BNP Paribas Unilever Indonesia - Competitive pressure offset by lower input costs

􀂃 Expect good 3Q09 results, despite intensifying competition.

􀂃 Margin erosion avoided by lower input prices, strong currency.

􀂃 One of the best companies in Indonesia, but valuation stretched.

Expect good 3Q09 results
Despite rising competition in several of its product areas, we expect Unilever to deliver another good set of results. Volume growth should remain strong at around 7-8% y-y and 9M09 revenue should grow by 17.5% y-y. Even though we expect gross margins to decline y-y as the company lowers prices for some products due to competition, and to gain market share, the overall impact on EBIT margin is likely to be neutral. They should remain at the 22-23% level, due to: 1) lower input costs as a result of lower commodity prices and a stronger IDR; and 2) a strong brand line up, enabling it to adjust marketing spend among the different brands while maintaining the overall spend. We expect the 9M09 earnings to account for around 82% of our 2009 forecast.

Unilever is a formidable competitor
Intensifying competition is an undeniable fact given the attractiveness of the Indonesian consumers and high margins and returns. For now, at least, we expect margins to be sustainable thanks to a favourable raw material and currency situation; in the medium-term margin erosion is inevitable. So far Unilever has proven to be a very formidable competitor, backed by its strong product line and superior grip on distribution to traditional outlets (still accounting for 60% of the total market). Unilever has been consistent in defending its market share, sending signals to competitors that it will not yield market share without a fight. Management is always on the alert and quick to respond.

Priced to perfection, HOLD
The sharp re-rating has put the stock close to its all-time high multiple of 29.8x 2009E and 25.9x 2010E. While a premium is definitely deserved due to Unilever’s superior profitability, we believe this is already reflected in our TP of IDR10,500, based on a P/E of 26x 2010, derived by applying a premium to the market’s P/E based on the premium differential between Unilever’s ROE and the market’s. Maintain HOLD as no sizeable alternative is available. Investors with a higher risk appetite might want to switch to Kalbe Farma (KLBF IJ; BUY; TP: IDR1,630), which looks undervalued. It trades at a P/E of 11x 2010E, despite also being a beneficiary of the strong currency, lower input costs and rising disposable income.