KimEng UNVR: Result in line with expectation, HOLD

Good 9M09 result
Unilever posted 9M09 net profit of Rp2,278b, up 11% YoY on the back of 15% revenue growth. Costs of goods sold were up 18% YoY while operating expenses increased 14% YoY as the company continued aggressive advertising and promotion. Operating margin came in at 48.6%. lower than 49.9% in 9M08. Net profit was supported by lower effective tax rate of 28.4% in 9M09 vs. 30.0% in 9M08. The result is in line with our expectation but above the consensus estimate. Revenue growth in 3Q09 came in at 10% YoY, almost all from volume.

On QoQ basis, revenue increased 2%. Costs of goods sold were only up by 1% QoQ thanks to the strong rupiah and softening commodity prices. As a result, gross margin improved 30bps to 49.7% in 3Q09 from 49.4% in 2Q09. What we liked from the 3Q09 result is that the company managed to record strong volume growth while lowering advertising & promotion expense a bit.

Outlook remains positive
We see revenue to remain strong in the future. There is slowdown from outer islands as commodity prices reversed their trends. However, demand from Java and Sumatra (two largest areas of revenue contributor) remained firm. On cost side, softening commodity prices and strong rupiah, expected to sustain in the coming quarters, are positive as they reduce cost pressure. The intensifying competition, we see, is still in normal level. Major competitors (P&G and Wings) still continued slashing prices and aggressive promotion. Hence, it is unlikely that Unilever will increase selling prices in two product categories, namely hair care and powder detergent. Price increase is still possible to take place, albeit remotely, in other product categories, probably in 2010.

An excellent company
Unilever is a solid company from all angles. Its products, ranging from margarine to haircare, command leading market share. The company has no debt, healthy cash flow. It pays hefty dividend. And it consistently generates high ROE (latest annualized ROE was 82%).

Revising target price but still a HOLD
Unilever share price has been down by 8% since our latest report in September 2009 and is now trading close to our previous target price of Rp10,450. Due to the strong volume growth and signs of lower A&P, we revised our forecast slightly. We also changed effective tax assumption to 28.4% from 28.6%. As a result of the above changes, we came up with the new target price of Rp11,000 The target price pegs the stock at 22x 2011F PER, 15x 2010F PBV and 3.7x 2011 P/sales. HOLD.