UNVR posted 1H10 net profit of Rp2.4tn (+13.9%yoy, -19.1%qoq), in line with our and consensus estimates. Net profit’s qoq decline was due to the jump in selling expenses of 27.5%yoy and 16.3%qoq. Our observation on major consumer goods stocks revealed that UNVR has the highest absolute share price return of 28.1% CAGR00-10, and highest risk-adjusted return of 4.4x using Sharpe ratio. Incorporating dividend payment, this ratio could be higher as it usually pays rich dividend payout of 80-100! %. However, at current price, the stock is trading at PER10-11F of 34.5-29.1x, which we believe has already incorporated UNVR strong fundamental and share price performance. Therefore, we have a Neutral call at TP of Rp16,000/share.
1H10 results were in line with expectations. Unilever posted 1H10 net income of Rp2.4tn (+13.9%yoy, -19.1%qoq). These figures represent some 48% of our and consensus estimates. Despite of revenue growth, operating profit contracted qoq mainly due to higher promotional expenses that rose by 27.5%yoy and 16.3%qoq.
Share price reflects fundamental performance. Our observation on major consumer goods companies in Indonesia and abroad revealed that UNVR delivered the highest share price return since 2000 with CAGR of 28.1%, compared with local peers average of 12.3%, and international peers of 2.6%. Note that this calculation underestimates UNVR true performance as it ignores dividend payment that the company usually pays at 80-100% payout ratio, aga! in, highest among its peers.
Highest Sharpe ratio (risk adjusted return). Still from the same observation, we found out that UNVR has the highest risk-adjusted return calculated using Sharpe ratio (stock price return in excess of risk-free rate, divided by standard deviation of stock price return) for 2000-2010 period. Its 4.4x Sharpe ratio is significantly higher than its local peers’ average of 0.6x and international peers of -0.2x. Highest absolute and risk-adjusted return, as well as solid fundamenta! l perform ance has become justification for the stock to be one of investors’ favorite holding so far.
Neutral recommendation. Our DCF valuation with WACC of 11.5% and TG rate of 7.0% results in TP of Rp16,000/share. At our TP, the stock is trading at PER10-11F of 33.2-28.1x, a premium to its peers to compensate for its strong fundamental performance and high Sharpe ratio. At present, we view that investors have priced in the positives of UNVR. Upside risk to our TP is investors’ bigger trust on UNVR as a safe-heaven stock, which is a very subjective assessment.
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