Indofood Agri Resources net profit crash 69%

Blame it on lower CPO prices.

According to CIMB, 1Q13 core net profit of Indofood Agri Resources plunged 69% yoy, largely because of lower CPO prices (-16% yoy), increased production costs (+19% to Rp4,391/kg) and higher effective tax rate. 

Here's more:

ASP achieved for CPO in 1Q was below market due to the poorer quality of fruits from plasma farmers. Production costs went up significantly because the group applied 3-4% more fertiliser due to better weather and fertiliser prices were 9% higher yoy.

On top of that, labour costs rose 15%. 1Q effective tax rate was higher at 33% as certain expenses were not tax deductible. These were partially offset by higher contributions from edible oils & fats and sugar.

Better earnings ahead
The group expects FFB production to pick up in the coming quarters. Itblamed the flat production in 1Q on drier weather experienced in Riau in March 2013. It is keeping its output growth target of 5-10% for FY13 and guided for a 5-10% rise in unit production cost for palm products.

However, earnings from edible oils & fats may slim down following its decision to reduce cooking oil prices by 10% and margarine by 4% in April 13.

Cut to Underperform
We scale back our earnings, which leads to a 16% cut in our SOP-based target price. Though the stock has underperformed the market, it may stay weak unless it is able to contain the rise in its cost of production and beat earnings expectations.