May 17, 2016 00:20:24
Unilever Indonesia (UNVR): Determined dominance   

Plenty of initiatives to grow future volumes: Our recent meeting with Unilever Indonesia (UNVR) reveals that the company is indeed determined to grow its future volumes through various measures:

-  Going deeper with “LeverEdge”: By the end of June 2016, UNVR plans to have completed its new distribution system called “LeverEdge”.  This would enable the management to better identify sales patterns at 822 of its distributors nationwide. The implementation of this powerful geotagged system would not only deal with out-of-stock items, but also deepen market penetration in difficult-to-reach rural villages. Note that UNVR currently has some 500k stores under its own direct coverage, out of 2m total retailers (only 1.2m are relevant for UNVR). However, we note that efforts to achieve greater product intelligence in various areas, coupled with a products push into the Eastern part of Indonesia, have resulted in higher distribution costs for the company, resulting in some margin pressure in 1Q16. However, we expect this to ease in 2H16, in line with completion of “LeverEdge”.             

-  Early festive plan to raise demand; 100% halal certification soon: To stimulate volume demand, UNVR is starting this year’s Lebaran season early through its “integrated” and “360 degree” (exhibit 12) marketing initiatives. Additionally, all A&Ps will be activated: above the line, below the line, traditional, media and digital ads. With store displays ready, UNVR will likely follow with other activities next month as the fasting month approaches.  Furthermore, Personal Care factories have been halal certified. This should be followed by detergent, which should receive its halal certification from LPPOM MUI by end of 2Q16, making all of UNVR’s products halal certified.   

-  40-product launches and relaunches in 2016; Downsizing SKUs: At this stage, we continue to like UNVR’s proactive stance when it comes to product introduction under the umbrella of its 39 powerful brands (exhibits 10-15). In 2016, the company plans to implement around 40 product launches and relaunches, compared to around 55 products per annum in the past. This is in line with management’s plan to downsize its current SKUs from 1,000 (originally 1,200) to 900.               

Recommendation: Maintain BUY with unchanged TP of IDR50,500
Despite our 2016-17F earnings reductions (exhibit 5) on slightly weaker-than-expected 1Q16 earnings, we retain our positive view on UNVR’s share price performance (exhibit 4), particularly as Indonesian banks face headwinds from government-related policies. Exhibit 6 shows UNVR’s constant upward re-rating in the past five years, suggesting that its expensive valuation is simply getting more expensive, backed partly by the company’s strong management as reflected in a near 125% ROE in 2015. In terms of target price, we maintain it at IDR50,500, based on 20% premium to its past 1-year average PER of nearly 50x.  With 14% upside potential to our new 12-month TP, we reiterate our BUY rating on UNVR. Risks to our positive call on the stock include a weaker IDR and more intense competition, particularly in the ice cream segment with Wings’ and Glico’s entry into the fray.