Mayora Indah (MYOR): Fat margin
- Lower costs on decreased raw-materials and stronger IDR: On the back of lower raw materials prices and recent stronger IDR, we have raised MYOR’s 2016-17F earnings by 19-25% (exhibit 5). With 2015 coffee prices having dropped 17% y-y, sugar (-5%) and wheat (-21%) (exhibits 8-10), MYOR booked higher-than-expected 2015 net profit of IDR1.2tn, +202% y-y (105% of our estimate and 136% of consensus). At this stage, we expect this trend to remain, allowing 2016-17F gross margin to be sustainable at around 28%, particularly given the possibility of higher ASPs ahead on raised purchasing power due to the government’s lower administered prices and Jokowi’s efforts to boost incomes of mid-low households, in line with MYOR’s target market. This report marks a transfer of coverage.
- Volumes to support top-line growth; Possible price hikes ahead: During our recent visit with the management, we learned that MYOR’s January and February revenue levels were 20% higher than the company’s peak monthly sales in 2015, and that MYOR expects a similar trend in March. This is all due to volume growth, helped by newly launched products (exhibit 12) as well as a small recovery in consumer spending on low inflation. The company has maintained its current ASP level and expects to implement fewer price hikes this year, considering the intense competition in the FMCG market. In addition, the management expects continued top-line support from its strongest division, biscuits (35% of revenue), currently with the largest market share in SE Asia, while coffee (28%), its troubled segment, is facing a challenging operating outlook due to the entry of Wings with its “Top” brand into the industry.
- A natural currency hedge from strong export sales: In 2016, the company is planning to maintain export contributions at around 49%, which in our view should be sufficient to act as a natural hedge against the possibility of IDR volatility. Note that in 2015, MYOR managed to increase export sales by 25% y-y, representing 49% of total revenue, up from 41% in 2014 (exhibit 11), helping to offset the weak domestic sales at the time. On the ground, MYOR’s ex Java sales suffered last year due to weaker farmer incomes in the outlying areas, resulting in higher Java sales of 60% of total domestic sales, up from 55% in 2014.
Recommendation: Maintain BUY and raise TP to IDR37,000
In tandem with our earnings upgrades, we raise our 12M TP from IDR31,000 to IDR37,000, implying an unchanged 25x 2016F PER, a 13% sector premium ex-UNVR (exhibit 7). Hence, 1M market outperformance of more than 9% (exhibit 4), related mostly to good news based on the 2015 results, should persist ahead, supported by positive sentiment from lower raw materials prices: robusta coffee (-0.3% ytd), sugar (-0.3%) and flour (-5.2%). Another possible catalyst would be the possibility for Indonesia to join the TPP, paving the way for increased MYOR’s exports to other Asian countries. BUY. Risks to our call would include higher raw materials prices caused by El Nino, resulting in lower-than-expected margins. $MYOR