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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)

Feb 22,2017 11:24:39

Indonesia market update: Here comes the rain
Ahok, floods & stocks

Bad news for Ahok in the lead-up to the Jakarta Governor race: In spite of efforts by Jakarta’s governor, Basuki “Ahok” Tjahaja Purnama, to prepare for and prevent flooding, 54 areas around the capital were paralyzed as water prevented travel (exhibit 3-4) given the water depth of up to two and a half meters in some places on the back of around 180mm rain intensity (2016: 157mm) in the past 24 hours. The weather bureau (BMKG) predicts the peak intensity of La Nina to stay until March 2017.  
2nd round Jakarta Governor campaign has started early: Dressed in a red parka (exhibit 2), Anies, Ahok’s competitor in the final round of the Jakarta Governor race, has managed to capitalize on the floods to raise his popularity ahead of the planned campaign scheduled for 6-15 April 2017.

Demonstration still took place despite flooding: The Jakarta floods did not deter an estimated 10,000 protestors (although much lower than the 100k participants previously forecast) from turning up in front of the parliament (exhibit 1), asking the government to remove Ahok from his Governor post. The rally was reportedly headed by Muslim forum FUI.    

Positively affected stocks: While all distribution channels are adversely affected by the floods, we believe there are sectors and stocks that could perform better than others under these conditions. Siloam Hospitals ($SILO) should see increased traffic as people get sick while the pharmaceutical sector is also likely to see some uptick from higher purchases of medicine to treat wide-ranging illnesses such as flu and skin diseases, benefiting Kalbe ($KLBF) and Sido Muncul ($SIDO). Additionally, during floodings, households and evacuation centers typically stock up on staple foods such as noodles, which would benefit Indofood Consumer Branded Products ($ICBP). During these times, smokers also have the propensity to smoke more, so we could see increased stick sales for Sampoerna ($HMSP). Within the commodities space, assuming continued downpours at Sumatra’s plantation estates, higher CPO prices might occur due to decreased output. This would benefit our favored plantation plays: Eagle High ($BWPT) and Tunas Baru ($TBLA).  

Adversely affected stocks: With the rains, cement, construction and coal companies could face operational delays. We also expect bread maker Nippon Indosari ($ROTI) to suffer (c.70% of sales in Greater Jakarta), as spoilage may be an issue due to the fresh nature of its products. Retailers could also be affected by the reduced traffic, particularly Ramayana ($RALS) whose low-end target customers lack cars for commuting. Traffic jams caused by flooding should spell bad news for transportation, adversely affecting both Blue Bird ($BIRD) and Express ($TAXI), as well as Garuda Indonesia ($GIAA), as flights may be delayed or cancelled.   

Jan 23,2017 12:14:13

Nippon Indosari ($ROTI), Notes

Nippon Indosari aims to increase its market shares in local bread market by launching more product variants in 2017. By having more product variants, it is looking to ensure that it has the first mover status on new bread types and flavours.

Jan 11,2017 10:50:18

Nippon Indosari Corpindo ($ROTI), A Good Start To 2017

Early 2017 has seen two significant developments for Nippon, which came in the form of lower input costs and the acquisition of a Philippines-based bread company. The company signed a new 6-months (for Jan-Jun 2017) purchase contract on flour – its main raw material – at a lower price. In addition, its JV SFC, acquired a local bread company which we see as a strategic move for Nippon’s penetration in Philippines market. Maintain BUY with a DCF-based TP of IDR1,870 (13% upside), implying 25x FY17F P/E.

Nov 10,2016 23:00:39

Nippon Indosari Corpindo ($ROTI): New SKU Launches, More Sales Force

In anticipation of improved consumer spending, Nippon is accelerating new SKU launches. The company is also boosting its sales force headcount to ensure availability of its products in every store in Greater Jakarta. We see huge room for a sales price increase, since it has not increased selling prices for more than two years. Given lower equity-financing costs, we raise our DCF-based TP to IDR1,870 (from IDR1,670, 17% upside), implying 25x FY17F P/E. Upgrade to BUY.

¨ More aggressive product launches. Nippon Indosari Corpindo (Nippon) aims to maintain and increase its domination in the local bread market by launching more aggressive product variants next year. It targets to launch 45 new stock keeping units (SKUs) and aims to have 100 SKUs by end-2017. Nippon only launched 15 new SKUs in 2016and four new SKUs pa in 2012-2015.

By having more product variants, it is looking to ensure that it has first-mover status on new bread types and flavours. Nippon is also refreshing the Sari Roti brand and product line. This would allow it to have more flexibility in serving local market demand – in line with local demand specialities. Hence, Nippon’s market penetration should increase going forward, in our view.

¨ Higher sales headcount. Nippon has strengthened its marketing arm by recruiting ~42 new merchandisers to ensure its products are available in modern trade stores in the Greater Jakarta area. Each merchandiser is responsible for a respective sales territory and has to ensure product availability (and not empty shelves) in stores. They would proactively fill Sari Roti products before such products on the shelves run out. We believe this can increase sales volume and lower sales returns. This is because Nippon is now able to more actively monitor product movements at each store. It would also have better knowledge on specific local market trends.

¨ Room to increase selling price. Nippon has not been increasing its selling prices for 28 months. During this same period, other domestic consumer food products like biscuits, snacks and instant noodles have seen selling prices increase by 5-6% pa. The price gap between bread and other consumer food products has widened, and we believe Nippon has huge room to increase its prices. This should help the company improve its EBIT margins.

