IndoAgri offers up to $270 million of shares to meet freefloat rules

The Indonesian palm oil company, which is primarily a consumption play, will trade in Singapore following the backdoor listing.
Indofood Agri Resources, or IndoAgri as it is commonly known, was in Hong Kong yesterday marketing an ongoing share sale that will complete its backdoor listing in Singapore.

The company, which is active throughout the entire palm oil value chain and is one of the leading producers of branded edible palm oils and fats in Indonesia, needs to increase the freefloat and broaden its shareholder base to comply with listing regulations and it is targeting a sale of up to S$422.5 million ($270 million) shares.

The company is looking to sell between 141 million and 338 million new shares, which at the bottom of the range will account for 12% of the company (the minimum requirement for a backdoor listing). However, IndoAgri is hoping to offload the full 338 million shares, which will give it a freefloat of 25% and a market capitalisation of between $790 million and $1.1 billion, sources familiar with the offering say.

The number of shares on sale has been reduced from an initial plan to sell up to 435 million shares, as communicated in a circular issued just before Christmas. The change is due to improved market conditions, which has allowed the company to increase the price per share.

IndoAgri is now offering its shares at a price between S$0.90 and S$1.25 apiece, compared with an earlier plan to sell them at ônot less than S$0.75ö. At the top of the price range, this means total proceeds could be 29.5% higher than the original target.

CIMB, Credit Suisse and Kim Eng Securities are joint bookrunners for the offering.

About 5-10% of the offering is expected to be set aside for Singapore retail investors and another 1.5% will be allocated to Hong Kong-listed First Pacific, who will distribute them among its shareholders. First Pacific is the controlling shareholder of IndoAgriÆs parent company, Indonesian instant noodle maker Indofood Sukses Makmur.

The roadshow in Hong Kong follows visits to Kuala Lumpur and Singapore, and gauging from the interest shown by investors, the company shouldnÆt have a problem meeting its sale target. For one, Indofood has seen its share price gain 99% in the past seven months, setting a positive backdrop for the deal. The parent will hold between 73.9% and 86.5% of IndoAgri following the share sale.

IndoAgri owns 130,000 hectares of plantation land û half of which is planted û and is active within milling and refining. Still, about 80% of the companyÆs revenues come from its cooking oil and fats division, making it not so much a play on palm oil prices (which has driven up share prices in the sector in recent months) as it is a consumer stock. The remainder of its revenues come from the sale of intermediate products and by-products from its milling and refining processes.

As a result, its earnings drivers are related more to the macro economic performance of Indonesia and the increasing wealth of the population, than the supply-demand situation of crude palm oil (CPO), people familiar with the company say. Indeed, IndoAgri uses virtually all the crude palm oil it makes to produce edible and industrial oils and margarine further down the value chain and still have to buy about 50% of its CPO needs.

One fund manager noted that this could make the company vulnerable to continued increases in the price of crude palm oil, but according to people familiar with the company believes it will be able to pass on most, if not all, of such potential increases to its customers.

In the past year, however, the companyÆs gross margins have suffered because of the 40% increase in CPO prices. And together with the appreciation in the rupiah, which has led to lower export revenues, this may result in a lower profit in 2006 than in the previous year, the company notes in the share sale document.

The price range translates into a post-money 2007 earnings multiple ranging from 12.7 times to just over 17 times, sources say. The bottom end of the range pitches the company at a discount to other Indonesian consumer stocks like Indofood, car manufacturing conglomerate Astra International, PT SMART Corp and PT Bakrie Sumatera Plantations, which trade at an average 16.5 times 2007 earnings, the sources say.

A second group of comps are the Malaysian CPO producers, which trade at an average 17 times 2007 earnings. People close the IndoAgri say these CPO plays are less relevant as comparisons, but some investors still choose to look at them.

Malaysian palm oil refiner Wilmar in particula is likely to become a comparison for retail investors, given that it too listed in Singapore through a reverse takeover in August last year and since then its share price has more than tripled. The company, which is in the midst of taking over a plantation business in its home country and is expected to see its Ebitda double in the coming year, currently fetches a 2007 PE multiple of about 18 times.

IndoAgri is expected to generate close to 30% annual Ebitda growth in the coming few years with Ebitda margins staying slightly above 20%, based on syndicate estimates.

ôThis is a consumer play and a growth story with very visible earnings growth going forward,ö one observer says, noting that the company already has a dominating market share in several of the products it sells.

Back in January 2006, Euromonitor International estimated that IndoAgri had 42% of the market for branded cooking oils, 59% of the branded margarine market û both in terms of volume - and a 38% share of the market for branded oil & fats in terms of retail value.

The growth should come partially from an expected increase in the sale of branded oils, which currently make up only 17% of IndonesiaÆs total cooking oil market, he adds, noting that as disposable income increases, people tend to use more branded products which tend to be of higher quality.

Euromonitor also projects that retail sales of branded vegetable and seed oils in Indonesia will grow at a compound annual growth rate of about 6% in volume terms between 2005 and 2010 to reach 501,800 tons, while the sale of branded margarine is expected to grow by a CAGR of 6.3% to 156,400 tons in the same period.

IndoAgri is also expanding its oil palm plantations and has a long-term objective to have a total of 250,000 planted hectares by 2015, which it plans to achieve by the planting of 70,000 new ha by 2009 as well as further acquisitions. Approximately 65% of the net proceeds from the share sale will be used for this purpose, while 20% will go towards the modernisation and relocation of a refinery in North Jakarta and the increase of the annual capacity of its refinery, fractionation and margarine processing plants by 120,000 tonnes, 60,000 tonnes and 30,000 tonnes respectively by 2008.

The primary aim with the plantation of more palm trees is to become self-sufficient in terms of raw material, but the company will also consider direct sales of excess CPO in the future, making it a potential beneficiary of the increasing demand from bio-fuel producers.

In the 10 months to October 2006, the companyÆs Ebitda stood at S$95.8 million, compared with a S$149 million in fiscal 2005. Net profit was S$84.7 million, versus S$92.7 million in 2005.

IndoAgri, which has been operating for more than 20 years û previously under the name of Indofood Oil & Fats - was bought by Singapore-listed shell company CityAxis Holdings for S$392.7 million in a deal that was approved by shareholders earlier in January. The transaction was settled by the issuance of new shares to Indofood, giving it a 98.7% stake in the company.

The bookbuilding for the international road show will end on February 6 with the final price expected to be determined the following day.
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