to delist, even though the offer is at the lower end of acquisition multiples for plantations.
IFAR’s parent company PT Indofood Sukses Makmur on Thursday announced a voluntary conditional cash offer to acquire all the shares in IFAR that it does not currently own.
PT Indofood Sukses Makmur currently holds a 74.5% stake in IFAR. If it gets control over at least 90% of the target, IFAR will be delisted and privatised.
The offer price also represents a premium of 21.5%, 26.3%, 29.0% and 23.1% over the volume-weighted average price (VWAP) per share for the one-month, three-month, six-month and 12-month periods up to and including April 5 – the last market day on which the shares were traded on the Singapore Exchange.
See: Indofood Agri Resources gets 28 cents per share offer to delist
According to lead analyst William Simadiputra, the proposed offer represents price-to-book value of close to 0.4 times, or US$4,400 EV/ha after adjusting for matured planting area. This is lower than typical plantations transactions at US$13,000 EV/ha.
“We believe that IFAR’s steep discount to its peers is attributed to its shrinking operating profit margins, unlike its peers who have been able to demonstrate an ability to maintain their margins amidst palm oil price movements,” Simadiputra says.
“Earnings in two out of the last three quarters had entered negative territory mainly on weak downstream and upstream margins,” he adds.
In the 4Q18 ended December, IFAR sank to a loss of Rp 211.7 billion ($20 million), from earnings of Rp 76.9 billion a year ago.
See: IndoAgri sinks into the red with $20 mil loss for 4Q on weak commodity prices
In addition, the analyst notes that IFAR suffers from low trading liquidity.
“Trading volume of IFAR has been less than 0.1% in the last 12-month period leading up to April 5, 2019,” Simadiputra says.
DBS’ last recommendation on IFAR was a “hold” call with a target price of 19 cents.
“We remain cautious on IFAR’s earnings momentum and its ability to return to pre-2017 earnings levels, although share price performance and valuations were undemanding,” Simadiputra says.
Shares in IFAR are currently trading flat at 28 cents.
