BNP Paribas Indofood's analyst meeting takeaway - CBP the major growth driver. (Elvira Tjandrawinata)

Key highlights:
· CBP is clearly the star performer with total operating profits up by 55% y-y on the back of sales growth of 10%. Overall EBIT margins were up to 14.1% from the already high 12.8% in the 1Q10 due to (1) lower prices of raw material and (2) a stronger currency which further lower input costs. CBP now is the largest contributor to EBIT at 41.6% followed by Bogasari at 31.6%, leaving behind contribution of agribusiness to only 27.6%.

· Instant noodle which contributed 77% of the total CBP recorded a very sharp margins improvement both y-y and q-q. While the y-y improvement to 15.5% vs. 11% in 1H09 is expected primarily due to a price increase of 4-5% in Aug 2009, the further margins improvement q-q to 17.9% in the 2Q10 vs. 12.8% in the 1Q10 is indeed impressive. This according to the company is due to further lower input costs and a stronger currency. Instant noodles recorded sales growth of 7.5% driven by 4% volumes growth and the impact of the price hike in Aug 2009.

· The question now is whether this level of EBIT margins for the instant noodle which is now at close to record high will be sustainable, given that wheat prices has increased by 17% YTD y-y as a result of concern as Russia ban exports. With wheat accounting for about 35-40% of instant noodle's costs, for every 10% wheat price increase, we estimate that earnings is likely to be affected by around 1.4%. Working backwards, we calculated that for every 10% increase in wheat prices, Indofood will need to increase prices by some 3.3%. So far this year, Indofood has increased prices by 3-4% starting on Aug 2, 2010, and we expect given a strong consumer confidence plus a more accommodative competititve situation the company may be able to push through another price rises if needed. However, do still have a buffer of 3 months worth of inventory before having to make the decision. The company believes that much of the recent price hike seen in wheat prices are mainly due to speculation after Russia announced the ban on exports. Indofood also believe that world's wheat inventory will expand this year by some 3 m tonnes to 187 m tonnes.

· The same trend was also true in dairy. Sales growth of 10% was achieved through 8.5% volumes growth in solid base and 5.7% in liquid base. EBIT profit also doubled driven by a doubling of EBIT margins as well to 13.4% vs. 7.4%.

· Bogasari's performance is also impressive with EBIT growing by 85% despite a 12.8% reduction in sales. This is as a result of both volumes and price reduction compared to the previous year. Volume suffered due to increased competition with several new players coming into the market, while price reduction was due to a partial pass on of lower raw material prices. The much lower raw material price is the reason for the doubling of EBIT margins to 15.2% from 7.2%. Like in instant noodles, the company is taking a cautious stance with regards to raising flour prices in response to rising wheat prices and observed that only the low end flour (those with lowest protein content) has so far increased prices by 10%. Indofood now concentrates in the high end of the flour market and due to rising competition will be focusing on margins vs. market share. Currently its market share is 55% vs. 53% in 1Q10 and 59% for FY2009.

· The agribusiness sector's contribution this time around was relegated to third place after loosing its second position in the 1Q10. The positive factor: a strong currency, working in favour for the CBP and Bogasari, unfortunately is negative for the agribusiness. Despite an increase of CPO price of 23% y-y, and a volume decline of 10% y-y, sales only grew by 8% in the plantation division while EBIT margins is flat at 28%. Continued tough competition in the cooking oil and fat sector meanwhile reduced volumes by some 5% but basically forced the already thin margins for refining to 0.5% vs. 4.3% last year. Clearly this is not a very good year for the agribusiness.

· Based on the excellent 1H10 results, we believe consensus will need to raise their forecasts as 1H10 their operating profit already accounted for 56% of FY10. While our operating figure is more or less in line, in the net profit level, the 1H10 number already accounted for 58% (vs. consensus of 63%).

· The listing of the Indofood CBP (ICBP) next month will be the short term catalyst for the stock especially since it it priced on a range of 16-19x 2011 earnings. Based on our calculation using the underwriter's earnings for ICBP's 2011 earnings of around IDR1.6t (this is based on an instant noodle EBIT margins of 15%), this implies that the market is currently only valuing ICBP within Indofood on a P/E of 13x, so definitely there is an arbitrage opportunity here. BUY, TP IDR 4,475.