Ground checks – Indofood’s higher flour retail selling price MoM, but flat noodle selling price

Based on our ground checks in a Hypermart store in Jakarta, Indofood Sukses Makmur’s (Indofood) ($INDF) flour Segitiga Biru and Kunci Biru retail selling price increased by 9% MoM and 8% MoM respectively – possibly to pass on higher wheat price which jumped at end of June. Meanwhile, Cakra Biru’s retail selling price remain flat.

Indofood’s instant noodle retail selling prices was also flat MoM. For premium instant noodle, Mayora ($MYOR)’s Bakmi Mewah retail selling price increased by 8% MoM which is now level with Indomie Real Meat’s price. Since its price difference to its competitors narrowed, we see Indofood’s premium instant noodle sales is likely to increase.

Instant noodles accounted for c.52% of Indofood’s consolidated 1H17 EBIT, while flour (Bogasari) contributed 14% to EBIT. We maintain BUY on Indofood with IDR10,300 TP (23% upside) which implies 16x FY18F P/E.

MYOR 3Q16 results: Strong EBIT above our expectation, roughly in-line earnings

Mayora Indah ($MYOR) booked solid 3Q16 results with total revenue of IDR4.0tn, (+28% y-y, -12% q-q), roughly in-line with our quarterly estimate. However, due to higher cost of raw materials (coffee +26% y-y, sugar +69% y-y), gross profit margin was squeezed by more than 100bps, yet MYOR still booked 71% y-y growth in operating profit helped by lower selling expenses especially on A&P costs. Unfortunately, due to the shift from a forex gain in 3Q15 to a forex loss in 3Q16, the company’s net profit was only IDR307bn (+14% q-q, +11% y-y) resulting in 9M16 net profit of IDR898bn (+3.2% y-y) with net margin dropping by 140bps.

Bahana comment: Looking ahead, we expect sustained volume growth and margins on MYOR’s ability to promote its new and existing product and maintain A&P cost below 11-12% of sales. BUY.

Mayora Indah: 3Q16 Beats Expectation ($MYOR; Rp 1,595; Neutral; TP: Rp 1,550)

• MYOR posted impressive growths despite declining margins, helped by decent sales growth and a surprise drop in ads and promotion spending to a 5-year low. The former is encouraging, but the latter is actually not.
   
  
• Core profit beats forecast. A swing from Rp260bn FX gain in 9M15 to Rp185bn loss in 9M16 slashed net profit growth to 3% YoY in 9M16. Stripping this out, core profit jumped 53% YoY to Rp1,037bn, beating our forecast with 73% realization (vs. 2-year average of 66%). Two key drivers are: 1) Impressive 28% YoY revenue growth in 3Q16, bringing 9M16 growth to 25% YoY (versus management’s 18% revenue growth guidance for 2016); and 2) significant 55%/59% YoY/QoQ drop in 3Q16 ads spend, which is as a big surprise.
   
  
• Revenue growth offsets weaker gross margin. Domestic sales (+35% YoY in 9M16) continued to drive growth, albeit from a low base (-15% YoY in 9M15). Weaker export sales growth is expected, partly due to stronger IDR, but the rebound in exports growth to 18% YoY in 3Q16 from -1% in 2Q16 helped overall momentum. That said, this manages to offset the negative impact from falling coffee (-2.4ppt QoQ) and confectioneries (-0.6ppt QoQ) in light of higher coffee and sugar prices, which have been reflected in the increase in raw material inventories of late.
   
  
• Alarming drop in A&P spending. We see the 59% QoQ drop in ads & promotion (A&P) spending as alarming for a fastgrowing consumer company. It implies a 5-year low A&P-to-sales ratio at 4.7%, much lower than the 10.5% ratio in 1H16. As a comparison, the A&P spending growth for UNVR/ICBP was 0%/34% YoY. We have yet to clarify with the management on this.
   
  
• 4Q16 should be showering with gifts. Sales are seasonally strong in Q4, especially for exports: IDR today has weakened by 119bps QoQ, and exports are half of sales.
   
  
• Neutral call unchanged, waiting for more clarity. We maintain our Neutral call and Rp1,550 price target. Our DCF based price target implies 24x 2017F PE. We may review our numbers as we seek further clarification from the management.
   
  

$MYOR $ICBP $UNVR

$MYOR - The biscuit industry is predicted to have a total revenue of Rp18tn in 2016, (+)8.4% YoY, according to the Indonesia Association of Biscuits, Bread, and Instant Noodles (Asrim).

Mayora Indah will still have the largest market share (30%-35%) in biscuit industry, followed by Khong Guan and Nissin with market share of 30% and 15% respectively. Asrim Chairman Sribugo Suratmo said that the new player Asia Sakti Wahid Foods (ASW Foods) has gained 8% market share with its Hatari brand. ASW Foods targets revenue to grow by 25% in 2016. Comment: Mayora has been growing faster than industry with double-digit growth rate.

Mayora Group to operate newest factories for bottled water in Dec’16

The Rp1-1.4 tn investment is spent to boost market share by 5x up to 30-40%. Capacity would increase to 5 mn carton/month (5x current capacity). According to the bottled water producer association (Aspadin), demand for bottled water is up by 9-10% YoY in 2016 from 24 bn liter, where 90% is supplied by SMEs. From the F&B business, Mayora Indah ($MYOR) hopes to revert back to 50:50 revenue contribution from domestic and export sales after slower export growth this year. $MYOR stated that domestic sales has increased by 30% YoY and export by 15% YoY. Mayora’s bottle water, Le Minerale, is not under the listed company.

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.
 
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