Danareksa: UNVR From strength to strength

Excellent FY08 results

Unilever has delivered again, recording a 23% YoY increase in net profits to Rp2.4 tn in FY08. At the top line, sales grew 24% YoY helped by price increases of 14% as well as higher volumes. The gross margin slipped to 49% in FY08 from 50% in FY07 due to higher commodity prices and rupiah depreciation. The operating margin was stable, however, at 22%. As a result of the rupiah depreciation in 4Q08, Unilever recorded forex losses of Rp60 bn (mostly comprising hedging costs). At the same time, however, the company also received additional income from a Rp32 bn income tax refund. This partially offset the forex losses.

Indonesia’s most profitable company
Unilever has shown time and time again that it is Indonesia’s most profitable company. For three years in a row, the company has managed to increase its ROE such that it reached its highest ever level of 83% in FY08. Coupled with a ROA of 40% - the highest in the region – it is clear that Unilever is doing an excellent job in generating returns for its shareholders. And at the same time, the management has also indicated that it will continue to pay out high dividends. What more could shareholders ask for?

BUY with a TP of 9,050
Unilever has performed consistently over the last 11 years. On the back of 22.6% sales growth, core earnings have grown 35.4% p.a. on average. Operating margins have been stable at around 22% (the highest in our consumer universe) and the ROE is, as previously noted, at record levels. Recent pressure on the share price has presented investors with a good opportunity to BUY, we believe. Our TP of Rp9,050 translates into 2009F P/BV of 19.63x and 25.4-22.0x PE09-10F.

The outlook remains bright
The company’s management remains upbeat. It still expects the top line and earnings growth to be in low double digits in 2009. Sales, we believe, should be supported by two factors. First of all, consumer purchasing power has been given a boost by cuts in fuel prices. Thus, consumer spending should, overall, hold up going forward. And secondly it should be noted that Unilever’s products – which are basically consumer essentials - have an extremely strong brand image. As such, they should continue to sell well. Historically, it can be seen that Unilever has grown at more than twice the pace of GDP. Going forward, we expect this trend to continue. As such, we expect the company’s sales growth to surpass 11% this year and to reach 13% p.a. on a 5-year forward looking basis as the economy is expected to quickly recover.

Despite the company’s resilience to economic downturns, gross margins tend to weaken when the rupiah comes under pressure. Nonetheless, the company has had the prescience to hedge its foreign currency exposure. This will minimize the impact of rupiah weakness. At the same time, the company has also implemented a new SAP system which is expected to help rein in sales and distribution expenses. Thus, while we expect gross margins to weaken slightly to 48.3% in 2009, operating margins should be relatively stable at 22%. In regard to earnings, we expect growth to slow to 12.1% in 2009, before it bounces back to 14-15% in 2010.