Feb 27, 2017 11:34:08

Nippon Indosari Corpindo ($ROTI) - More Tailwinds In FY17

Nippon indicated that its monthly sales – which were hurt in Dec 2016 due to a temporary products boycott – have returned to normal. This year, the company is likely to raise its selling prices, since there have been no price hikes for almost three years. On the flip side, flour prices (its main raw material purchased under semi-annual contracts) have declined. This year, Nippon has also started to move into new markets in Kalimantan and increased its GT sales forces. Maintain BUY and DCFbased IDR1,870 TP (22% upside), which implies 25x FY17F P/E.

Better sales in January after Dec 2016’s boycotts. Our channel checks on minimarts in Jakarta suggest that Nippon Indosari Corporindo’s (Nippon) sales have started to improve in January after a temporary products boycott in Dec 2016. Nippon’s general trade (GT) distribution is also strengthening. This can be seen by the number of Sari Roti hawkers (and their ubiquitous tricycle carts) already back on the streets. This year, Nippon aims to increase its GT channel sales force too by boosting the number of “Mbak Sari” (ladies selling Sari Roti products from trollies) by 3x. The company also aims to increase its GT sales contribution to 26% of total sales in FY17 (FY16: 24%).

New markets in Kalimantan. As at January, Nippon started selling its products in cities in Kalimantan. These urban centres include Pontianak, Banjarmasin and Samarinda. The firm delivers its bread products – which produced at its Java plants – to Kalimantan via air freight. Although the transportation costs are high, Nippon said its Kalimantan’s EBIT margins are same as the Java market. This is because all transportation costs are passed on to its customers.

Likely to increase ASPs while costs decline. Nippon has not increased its selling prices for almost three years. During this same period, other domestic consumer food products like biscuits, snacks and instant noodles have seen prices increase by 4-6% pa. The price gap between bread and other consumer food products has widened, and we believe Nippon has huge room for increasing its prices. On the flip side, contracted flour price (for purchase contracts in JanuaryJune) is set to decline by 4% from prices in the previous 6-month period, ie Jul-Dec 2016. Since flour accounts for ~25% of Nippon’s COGS, we see this lower input cost having a significant impact on its production costs.

Softened FY16 earnings likely, but it should recover this year. The temporary Sari Roti products boycott has caused sales disruption. Hence, some of its bread products expired at the minimarts, which resulted in higher 4Q16 sales returns. This could narrow its EBIT margins and conceivably soften earnings growth. However, such growth should accelerate this year, driven by lower input costs and higher selling prices. These factors should help Nippon improve its EBIT margins.

We maintain our call and DCF-based IDR1,870 TP (22% upside), which implies 25x FY17F P/E, on this stock. Key risks to our call include rising competition, higher sales returns and weakened consumer spending. (Andrey Wijaya)