Aug 25, 2016 11:23:07
Better Outlook For Indofood CBP And Bogasari

We expect a brighter outlook for Indofood driven by:
1. Faster growth at the CBP division on higher consumer spending;
2. Stronger flour earnings, benefiting from higher sales volume and lower
input costs;
3. Recovery of agri earnings on stronger sales volumes.
We lift our earnings estimates and SOP-based TP to IDR9,700 (from
IDR8,600, 22% upside), implying 18x/15x FY17F-18F P/Es. Maintain BUY.

Accelerating consumer branded products (CBP) earnings. In 2H16, we
expect subsidiary Indofood CBP Sukses Makmur’s (Indofood CBP) (ICBP IJ,
BUY, TP: IDR10,200) earnings to be stronger, driven by:
i. Consumer spending growth – better noodles and dairy product sales;
ii. Lower input costs (especially flour) lifting earnings at its noodles unit;
iii. Lower operating losses at its beverage segment.
Indofood Sukses Makmur’s (Indofood) said that consumer spending has been
improving since the middle of 2Q16, as indicated by higher sales volumes and
stronger demand for premium products, eg Indomie Real Meat and Indomilk.

Better PT Bogasari Flour Mills’ (Bogasari) outlook. In August, Bogasari
reduced ASP by 3%, which we view as in line with Indofood’s strategy to
increase market share. We have factored this lower flour ASP in our forecast.
Despite the cut, we expect Bogasari’s EBIT margins to be manageable, thanks
to lower wheat prices – a raw material for flour – as well as a strengthened and
stabilised IDR vs USD. Notably, flour ASPs came down by 1% YoY 1H16, but
Indofood’s EBIT margin continued to expand to 8.9% in 1H16 (1H15: 7.9%). So
far this year, Bogasari’s sales volumes have increased YoY, after posting flat
growth in 2012-2015.

Agribusiness earnings likely to recover. While Indofood Agri Resources
(Indofood Agri) (IFAR SP, NR) booked weak 1H16 earnings on dismal CPO
production on the back of El Nino, we expect CPO production to recover from
2H16. This should lead to lower unit production costs and improved profitability,
in our view. Taking a lesson from its El Nino experience in 2009, Indofood Agri’s
lower CPO production level in 2010 was followed by strong production growth in

Lifting earnings estimates and TP. 2Q16 earnings came in ahead of our
expectations. Given stronger projected earnings at Indofood CBP and Bogasari,
we lift our FY17-18 earnings by 7%/9% respectively and increase our SOPbased
TP to IDR9,700. Our TP implies P/Es of 18x/15x for FY17-18F. Based on
our SOP valuation, Indofood’s fair value is IDR12,000 but we have
conservatively excluded the value of China Minzhong Food Corp (Minzhong)
(MINZ SP, NR) and assumed a 15% holding company discount in deriving our
TP. Maintain BUY. Near-term catalysts include the completion of Indofood’s
proposed divestment of its stake in Minzhong. Risks to our call include lower
CPO production and sales volume, and weakened consumer spending.