NISP A Fully Integrated Company

A Fully Integrated Company

We initiate our coverage on Indofood (INDF) with a Buy rating and target price of Rp1,070/share based on SOTP valuation. We believe weakening wheat price should benefit Indofood’s noodle and flour business, while at the same time cost pressures to further subside amid declining fuel price. Our target price offers 16.3% potential upside. Recommend Buy.

Softening raw material price
High oil price which started to kick in 2007 to mid 2008 has pushed commodity prices, palm oil (CPO) and wheat, to its peak in 1Q08. CPO and wheat price rallied to a record of US$1,143/ton and US$1,190/ton in March 2008 from US$450/ton and US$580/ton in mid 2007 due to declining global wheat supply and increasing demand of CPO from countries like China and India. On average, CPO and wheat price of US$865/ton and US$850/ton in 2008 were higher compared to US$720/ton and US$630/ton in 2007. Then, as commodity prices significantly slowdown on falling demand, CPO and wheat price have plunged by 26.0% and 32.0% during the last 6 months on the back of favorable weather and good harvest.

Bogasari: The ups and downs of wheat price
Wheat price futures shot up by more than double in 1H08. Then, as oil price tumbled to around US$50/bbl by the end of 2008, wheat price also went down on the back of excess supply. As wheat and fuel price rose significantly, we should see contraction in flour margin as EBIT margin is squeezed to 9.3% in 2008F from 11.5% in 2007. Further, along with declining wheat price, we expect EBIT margin to increase to 14.0% this year. This should help Indofood to maintain margins as softening commodity price in 2009F will drag down company’s plantation revenue.

Softening CPO price to curb plantation’s revenue
Supported by high CPO price in 2008, Indofood’s plantation registered Rp3.8tn revenue or increased almost threefold from Rp947.7bn in 2007. This was mostly due to full year effect of LSIP sales contribution, which was acquired in December 2007, to the division. Total agribusiness group posted Rp11.8tn revenue in 2008 from Rp6.5tn in 2007, up by 82.0% YoY, with plantation, cooking oil and commodity groups contributed Rp3.8tn, Rp6.5tn and Rp1.5tn or 31.0%, 55.0% and 14.0%, respectively. As we assumed CPO ASP to decline from US$850/ton in 2008 to US$575/ton in 2009F, we expect plantation revenue to go down by 24.8% YoY in 2009F to Rp2.8tn before rebounding by 10.2% YoY to Rp3.1tn in 2010F as we set higher CPO ASP of US$600/ton.

Recommend Buy with target price of Rp1,070/share
We valued Indofood based on sum-of-the-part methodologies with DCF applied to its agribusiness groups (Indofood Agri and LSIP) and EV/EBITDA multiple for noodle, consumer branded products, Bogasari and distribution unit. We arrived at target price of Rp1,070/share, which implies 2009F PER of 10.0x and EV/EBITDA of 5.0x. With potential upside of 16.3%, we recommend Buy on the stock. We believe softening wheat price should benefit noodle and flour business, while cost pressures should further subside amid declining oil price. At current price, the stock trades at 2009F PER of 8.6x and EV/EBITDA of 4.6x.