Apr 18, 2016 08:54:59
Indofood Sukses Makmur(INDF) - EBIT Lifted By Consumer And Agri Units
We maintain BUY on Indofood with a higher IDR8,600 TP (from IDR7,150, 20% upside) as we changed our valuation base to SOP (from P/E). Higher consumer branded products (CBP) and agribusiness earnings should boost its EBIT, thanks to lower input costs and a higher CPO price. In addition, an improved distribution network should enable Indofood to identify the sales trend for each region, which could boost its sales. Key risks to our call include a significant decline in the price of CPO.

¨ Better CBP EBIT. Indofood Sukses Makmur’s (Indofood) CBP division, which produces noodles, should benefit from lower flour costs – which makes up the main cost of its inputs. In 1Q16, flour prices declined 2-3% from lower commodity wheat prices and a stabilised IDR. We think flour prices should decline further on the back of a downtrend in wheat prices and the entry of new players, which commonly set their prices lower than those of existing players. This could lead to price competition and ultimately benefit CBP players.

¨ Accelerating EBIT for agri unit. Its agribusiness should directly benefit from a higher CPO price due to lower supply. We estimate that the disruption in CPO supply after last year’s El Nino could boost the average CPO price by 14% YoY to IDR8,000/kg in 2016F (2015: IDR7,000/kg). Since most agribusiness’ costs are fixed, a higher CPO price should increase EBIT significantly.

¨ Strengthened distribution network. Its distribution arm aggresively expanded its network by establishing new branches, adding stock points and increasing the number of registered retail outlets. It also strengthened its logistics capabilities, by adding sales team workforces. Indofood aims to grow its penetration – especially in rural areas – by expanding its outlets.

¨ Likely to maintain dominant position in flour. Despite new flour producers flooding the Indonesian market for the past three years, Bogasari – the largest local flour producer – has maintained its market share of ~60%. This year, Wings and Mayora group are expanding and building new flour mills. This should not hurt Bogasari’s position, in our view, thanks to its strong brand names. To deal with rising competition, Bogasari will focus on maintaining its current customers and helping them to grow faster than the industry average.

¨ Maintain BUY. We raise our TP – which is now based on SOP (from P/E previously) – to IDR8,600 (from IDR7,150). Our TP implies 19x/17x FY16F/FY17F P/Es. Indofood’s FY15 earnings fell to IDR3trn (-25% YoY), driven by higher unrealised forex losses on foreign currency-denominated debts which caused financing costs to surge. However, its FY15 core earnings were still in line with expectations. Hence, we maintain our FY16F/FY17F core earnings at IDR3.6trn/4.1trn.