Tuesday, July 5, 2011

Indofood CBP Sukses Makmur - Food for thought

by Bahana Securities

Continued price increases = 2Q11 margin protection

Our recent lunch with ICBP reveals that the company has continued to raise prices for its products with the latest June price hike of 2% on its “Cap Enak” condensed milk. This followed a slew of price increases in 1Q11 as follows:

7-8% on noodles (mid January 2011)

3% on dairy products (February 2011)

6-11% on potato chips (February 2011)

This suggests that the company will emerge relatively unscathed from the adverse impact of higher commodity prices in 1Q11. Our sensitivity analysis shows that for every 1% price hike on ICBP’s noodle division, net profit will rise 7%. At this stage, we expect these price increases will allow ICBP to book 2011 noodle EBIT margin of 16.4%, relatively stable when compared to 16.5% registered in 2010. Note that noodles accounted for 71% of ICBP’s 1Q11 sales and 80.3% of the company’s operating profit (exhibit 6 & 9).

Higher margins in the offing; Weak volumes due to bad harvests

Looking ahead into 3Q and 4Q11 earnings, we expect ICBP to experience margin expansions, not only due to the aforementioned price increases, but also on the back of softening commodity prices and continued IDR strength. However, it is worth noting that based on our conversation with the management, there are no plans to implement further price increases for the rest of the year given that volumes have not picked up in 2Q11 relative to 1Q11 levels. The management attributed this weak volume growth towards failed harvests in Java due to pest problems. We also believe weak purchasing power also stemmed from over extension in credits of motorcycles, electronic products such as hand phones, TVs, DVDs, etc. Finally, we must also not underestimate the impact on weaker purchasing power in Java caused by lower overseas workers’ remittances as a result of continued tension in the middle east.

Unjustified valuation: The UNVR comparison

Exhibit 10-12 shows that ICBP has outpaced Unilever Indonesia (UNVR-REDUCE-IDR14,950-TP:IDR12,275) in terms of growth from top to bottom line. On the balance sheet side, ICBP has transformed itself from a 57% net geared company in 2009 to a net cash company in 2010 (exhibit 13) while UNVR has depleted most of its cash reserves by the end of 2010 and we expect the company to become 24.5% net geared by 2011. Meanwhile, in terms of valuations, UNVR is trading on 2011 PE of 30.6x, compared to ICBP’s 16.8x PE, reflecting 82% premium. We believe UNVR’s premium over INDF is unjustified, particularly given the latter’s balance sheet repair. Additionally, ICBP’s valuation is also cheap when compared to its regional peers which are trading on 2011 PE of 21.5x (exhibit 14). Therefore, we reiterate our positive view on ICBP on 19.6% upside potential to our target price of IDR6,700, which reflects PE re-rating to 20x. BUY.

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