Danareksa Indofood Sukses Makmur (INDF IJ, Rp1,720 BUY) Undergoing a recovery

BUY with TP of Rp2,250
We make significant changes to our forecast. As a result, our FY09-10F net profit forecast is reduced by 41-27%. Nonetheless, since our new TP of Rp2,250 based on the SOTP valuation still offers 31% upside potential, we maintain our BUY recommendation. Our new TP implies 18.5-13.0x PE09-10F. We believe this valuation is justified given the company’s good growth prospects and also because INDF’s well diversified business activities reduce the downside risks posed by volatile commodity prices.

Increased sales and EBIT estimates for consumer based products
Lower commodity prices have led to higher margins for the company’s consumer based products (CBP). Moreover, the newly acquired dairy business (Indolakto) has added to the range of CBP sold by INDF. Going forward, we expect CBP to remain the backbone of INDF’s business with sales growth of 38.2% in FY09 and EBIT growth of a breakneck 228%. Given the better than expected 1Q09 results, and by incorporating the dairy business, we raise our sales and EBIT estimates for the CBP division by 29-31% and 309-280% in FY09-10F.


Higher valuation for IndoAgri due to the recovery in CPO prices

The share price of IndoAgri (IFAR) has surged 174% YTD on the back of the recent recovery in CPO prices. This has given a significant boost to our SOTP valuation for INDF. Based on the consensus FY09 earnings forecast for IFAR and a 16x PE assumption, Indofood’s agribusiness has an effective Enterprise Value of around Rp9.9 tn.



Bogasari’s margins should improve

Despite lower wheat costs over the last 6 months, Bogasari recorded an EBIT margin of only 4.4% in 1Q09. This stemmed from: 1) the stiffer competition posed by new entrants and imported flour 2) the end to 10% VAT government subsidies starting in early 2009. Nonetheless, we still expect Bogasari’s margins to improve going forward. In FY09 we expect an EBIT margin of 6%, increasing to the 9-10% level in FY10-11F on the back of hikes in selling prices and higher import taxes on imported flour.