Another strong result
Unilever posted Rp2,407b FY08 net profit, up 23% YoY. The result is in line with our expectation. Revenue grew strongly at 24% YoY to Rp15,578b. Unilever increased prices by average 14%, to partly pass on increase in costs. Its cost of goods sold increased 27% YoY to Rp7,947b, the cost increase was triggered by higher commodity prices and rupiah depreciation. In 4Q08, gross margin was down to 46.2% (from 48.7% in 3Q08) mostly due to the rupiah weakness. Although costs of goods sold increased at a higher rate than the revenue growth, Unilever managed to control its operating expenses, hence, it was able to maintain operating margin at 22%.
Unilever managed to increase proportion of foods (vs. household & personal care) to 24%:76%, from 22%: 78% in 2007. Overall, food items command higher margins. Its growth potential is also higher than that of household & personal care as Unilever has relatively small market share in foods compared to its leading shares in most of the household & personal care products.
Expects a good 2009
According to management, in the first three months of year 2009, Unilever sales is still strong, although it will probably be less than that in 4Q08 when wholesalers / distributors piled up inventory in a fear of further selling price increases.
There is slowdown from outer islands as commodity prices reversed their trends. However, demand from Java and Sumatra (two largest areas of revenue contributor) remained firm. Higher government spending and cash aids have supported demand from the lower end consumer segment. Election funds flow also helps supporting purchasing power. In middle to upper end of the segment, since household /personal care products represent a small portion of consumer income, these consumers do not cut backs on such items.
On cost side, sustained rupiah depreciation will result in higher cost pressure. However, the company is hedging all foreign currency exposure, this will help smoothing out the effect. The recent strength in rupiah, if sustains, will help reduce cost pressure. Lower commodity prices will also help.
Unilever has managed to implement effective cost management. Over the years, despite continuous growth, the company has been running more efficiently, shown by lower proportion of operating expenses to sales.
Healthy cash flow, hefty dividend
As revenue is growing, cost is under control and the company has no debt, cash flow remains healthy. Unilever management puts maintaining a healthy cash flow a priority. Capital expenditure n 2009 is budgeted at around US$50m. Management will continue to maximize dividend payout.
The right stock to pick
In the midst of this uncertain market condition and overwhelming tendency of global flight to quality, Unilever is the right stock to pick. The company has no debt. Its solid performance proven by consistently outstanding ROE (latest was 78%), resulted from strong management and brand equity, provides shield to the market fluctuations. Unilever pays high dividend yield. Reiterate BUY. Our 12-month TP is Rp9,200, which will translate into 2010F P/Sales of 3.7x.
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