Sep 14, 2016 11:04:45

Indofood Sukses Makmur: Minzhong Divestment Close to Deal

Marvellous Glory (Marvellous) offers to buy 82.9% stakes in China Minzhong (Minzhong) which is owned by Indofood Sukses (Indofood). We see this divestment should unlock Indofood value, driven by:

1) Healthier balance sheet since its proceeds are to pay Indofood debts;

2) Lower currency risk after reduction of foreign currencies debts.

Since we now included the proceeds of Minzhong to our SOP valuation, we raised our TP to IDR10,300 (from IDR9,700, 23% upside), implying 19x/16x FY17/18F P/Es. Maintain BUY.

¨ Positive update on Minzhong divestment. Marvellous offers to buy 82.9% China Minzhong (MINZ SP) which is owned by Indofood at price SGD1.2/share. The stocks which will be bought is higher than previous MoU which was 52.9%. Indofood to receive SGD652m proceeds via:

i. SGD416m cash payment for 52.9% stakes in Minzhong;

ii. SGD236m exchangeable bonds for 30% stakes in Minzhong.

Note that Indofood had received SGD40m as advance payment in Dec-15.

In our calculation, Indofood likely to book SGD65m gain (around 15% of Indofood FY16F earning) from this transaction since average cost to acquire Minzhong is around SGD1.08/share.

¨ Stronger cash position with lower currencies risks. After the divestment, we see that Indofood balance sheet should be healthier and financing cost to come lower as the divestment proceeds are to lower Indofood debts which was used to finance Minzhong acquisition. Minzhong has high liabilities denominated in foreign currencies amounting to IDR4trn or the equivalent of 14% of Indofood’s total debts. At end Jun-16, Indofood total debts were IDR29trn with net-debts to equity ratio (NDER) of 0.36x. Around 50% of Indofood debts denominated in foreign currencies.

¨ Trading at huge discount. Based on P/E valuation, Indofood is trading at 36% discount to its subsidiary Indofood CBP (ICBP IJ, BUY, TP IDR10,200). In term of P/Es, Indofood was trading at premium or same with Indofood CBP. However, since end 2013, Indofood was trading at discount, partly driven by its investment in Minzhong. We see Minzhong divestment should triger re-rating on Indofood valuation.

¨ Reiterated BUY with higher TP. We see the Minzhong divestment should create positive sentiment on Indofood share price. Our previous TP excluded Minzhong value for conservative reason, due to its uncertainty. Since we now included proceeds of Minzhong to our SOP valuation, we raised our TP to IDR10,300 (from IDR9,700, 22% upside), implying 19x/16x FY17/18F P/Es. We assumed a 15% holding company discount in deriving our TP. We maintain BUY. Main risks in our call is cancelation on Minzhong divestment since it is subject to minority shareholders approval on Dec-16 EGM. (Andrey Wijaya)

$INDF HK:0142