Wednesday, December 28, 2011

PT Indofood CBP Sukses Makmur Tbk - ICBP, a Cash Cow Well Posed for Growth

by Ciptadana Securities

ICBP is initiated with a BUY recommendation backed by; 1) strong expected top line growth 2) solid long term prospect for its dairy and snacks businesses and 3) rapidly growing returns from its food seasonings business. Our valuation uses DCF method, with 12.73% WACC and 3% terminal growth rate assumptions. Target price is at Rp6,150, implying a potential upside of 20.59% from current price of Rp5,100. It implies a P/E ratio of 17.22 in 2012 and 15.48 in 2013.

Solid macro factors benefits incumbent’s top line

Indonesia’s resilient fundamental structure and consistent growth have been beneficial to all of ICBP’s line of businesses; noodle, dairy, snacks, food seasonings, nutrition and special foods. Each market sector experienced double digit CAGR from 1999 – 2009.

In 2011, we expect ICBP’s revenue to grow by 10.75% to Rp19.9 trillion; led by large revenue growth from its food seasonings business (36.97% YoY) and snacks business (21.51% YoY). Going forward, with most of its income domestic (low export sales), ICBP’s top side is well poised to benefit from higher food spending and Indonesia’s sustained growth. Revenue growth is forecast at a sustained double digit rate for 2012 (at 10.54%) and 2013 (at 11.10%).

Dairy, snacks, and food seasonings to lead top line growth in the long run

Higher disposable income and rising numbers of affluent, urban, middle class are expected to boost milk and snacks consumption. ICBP has a major position in sweetened condensed milk (SCM) which accounts for roughly 35% of milk consumption, and has a legacy brand (Indomilk) for the liquid segment. Its dairy business is expected to post an 8.58% top line growth in 2011 followed by faster growth of 12.25% in 2012 and 12.29% in 2013.

In addition to higher household spending on the back of rising disposable income, its snacks business also benefits from rapidly growing urban population and modern retail outlets (especially convenience stores). ICBP’s snacks revenue is expected to grow at 21.51% in 2011 to Rp1.19 trillion followed by a forecasted sustained double digits annual growth of 18.34% in 2012 and 2013.

ICBP’s food seasonings business enjoyed a 36.97% revenue growth in 2010, and is expected to sustain that rate for 2011. ICBP is a major player in the instant seasonings segment and is expected to enjoy strong growth expected by the segment.


Volatility in commodity prices

ICBP’s COGS is highly aff ected by commodity prices, due to substantial amount of raw materials that are required to be imported; skimmed and whole milk powder, potatoes, wheat (indirect), amongst others. Changes in commodity prices due to global or other factors will have substantial impact on ICBP’s margins.

Three commodities will especially have signifi cant eff ects on ICBP due to its relatively large contribution to its COGS; wheat (indirect), CPO, and whole/skimmed milk powder. In which all three are currently relatively high from a historical point of view. For our base case valuation, we assume that ICBP will focus on maintaining margins (thus a historical reference to margins of each of its businesses is used), and declining margin projection for noodle due to saturating market.

Another note is that wheat will have an indirect eff ect on ICBP’s operation, subject to Bogasari’s discretion on its fl our selling price.

Softer growth due to global factors and saturating markets for several of its businesses Despite the resilience Indonesia has shown during the recent global turbulence and ICBP’s low export sales, without a doubt, probable worsening global/ regional/ domestic sentiment due to uncontrollable factors will drag down performance.

Additionally, several segments for ICBP’s products have shown indication of maturity with slowing growth; such as noodle and SCM. Saturation along with shifts towards substitute goods is probable, and material, risks to the specifi c segment’s growth.

Weakening Indonesian Rupiah

High exposure to foreign imported ingredients causes ICBP to be highly eff ected by fl uctuations in the IDR’s exchange rate. Weaker IDR will result in higher COGS and lower margin for ICBP. An approximation of COGS’s sensitivity to USD/IDR movement is 0.78 for the food industry as a whole. Meaning that for every 1% movements in USD/IDR exchange rate, COGS will move by 0.78% in the same direction of USD.

Toughening competition to depress margins

Regardless of ICBP’s tremendous advantage of brand equity in most of its segments, toughening competition will force ICBP to face depressed margin as it takes time to adjust its market share and profi tability; during which, temporary or permanent loss of return might occur. Continuous innovation and staying up to date will be a necessity, as is commonly required to stay on top of the consumer products industry. mines in the future.

BUY with Rp6,150 target price

Target price valuation uses DCF method with 12.73% WACC and 3% terminal growth rate, implying a 20.59% upside potential with nominal price of Rp6,150. Factors considered include; 1) increase in COGS due to higher imported raw materials price 2) slower growth due to global factors and saturating market for several of its businesses, such as noodle and SCM 3) weakening Indonesian Rupiah, and 4) toughening competition depressing margins.

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