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Nov 23, 2016 08:48:45

Did you know?  That ICBP’s Indomie instant noodle has more than 40 different flavors? Since inception in Sept 1970, Indomie has been the leading instant noodle in Indonesia and around the world.
 
Offering different flavor such as Fried Noodle, Soto Mie, Tom Yum, Bulgogi, and Real Meat, Indomie is now available in more than 100 countries. Also worth noting that in present day, Indonesia is the second largest instant noodle consumer in the world at 14.5bn packs/year, after China which consumes 44bn packs/year.

Indofood ($INDF) through its subsidiary Indofood CBP ($ICBP) has been innovative with its products to appeal to “demanding” customers both domestically and overseas.  As such, we can see a wide range of products from the company now available for our choosing.

New product launch is a key strategy for all consumer companies to grab market share.  Reason why we see consumer staple companies such as Unilever ($UNVR) and Wings also aggressively launching new line of products.

Today consumer analyst Merlissa Trisno points out that INDF will keep its pace in product launch to grab market share.  INDF will see stronger revenue growth potential for its CBP division at 12.3% in 17CL driven by its new products launching particularly in the dairy and beverage divisions.

However, due to potentially weaker Rupiah assumption and higher soft commodity prices (ie. CPO, sugar, skimmed milk), we estimate 50bps lower Ebit margin for 17CL.
 
Thus, Merlissa expects lower earnings growth potential for 17CL at high single-digit level of 8.1% as compared to 25.6% in 16CL.

While higher CPO price results in higher cost for CBP, INDF the parent company is a net beneficiary given its upstream plantation exposure (15-20% of Ebit).  4Q16 CPO price has exceeded RM2,800/t (+5% qoq) and close to RM3,000/t in the week of November 11.
 
This spells upside for our current regional CPO price forecast of RM2,450/t and RM2,600/t in 16-17CL respectively.  Our sensitivity analysis suggests that for every 10% CPO price increase it translates to 6-8% EPS upside at INDF level, all else equal.

Merlissa’s thesis on CPO is supported by CLSA’s plantation analyst, Chuanyao Lu (CY), who in his latest report emphasized the persistent low inventory level in Malaysia and China due to El-Nino aftermath.  CPO inventories in Malaysia stood at 1.57mt which is virtually unchanged from Sep and is 45% lower compared to 2015.

As such, CY expects CPO prices to continue its uptrend.  And with production recovery on the horizon, we expect this to translate into better earnings for the industry.

Circling back to INDF, Merlissa highlights that INDF claims that the SGD416m proceed from 52.9% China Minzhong (SG:K2N) divestment will likely be received around December 2016, subject to the delisting and privatization process in SGX.  Merlissa has incorporated ~Rp370bn divestment loss in her 2016 financial forecast.
 
Post the transaction, net gearing will drop to 17% in 2016-17CL, from 33% in 2015.  We estimate interest cost saving of around Rp100bn but with lower earnings contribution from Minzhong which might lead to a net net Rp60-70bn cut in 2017 earnings.

In summary, Merlissa adjusts INDF’s EPS down by 6% for 17CL and 4.1% for 18CL to factor in a lower EPS assumption for the CBP division and lower Minzhong ownership (from 82.9% to 29.9%).
 
Despite lower earnings assumptions, Merlissa maintains her BUY recommendation and target price at Rp10,500/sh for INDF as she rolls forward her SOTP-based valuation to end-2017.  The target price implies a 20x 17CL PE.

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