Re-rating on improved instant-noodle profit
Instant-noodle profit improving
EBIT margin on instant noodle was 12.2% for Q109, the highest since 2003. The big story, in our view, is easing competitive pressure as Wings Group has reached its target market share of 25%, which should make it a price follower (the 2004 price war between Indofood and Wings is unlikely to be repeated, in our view).
Earnings upside potential from plantation (IndoAgri)
CPO spot price is US$750/ton fob and the YTD average is US$620/ton. This compares favourably with our CPO price assumption of US$550/ton. According to our sensitivity analysis, a CPO price 10% higher than our assumption would cause Indofood’s net profit to rise 8-9%.
Gearing concern alleviated
A stronger rupiah (from Rp12,000/US$ two-three months ago to the current Rp10,300/US$) and the local bond market opening up are big positives for Indofood. This is because it has 170% net gearing and large US$ debt exposure (US$810m—half of its total debt).
Valuation: maintain Buy; raise price target from Rp1,370 to Rp2,500
We raise our sum-of-the-parts-derived price target from Rp1,370 to Rp2,500 because of: 1) our earnings estimate increases (we raise our EPS estimates from Rp 128/158/172 to Rp147/174/199 for 2009/10/11); 2) our lower risk-free rate assumption; 3) the rollover of the valuation cut-off date; 4) lower debt in Rp terms following our stronger FX rate assumption; and 5) change in valuation method for IndoAgri from UBS price target to share price. Our new price target implies 14.4x 2010E PE.
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