Citigroup Indofood Sukses Makmur (INDF.JK) Alert: 2Q10/1H10 Results in a Snapshot

 1H10 net profit ahead of CIRA and consensus — Indofood recorded 1H10 net profit of Rp1,410.5bn (+76.4% of CIRA FY10E; 65% consensus) underpinned by lower COGS and lower interest payments which more than offset the flat revenue growth.

 Flat revenue growth in 1H10 — Against a backdrop of lower wheat prices, stronger rupiah and lower CPO production, INDF only logged a marginal 0.2% YoY growth in revenues to Rp18,122.6bn (44.4% of CIRA FY10E; 45.1% Consensus). This was largely in line as we expect INDF to deliver a stronger performance in 2H10 driven by better performance from its agribusiness.

 1H10 COGS declined 8.4% YoY — We attribute this primarily to stronger rupiah which led to cost savings from imported wheat, fertilizer and milk costs. Wheat costs typically account for 80-90% of Bogasari’s total production costs while fertilizer costs account for 30-40% of INDF’s plantation business.

 Across the board margins improvement — The lower cost environment also reflect well on margins. Gross, operating and net profit margins improved from 26.1%, 12.3% and 4.4% in 1H09 to 32.5%, 17.2% and 7.8% in 1H10 respectively.

 Lower cost benefits also reflect well on 2Q10’s profits and margins — Revenues: Rp8,814bn (-5.3% QoQ; -4.1% YoY); COGS: Rp5,726.9bn (-12.1% QoQ; -14.6% YoY); Operating profit: Rp1,709bn (+21.1% QoQ; +55.7% YoY); Net profit: Rp778.6bn (+23.2% QoQ; +13%YoY); 2Q10 Gross, operating and net margins: 35%, 19.4%, and 8.8%; 1Q10 gross, operating and net margins: 30%, 15.2%, and 6.8%; 2Q09 gross, operating and net margins: 27%, 11.9%, and 7.5%.

 Net debt continues to go down — As at June 2010, INDF’s net debt was Rp5.6trn vs. Rp11trn in 1Q10. The planned listing of ICBP should further deleverage the company.

 2H10 outlook — With wheat prices rising in early August, we expect the impact to reflect in 4Q10 financials (given 2-3months lag effect). But this should be more than compensated by the stronger rupiah, lower debts (post ICBP listing) and improved CPO production/price outlook. Overall, we maintain our positive outlook on INDF. Maintain Buy/Low Risk (1L) with TP of Rp4,500.