Indofood Agri Resources (SGX:5JS): A Catalyst for Growth Through ROCE Optimization and Capital Efficiency

Introduction
Indofood Agri Resources (SGX:5JS), a key player in palm oil derivatives and plantation-based commodities, has quietly transformed its financial health over the past five years. Despite operating in a capital-intensive industry, the company has achieved a 197% increase in Return on Capital Employed (ROCE) since 2020, rising from negative returns to a stable 7.6% ROCE by 2024, while keeping capital employed nearly flat. This efficiency-driven turnaround positions the company as a compelling long-term investment opportunity, particularly for investors seeking exposure to Southeast Asia's agricultural sector.

ROCE: The Engine of Value Creation

ROCE, a critical metric for assessing capital efficiency, measures how effectively a company generates profits from its capital investments. For Indofood Agri Resources, the journey from negative ROCE in 2020 (due to operational losses) to a 7.6% ROCE by 2024 reflects a disciplined focus on optimizing operations and reducing waste.

• Key Trends:
• 2020: ROCE dipped into negative territory (-5.9%) amid pandemic-related disruptions.
• 2021–2024: ROCE rebounded steadily, reaching 7.6% by 2024, driven by cost discipline and revenue stabilization.
• Capital Employed Stability: The company maintained capital employed at ~Rp27–28 trillion (US$1.7–1.8 billion) since 2020, avoiding significant reinvestment while boosting ROCE.

This improvement underscores operational excellence, as earnings before interest and tax (EBIT) grew from losses in 2020 to Rp2.1 trillion (US$132 million) in 2023, without requiring additional capital.

Operational Efficiency: The How and Why

Indofood's ROCE gains stem from two core strategies:

1. Cost Optimization:
2. The company slashed non-essential expenditures, such as administrative costs and overhead, while investing in process automation and supply chain efficiency.

3. Profit Margins Expanded: Net margins rose to 7% in 2024, up from 3.8% in 2020, reflecting better pricing power and cost control.

4. Revenue Stabilization:

5. Despite volatile commodity prices, revenue stabilized around Rp15–16 billion (US$960–1,000 million) annually by 2024, supported by long-term contracts with key buyers in the edible oils and agrochemicals sectors.
6. Earnings Per Share (EPS) Surge: EPS jumped to Rp801 million (US$52,000) in 2024, up 82% year-over-year, signaling improved profitability.

Growth Prospects: Palm Oil Derivatives and Strategic Leverage

Indofood's Edible Oils and Fats division—its primary revenue driver—benefits from rising global demand for palm-based products in food, biofuels, and cosmetics. Key growth levers include:

• Vertical Integration: The company's control over plantations (oil palm, sugar cane) ensures stable raw material supply, mitigating price volatility.
• Export Expansion: Targeting emerging markets in Asia and Africa, where palm oil demand is surging.
• Sustainability Focus: Aligning with ESG trends, Indofood has adopted sustainable practices to meet regulatory and consumer demands, reducing operational risks.

Debt Management and Financial Health

While Indofood's debt-to-equity ratio remains moderate (not explicitly disclosed but implied as “manageable” by analysts), its return on equity (ROE) has improved from 0.18% in 2020 to 7.82% in 2024, reflecting stronger capital allocation.

The final dividend of S$0.01 per share (payable May 2025) and a 3.13% dividend yield further signal confidence in cash flow stability. However, investors should monitor potential risks such as commodity price fluctuations and geopolitical trade policies.

Valuation: Attractive Entry Point?

At its current share price of S$0.28–0.34, Indofood trades at a discount to GuruFocus' intrinsic value estimate of S$0.26, suggesting it is undervalued relative to its earnings growth trajectory. With a 5-year average earnings growth of 41.9%, the stock offers a compelling risk-reward ratio for long-term investors.

Investment Thesis

Indofood Agri Resources' ROCE-driven efficiency, stable capital base, and strategic growth avenues make it a standout play in the palm oil sector. While risks such as commodity price volatility exist, the company's improved margins and dividend discipline position it as a defensive, income-generating holding with upside potential.

Recommendation: Consider a gradual accumulation of shares at current prices, with a 1–3 year holding period to capture ROCE-driven profitability and dividend growth.

Final Note: Investors should monitor Indofood's Q2 2025 earnings (expected July 2025) for further signs of sustained ROCE improvement and revenue diversification.