Citigroup Unilever Indonesia (UNVR.JK) Sell: FY09 In-Line with Our Estimates

 No surprises in FY09 – Unilever Indonesia (ULI) reported FY09 net profit of Rp3trn (+27% YoY), on 17% higher revenue growth YoY to Rp18.2trn, in-line with our expectation. Gross profit increased 19% YoY to Rp9trn and operating profit grew 23% YoY to Rp4.2trn, with gross margin and operating margin improving to 49.6% and 23.1% respectively, from 49.0% and 22.0% in FY08. Margin improvement was on the back of product mix, as well as lower commodity prices.

 Strong 4Q09 – The strong Rupiah resulted in margin expansion in 4Q09. On 4% higher revenue QoQ (+24% YoY) to Rp4.7trn in 4Q09, gross profit rose 10% QoQ (+40% YoY) to Rp2.5trn, expanding the gross margin to 52.4%, from 49.7% in 3Q09 and 46.2% in 4Q08. Opex was 20% higher QoQ (+17% YoY), underpinned by higher marketing and selling expenses. Thus, operating profit was 2% lower QoQ, but was 92% higher YoY, at Rp1.1trn. Operating margin was 22.4% in 4Q09, lower than the 23.7% in 3Q09, but higher compared to 14.4% in 4Q08.

 Division breakdown – The Household & Personal Care (HPC) division accounted for 76% of total sales, with the remaining 24% from Food & Beverages (F&B). Each division grew 17% in FY09. HPC posted higher margins in FY09, with gross margin and operating margin at 52.3% and 31.2%, expanded from 51.6% and 29.2% in FY08, respectively. The F&B division had a gross margin of 40.8% and operating margin at 16.7% in FY09, improved from 40.6% and 15.1% respectively in FY08.

 Net cash, with no debt – As at the end of 2009, ULI had a cash balance of Rp858bn, with no debt. Its inventory turnover improved to 52 days, from 58 days
in 2008. Assuming a 100% payout ratio, we estimate a 3% dividend yield.

 Maintain Sell – Our DCF-based target price of Rp11,327 equates to 19x 2011E P/E. We view that, despite the company’s strong performance and high ROE (above 90%), the stock at current levels provides limited upside potential.