Thursday, September 8, 2011

Indofood CBP Sukses Makmur - Investment Thesis

by Kresna Securities

We upgrade our rating on ICBP to BUY with a new TP of Rp6,400, as we shifted our DCF base year from 2011 to 2012 to capture appealing prospects of the company next year. In 1H11, ICBP succeeded in recording a 23.7% YoY increase in net income, surging to Rp990.0bn, supported by a positive turnaround in net interest income of Rp68.5bn (vs a net interest expense of Rp15.8bn in 1H10) and a lower effective tax rate of 24.2%. 2H11 should see stronger performance, fueled by robust demand as it includes fasting season; results will also be boosted by a selling price increase of 6%-7% for snack foods (May11) and 2% for dairy products (June11).

Key Catalysts

1H11 revenue grew by 5.7% YoY to Rp9.4tr. This performance was attributable to positive sales volume growth across all divisions (+2.5%-17.1% YoY), except for noodles, which declined by 6.7% YoY to 5.4bn packs. However, as ICBP had already jacked up its noodle price twice (3%-4% in 4Q10 and 7%-10% in 1Q11) the Noodles Division still managed to record a 4.2% YoY increase in 1H11 sales, at Rp6.5tr. Other divisions also posted a positive sales growth of 4.5%-48.9% YoY in 1H11.

Improvement in operating margins. A selling price increase repeated twice allowed 1H11 operating margin for Noodles Division to improve by 0.4% YoY to 16.1%, against increasing input costs. Food Seasonings as well as Nutrition and Special Foods (NSF) also posted improvement in margins by 1.6% YoY and 3.5% YoY, respectively, due to sales price increases and stabilized fresh food costs this year. However, high skim milk and sugar prices have cut into Dairy margins, which fell by 3% YoY to 9.4%, while high potato and cooking oil prices slashed Snack Foods' margin by 0.5% YoY to 6.5%. However, as the contribution of Dairy and Snack Foods was only 15.7%, 1H11 consolidated operating margin should still be able to expand by 0.3% YoY to 14.0%.

Should see better performance in 2H11 as price increases just took place by end-2Q11. Company had increased selling prices by 6%-7% for Snack Foods Division products (May11) and 2% for Dairy Division (June11) products to mitigate the impact of rising input costs.

Stronger growth at the bottom line. ICBP booked Rp990.0bn in net income in 1H11, increased by 23.7% YoY from Rp800.2bn in 1H10. This accelerated performance was mainly supported by: 1) a lower effective tax rate of 24.2% vs 26.4% in 1H10, and 2) net interest income of Rp68.5bn in 1H11, as compared to an expense of Rp15.8bn in 1H10 from unused IPO cash proceeds.

Earnings Outlook

Our earnings forecast revised. We revised our FY11/12 projected sales down by 2.4%/2.1% to Rp19.8tr/Rp21.6tr, because of weaker noodles sales volume. However, as the impact of lowered promotional expenses (18.5% - 19.3%) and increased interest income (34.0% - 44.5%) is higher than the downward revision in sales, our new FY11/12 net profit targets of Rp2.0tr/Rp2.2tr are still higher by 7.6%/14.1% compared to our previous forecasts of Rp1.9tr/Rp2.0tr.

Upgrade to BUY with a new TP of Rp6,400. As we are entering 4Q11, we decide to shift our DCF base year from 2011 to 2012 to capture the appealing prospects of the company next year. Thus, we raise our TP on the counter by 14.8% to Rp6,400.

Currently, ICBP is trading at FY12 P/E of 16.7x, a reasonable valuation in our view.

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