Sep 12, 2017 17:57:25

Our ground checks suggest the retail selling price for instant noodles remained stable, while the selling price for dairy increased, probably as a result of a higher skimmed milk price. While the cost of flour remains manageable, which is positive for instant noodles, we see increased competition in the RTD-tea, indicated by its lower selling price YTD. A main challenge on input costs is the potentially higher refined sugar price after the implementation of a new regulation by the Ministry of Trade. The impact of the new policy is still unclear thus we maintain our forecasts and BUY recommendation on Indofood with an IDR10,300 TP (18% upside) which implies 21x FY18F P/E.

  • Retail selling prices for instant noodles were relatively flat. Our ground checks during August suggest that the retail selling prices for Indofood’s instant noodles Indomie Kari Ayam and Goreng Special were relatively flat MoM. For premium instant noodles, the sales volume of Indomie Real Meat is likely to increase, as its retail selling price is below that of its competitors. On the cost side, over the past two months the international wheat price was in a declining trend. As there is a timelag between the international selling price of wheat to that of the domestic flour (the main raw material of noodles) the input costs of instant noodles should remain manageable over the next two-three months. Noodles accounted for c.62% of Indofood’s total sales in 1H17 (Figure 1).
  • Due to higher raw material costs, a higher retail selling price for dairy. Indofood’s dairy price for Indomilk in small pack (190ml) began to increase in August following Indomilk’s price increase for its large pack (1ltr). In our view, this is likely due to a higher cost of its raw material (ie skimmed milk). Dairy products accounted for c.19% of Indofood’s total sales in 1H17 (Figure 1).
  • Our ground checks suggest that competition in the ready to drink (RTD) tea market remains intense which is indicated by a declining retail selling price of the major RTD-tea brands which include Indofood’s Ichi Ocha, Sinar Sosro’s Teh Sosro, ABC President’s Nu Tea and Coca Cola’s Frestea.
  • New policy impacting the refined sugar. Following the implementation by the Government of a new Trade Regulation (No. 16/2017) the main challenge going forward on RTD-teas and dairy products is the potentially higher cost of refined sugar. However, the impact is still unclear. The Vice Chairman of Indonesian Farmers Concern Association (HKTI) said this policy may increase the cost of refined sugar by c.2%. The Association of Soft Drinks Industry estimates the price of refined sugar may increase instead by 15%-30%.
  • Maintain BUY with an IDR10,300 TP (18% upside) which implies a 21x FY18F reported P/E. We maintain our forecast on Indofood for now as the impact of the new policy is still unclear. The main risk to our call is the magnitude of the increase in the cost of refined sugar which may result in added pressure on the earnings of dairy and beverage products. Beverages accounted for c.5% of Indofood’s total sales in 1H17 (Figure 1). (Andrey Wijaya)