CLSA Initiating coverage Mayora, BUY, TP Rp7100

Our research assistant Jessica has initiated coverage on Mayora Indah (MYOR IJ) with a BUY call and TP of Rp7100, offering a hefty 45% upside. Stock looks very cheap, trading at 6.2x 11PER.

This is Indonesia’s largest biscuit manufacturer with a solid brand presence throughout its product line. Revenue has grown a compound 24% for the past decade, and we expect similar growth this year and next. MYOR has been able to gain market shares in key product line.

Raw materials account for 55% of the COGS. The concern is that margin is probably peaking but stronger rupiah and MYOR’s brand loyalty (many of MYOR brands are “top of the mind recall”) and should be able to at least maintaining the margins for a while.

Risks: (1) liquidity is not great for this stock in spite of large free float. (2) Related party transaction is considered as one of the risks for MYOR (although the advantage is that related party distribution co bears all the bad debt risk).

MYOR’s market segment is the middle to low income class (growing fast in Indonesia), and its products are priced very competitively with good product quality. As a comparison, we show below the buying power of one Starbuck’s grande caramel macchiato against some of Mayora’s most popular products.

Key points from the report:
Expect MYOR to be a beneficiary of the growth in domestic consumption, and more importantly the rapid growth in processed food consumption.
The company is planning to expand 20% capacity each year for the next four years, and potentially grow its earnings by 28% 4-yr CAGR in our estimate.
MYOR’s costs are subjected to commodity price’s volatility as raw materials make up 55% of COGS.
While raw material prices may rise, a stronger Rupiah will help offset costs, and we expect margins to remain stable.
MYOR offers high growth, high returns, and stable dividend payouts.
At 6.2x 2011 earnings, valuations look attractive against the regional peer average of 17.2x.
Our TP of Rp7,100 is based on 9.0x 2011CL PE, close to the stock’s five-year P/E average.