Jun 04, 2016 18:32:38
Indofood CBP (ICBP) - Outlook Still Promising Despite Weak 4Q15
We maintain a BUY call and raise our TP to IDR16,800 (from IDR16,300, 11% upside), as we change our valuation to DCF from P/E multiple. We see a promising earnings outlook for Indofood, on the back of lower flour costs, which should boost its noodles segment’s earnings. Flour prices are estimated to decline further, after falling by 2-3% YTD.

¨ Likely to benefit from lower input cost. We see that Indofood CBP’s (Indofood) noodles segment – which accounted for c.90% of consolidated earnings – should benefit from lower flour costs, which is its main input cost. YTD March, flour prices have declined 2-3% thanks to lower commodity wheat prices and a stabilised IDR. Going forward, we believe flour prices should decline further on the back of a downtrend in wheat prices and the entry of new players, who commonly set their prices lower than those of existing players. This could lead to price competition and ultimately benefit flour consumers such as Indofood, which produces noodles.

¨ Maintain BUY with a higher TP. We raise our TP to IDR16,800 (from IDR16,300), as we change our valuation method to DCF from P/E multiple. Our revised TP is based on 9.7% WACC and 2% TG, implying 26x/24x FY16F-17F P/Es. The key risk to our call is higher flour prices.

¨ 4Q15 earnings: below expectations
¨ 4Q15 earnings miss our and consensus estimates, declining to IDR706bn (-21% QoQ). Sales were flat, driven by lower noodles segment earnings, which were hit by higher flour costs. The noodles segment’s EBIT margin narrowed to 12.4% in 4Q15 (vs 17.4% in 3Q15), despite a higher ASP. Based on our checks with Indofood Sukses Makmur (Indofood Sukses) (INDF IJ, BUY, TP: IDR7,150), flour ASP increased 3% QoQ during the period.