.P.Morgan Indofood Sukses Makmur 1Q09 results

1Q09 core net income in-line: INDF reported 1Q09 net income of Rp110B; down 70.4% Y/Y. The sharp decline in net income is due to a Rp362.2B of forex loss from Rp depreciation. Taking out the forex loss, the estimated 1Q09 core profit is Rp327B; down 13.5% Y/Y. The core net income is in-line with J.P. Morgan's (28.6%) full year core income forecast of Rp1,142B, but slightly ahead of consensus’ (30.3%) estimate of Rp1,078B.

Margin compressed: Gross margin compressed by 185bp while excellent expense management caused operating margin to decline by 119bp. If we exclude the non-recurring items such as forex, core net income margin declined by 61bp. We hypothesize that lower CPO price could be the cause of the margin decline.

Milder profit decline: The operating profit decline of 7.9% is lower than our forecasted figure of 24.6% decline in FY09E operating profit. The core net income decline of 13.5% Y/Y is less than our full year estimated figure of 28.1%. Despite the Y/Y decline in profit, the declines are milder than originally expected.

Maintain Neutral and Dec-09 PT of Rp1,100: We maintain Neutral and our Dec-09 PT of Rp1,100 on INDF. We will revisit our model once more details are available. Our SOTP-based PT is derived using the market value of IndoAgri and the sum of DCF values of other divisions. The DCF values are derived using a risk free rate of 13% and terminal growth rate of 7%. In addition, we apply 25% conglomerate discount and 35% discount to reflect investors’ negative sentiment towards Indolakto acquisition. Risks: unexpected positive or negative swing in profit.