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Apr 11, 2017 15:09:36

Post-China Minzhong divestment, Indofood’s balance sheet became healthier with lower debt. Net gearing declined to 0.2x as at end-Dec 2016 (from 0.5x end-Sep 2016). Our ground checks suggest Indofood’s flour and CBP retail selling prices increased in Dec 2016 and January. These higher ASPs are likely the result of the pass on costs from the increase costs especially cost of goods sold (COGS) in 4Q16. We maintain our BUY recommendation with a DCF-based IDR10,300 TP (28% upside), implying 19x and 16x FY17F-18F P/Es respectively.

  • Healthier balance sheet. Indofood Sukses Makmur’s ($INDF) balance sheet is healthier after the China Minzhong divestment, which was completed at end 2016. Proceeds from the divestment were used to pay its debt, which saw a decline to IDR22trn (-30% QoQ) at end-Dec 2016 (from IDR32trn at end-Sep 2016). Net debt-to-equity ratio declined to 0.2x (from 0.5x) with its foreign currency debt exposure declining to 37% (from 50%) in the same period. Going forward, we also expect financing costs to decline.
      
  • Raised ASPs. Our ground checks indicate that the retail selling price of Indofood’s flour Cakra Kembar and Segitiga Biru rose by around 10% and 5% MoM, respectively in Dec 2016. Furthermore, in January the retail selling prices of its subsidiary, Indofood CBP ($ICBP)’s products such as instant noodle and RTD-tea also increased. These higher ASPs are likely to improve EBIT margin. Notably, Indofood’s flour and consumer branded products’ (CBP) 4Q16 EBIT margin narrowed, driven by higher costs. Maintan BUY with IDR10,300 TP, implying 19x/16x FY17F-18F P/Es respectively.
      
  • 4Q16 earnings in line. Indofood’s 4Q16 earning came in at IDR905bn (- 10.4% QoQ), in line with expectations. EBIT margin widened to 13.9% in 4Q16 (from 12.2% in 3Q16) thanks to its improved agribusiness earnings. However, it was offset by lower financing income and lower income from associates. (Andrey Wijaya)
      
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