Swati downgrades Indofood (INDF IJ) to Underperform (from Outperform), keeping her TP at Rp4200. The stock has gained 140% since we initiated with a conviction BUY in June 2009.
Reasons for the downgrade:
· No upside to our target price.
· INDF will spin off its consumer branded business (= 40% of its operating profits). INDF will likely have a holding company discount.
· Sensitivity analysis: profits to reduce by 3-4% for next year as lower interest expense will not compensate for increase in minority interest.
· Wheat prices are already 30% higher than our forecasts. Pass through in higher costs will temporary affect volumes.
We think Swati is still on the generous side. She is still assuming noodle EBIT margins to stay around 13% (despite wheat makes up about 30% of noodle COGS) and noodle volumes still growing 3-4% p.a. for the next two years. Despite this fact, Swati’s numbers are still 5% below consensus this year and 2011. Is consensus still too bullish? Risk is clearly on the downside, in our view.
In term of the SOTP, Swati already assigned 21.5x 10 CL PER for consumer branded product business. NAV/share is Rp4200, suggesting very little upside.
We prefer to go long soft commodity names and reduce consumer names that rely on soft commodity inputs. Switch out of INDF to London Sumatra (LSIP IJ) and Indofood Agri (IFAR IJ).
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