Danareksa Indofood Sukses Makmur (INDF IJ, Rp3,900 BUY) Counting on noodles

Headlines
l On the back of a 4.8% yoy increase in revenues to Rp9.3tn in 1Q10, operating profits jumped 25.2% to Rp1.4tn, reflecting excellent operating performance in the quarter.

l There was a big improvement in margins. Gross margin widened by some 480 basis points. This and lower interest costs helped push up core profits by 78.3% yoy (+37.0% qoq) to Rp562bn.

l The sales volume of consumer branded products (CBP) saw a significant improvement across the board (see exhibit 2). The largest contributor, the noodles division, registered volume growth of 4.0% yoy and 11.0% qoq. On a yearly basis, this is the strongest growth since 2007

Comments:
l Bottom-line, it was a good result and broadly in line with our forecast. The slight difference owes to the forex gain of Rp97bn vs. our forex loss assumption of Rp95bn. This mainly owes to our conservative exchange rate assumption of Rp9,649/US$ for YE10 vs. Rp9,115 in 1Q10.

l It’s the noodles business that counts. The superlative 4.0% yoy growth in noodles sales volume to 2.9bn packs in 1Q10 despite the 1% industry decline overall is a clear indication of Indofood’s strong brand equity and relatively weak competition. We share the management’s view that packaging changes in early 2010 - in addition to the improving economic conditions - helped spur volume growth. The 14.7% increase in operating profits to Rp416bn was also helped by lower wheat costs, while the full impact of last year’s price hikes helped lift the EBIT margin to 13.3%. For FY10F, we forecast noodle’s EBIT margin of 10.9%.

l The Bogasari and cooking oil divisions had to face relatively stiff competition, limiting and even lowering margins. Whilst Bogasari faces competition from imported flour (with a 15% price differential), its cooking oil competes against Wilmar’s products. As a result, the company has to sacrifice either volume or margins – and the company’s indication is that it places a higher emphasis on maintaining volume sales rather than margins. We estimate a decline in Bogasari’s operating margin to 9.6% in FY10F from 11.4% in 1Q10.

l We remain positive on Indofood for the following reasons: 1) potential de-leveraging following the imminent ICBP listing, and 2) stable noodle margins underpinned by the firm rupiah, lower wheat costs, and improving purchasing power. Our forecast is intact for the time being and we reiterate our BUY call on the stock with a TP of Rp4,500, implying 18.8-16.6x PER10F-11F, still a 20% discount to its regional peers.