¨ New distribution network. Sari Roti is now available at all 176 national railway routes across Java and Sumatera. This first-mover availability in trains across Indonesia is booked under general trade. We see this as a positive growth driver for general trade sales.

¨ Upgrade to BUY. Given lower equity-financing costs, we raise our DCF-based TP to IDR1,870 (from IDR1,670, 17% upside). This implies 25x FY17F P/E, ie near to its 5-year average forward P/E. Key risks to our call include rising competition, higher sales returns and weakened consumer spending. (Andrey Wijaya)

Sep 22,2016 12:38:28

Nippon Indosari Corpindo ($ROTI)’s products launches to double this year ROTI will produce 12 unspecified new product classifications in 2H16 and 12-20 SKUs in 2017. Management upgrades revenue target to Rp2.6 tn and Rp3 tn in 2016 and 2017, respectively. Yet concerns over costs still linger due to ROTI’s ongoing expansion to the Philippines. (Kontan)

Jun 15,2016 09:51:01
ROTI: Freshly Baked
ROTI mencatat pertumbuhan penjualan dalam 5 tahun sebesar +27,9% CAGR dengan pertumbuhan laba bersih +23,5% CAGR. Dengan pertumbuhan retail yang meluas di Indonesia, kami meyakini ROTI masih memiliki ruang besar untuk tumbuh. Pada tahun ini, ROTI berencana untuk melakukan penetrasi ke general distribution (GT) seperti, warung yang saat ini berkontribusi 24%; sedangkan kontribusi terbesar ada pada modern trade (MT), seperti Alfamart dan Indomaret, berkontribusi lebih dari 60%. Pada tahun 2015, penetrasi warung ROTI sebesar 33k sedangkan Indonesia memiliki sekitar 2-3 juta warung. Selain itu, ROTI juga berencana untuk melakukan joint venture dengan Monde Nissin Coroporation membangun pabrik di Filipina yang direncanakan akan mulai beroperasi di sekitar Q3 2017. Terakhir, kami juga melihat bahwa ROTI memiliki keuntungan dimana saat ini harga gandum berada dalam tren penurunan sehingga margin dari ROTI akan meningkat. Sebagai kesimpulan, kami merekomendasikan BELI untuk ROTI dengan target harga Rp1700/saham mengimplikasikan pertumbuhan EPS sebesar 21,6% dengan PE 25,1x.

Apr 04,2016 14:16:32
Nippon Indosari ($ROTI) - Maintaining Earnings Estimates Despite Strong 4Q15

We keep our TP of IDR1,320 (3% upside) on Nippon, reflecting 23x/19x FY16F-17F P/Es respectively despite strong 4Q15 earnings and maintain NEUTRAL. In 1Q16, the company’s input costs are likely to increase due to higher flour prices, which are mainly determined on a 6-month contract basis. However, in our view, 2H16 flour costs should decline as the commodity price of wheat is trending down. At the same time, the IDR is also strengthening.
Feb 28,2016 10:36:12
Nippon Indosari Corpindo ($ROTI)
Foray Into New Territory

We are positive on this expansion since Nippon is partnering with MondeNissin, which has an extensive distribution network. However, there are additional risks stemming from its penetration into a new market. We downgrade Nippon to NEUTRAL, with a lower IDR1,320 TP reflecting 23x/19x FY16F/FY17F P/Es (from IDR1,450, 0% upside). We also cut FY16F/FY17F earnings after factoring in higher flour costs as well as higher operational expenses, which driven by additional costs from its expansion into the Philippines market.

? Nippon Indosari Corpindo (Nippon) is expanding its business in the Philippines and has entered into a JV with Monde Nisson Corp (MondeNissin) to establish Sarimonde Foods Corporation (Sarimonde). The JV company will produce bread for the mass market, while distribution will be done by MondeNissin. Sarimonde will build a factory with two distribution lines near Metro Manila, which is set to begin commercial production in 2Q17. In the Philipines, Sarimonde aims to sell around 90% of its bread via general trade (GT) channels, while competitors like Gardenia, Goldilocks Bake and MLM Foods sell their breads mainly via modern trade (MT) channels. While we are positive on Nippon’s expansion plan in the Philippines, there are risks associated with penetrating a new market.

? Higher flour costs. Nippon revealed that flour prices as stipulated in its 6-month Jan-Jun 2016 contract have increased the previous contract. We think flour producers have increased their selling prices to pass on significant cost increases caused by the IDR/USD depreciation in 3Q15. Our ground checks suggested flour prices in supermarkets increased by 2.3% in 3Q15. However, flour prices in Nippon’s Jul-Dec 2015 contract was likely based on better exchange rate currency. Notably, the IDR/USD rate depreciated significantly in Sep 2015 – after Nippon signed its flour contract for Jul-Dec 2015 contrat.

? We cut our FY16F/FY17F earnings to IDR292bn/350bn (-9.6%/-13.7%), factoring higher flour costs as well as higher operational expenses from its regional expansion in the Philippines market. Flour accounts for around 20% of Nippon’s COGS. In addition, we think Nippon’s operation in the Philippines is likely to book losses in 2016. In addition, in early 2017, its Philippines unit’s EBIT margin may not as high as that of its Indonesian operation – as Sarimonde is a new player in the Philippines and would be looking to grow its market share.

? We downgrade our call to NEUTRAL (from Buy) with a lower IDR1,320 TP based on DCF assuming a WACC of 10.3%, TG of 2% and implies 23x/19x FY16F/17F P/Es. Key risks to our call are the fluctuating value of the IDR and higher wheat prices that may increase production costs.