JP Morgan - Unilever Indonesia Tbk 4Q08 net income declined by 7.3%

FY08 income in line: Unilever Indonesia reported FY08 net income of Rp2,502B, up 22.5% Y/Y from Rp1,965B in FY07, and in line with both J.P. Morgan’s (96.2%) and consensus’ (98.1%) estimates of Rp2,502B and Rp2,454B, respectively. Most of the gh, however, is generated in 9M08.

Weak 4Q08: Subtracting 9M08 income, 4Q08 net income of Rp360B is down 7.3% Y/Y and 46.9% Q/Q. The reasons for this are: (1) Margin compression as a result of high input cost as oil and commodity prices peaked in 3Q08. (2) Significant increase in SGA expenses, where research expense increased by 54.6%Y/Y from Rp249.9B to Rp386.3B. These caused operating margin to decrease by 406bp Y/Y and 891bp Q/Q.

Concerned about FY09: As mentioned in our report “We see signs of a retail slowdown; downgrade to UW”, 26 March 2009, we are concerned about the potential slowdown in FY09 due to weak consumer purchasing power. During an economic downturnilever Indonesia historically has not been immune as evidenced by slower profit growth. Based on that we think that there is a potential of FY09 being a challenging year for Unilever Indonesia .

Maintain UW and Dec-09 PT of Rp7,000: We maintain our UW rating on UNVR and our DCF-based Dec-09 PT of Rp7,000. Our DCF method is derived using a risk free rate of 13.0%, equity risk premium of 5.5% and terminal growth rate of 7.0%. Risks to our PT: (1) Better-than-expected reported earnings. (2) Defensive trade – bear market continues.