Danareksa Indofood Sukses Makmur (INDF IJ, Rp4,350 BUY) 1H10 result

Headlines
Revenues were flat in 1H10 at Rp18.1tn (up 0.2% yoy). Much better, however, were the operating profits and earnings which soared 40.3% and 76.4% yoy to Rp3.1tn and Rp1.4tn, respectively mainly thanks to lower input costs and lower interest expenses.

The profitability margins were much better. The gross margin widened 630bps to 32.5% and the operating margin widened 490bps to 17.2%. This is an excellent result as the gross and operating margins are at their highest levels since 2001.

Overall, the top-line figure is in line with our (and the consensus) expectation. The net profits, however, comfortably beat our expectation as they are 67% of our full-year forecast.

Comments
In our view, the better-than-expected result is largely due to: 1) lower wheat costs (US$4.4/bushel in 1H10 vs. US$4.6/bushel in 1H09), and 2) the application of less fertilizer in the company’s plantation division. At the same time, the substantial reduction in the company’s debts - by around Rp2.3tn in 1H10 – slashed the company’s interest expenses by Rp175bn, helping to lift the bottom-line.

How about the 2H10 outlook? Well, we believe Indofood’s margins will likely soften due to higher wheat costs (currently around US$6.2/bushel, US$4.7/bushel ytd). Additionally, the plantation division has little choice but to apply more fertilizer in 2H10 else the yield would be sacrificed. Baring any further price increase, we therefore estimate operating margin of 13.6% for FY10F.

However, we believe the downside risk to margins in noodle division is limited. The company has some pricing power and hiked noodle selling prices by Rp50/pack in early Aug 2010 – a 4% price increase to anticipate higher input cost. This time, impact to volume may not be that much, as: 1) competitors will likely to follow Indofood’s strategy by raising the ASPs (note that Indofood has started to advertise Bu Krim – soap product – to pressure their main rival, Wings), and 2) the timing is close to the Moslem’s festival. Our rough calculation suggests that the company needs to raise selling prices by around 3% for every 10% increase in the wheat price to maintain their margins.

As for Bogasari division, Indofood has yet to increase flour selling prices in their premium products, factoring tougher competition in this category. While for low-end products, the price increase would probably around 10%, taking opportunity from the reduction in Turki imported flour as drought strains Russian wheat supply. Therefore, as market share is company’s main concern, we expect lower EBIT margin in 2H10 compared to 15.2% in 1H10. Note that Bogasari market share has grown to around 55% presently, from 53% in 1Q10.

For the time being, we remain positive on the company given its defensiveness, which should well benefit from Indonesia ’s burgeoning consumer market as well as commodity. The imminent listing of ICBP (expected late Sep-early Oct) will provide a further impetus to the share price. BUY maintained with a TP of Rp5,100, implying 18.8-16.6x PER10F-11F.