UBS INDF Earnings bump ahead

At a Glance
• 1Q09 should turnaround to profit
• Stable rupiah will reduce FX losses
• Valuation updated following revised EV/EBITDA and DCF valuations for IndoAgri
• Upgrade to Buy with new TP of Rp1,650

1Q09F should turnaround to profit. Stabilized raw material prices (wheat and CPO) are expected to improve Indofood (INDF) 1Q09F profit, following multiple price increases last year. We also expect FX losses to drop markedly q-o-q (it caused 4Q08 to register a loss), as the rupiah had depreciated at a much slower pace in 1Q09.

Volume recovery expected. Unlike the 9.5% and
13.6% y-o-y drop in flour and instant noodle sales volumes last quarter, we expect the sales volumes to recover in 1Q09 based on indications by the group for the first two months of this year. We attribute this to industry-wide price adjustments that would prompt consumers to switch back to branded products.

SOP revised. Following our upgrade of IndoAgri’s DCF-based valuation, we raised INDF’s SOP value. We now peg the group’s consumer branded products and Bogasari’s EV/EBITDA ratio to 6x and 5x, respectively.
We forecast 24% 3-year EPS CAGR, and the counter is currently trading at 5.3x FY10F EV/EBITDA.

Upgrade to Buy. The group’s plan to refinance its maturing bonds and most of its USD short-term debt with long-term debts are steps in the right direction. Given its effort to reduce gearing, recovering sales
volumes, and moderating raw material costs, we believe INDF is undervalued. We upgrade the counter to BUY from Hold, with a revised Rp1,650 target price.