We upgrade to Neutral and raise our PT to Rp15,000: Due to margin improvement owing to a stronger Rp, we upgrade UNVR from Underweight to Neutral and raise our Dec-10 PT from Rp10,000 to Rp15,000. We believe its operations could improve due to a stronger Rupiah and a potential acquisition, but high valuation and likely underperformance in a bull market could work against further share price appreciation.
• Not concerned about price cuts: Our recent meeting with management indicates that the company is not concerned about price cuts initiated by P&G. The company believes it will come out unscathed as its market share has remained fairly stable while margin has been maintained, despite facing P&G head-on by price cuts in its personal care division.
• Positive and negative factors negate each other: We believe that the following factors will negate each other in the next 6-12 months: Positive drivers: (1) A stronger Rp leading to margin expansion; (2) value creation through an acquisition; and (3) strong results. Negative drivers: (1) rising commodity prices; (2) potential underperformance in a bull market; and (3) very high valuation.
• Rising consumption might not result in outperformance: Although a section of the Street believes that UNVR’s stock price will re-rate due to rising consumption, our historical analysis suggests otherwise. Tracing back the total consumption and non-food consumption both on nominal and real basis starting from FY00, we conclude that a strong rise in consumption might not necessarily result in UNVR’s share price
outperformance.
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