Danareksa Indofood Sukses Makmur (INDF IJ, Rp4,475 BUY) A new future

BUY, TP of Rp5,100
We have raised our 2010F EPS estimates by 24% to take into account: 1) the stronger pricing power and 2) the firmer rupiah exchange rate which ultimately leads to better margins. Stronger pricing power is evident in the company’s decision to hike noodle prices by Rp50/pack in early Aug. While, a record-high gross margin should provide a buffer against increasing input cost pressures in 2H10. Also worth to note, imminent ICBP listing indicates a premium valuation (around 17-21x P/E10F and 15-19x P/E11F) – or above the current valuations for Indofood and the consumer sector. Yet, any upside from the IPO should lead to greater value for Indofood. All in all, we remain upbeat on the stock given its defensive attributes, meaning that the company should benefit from both burgeoning domestic consumption and commodity price recovery. BUY maintained with a TP of Rp5,100/share, implying 17.1-15.9x P/E10-11F.

Best year for noodles since 2003
Despite mounting raw material cost pressures – particularly wheat – we believe Indofood can sustain the noodles operating margin at around 14% this year. The company has already hiked noodle selling prices by Rp50/pack in early Aug 2010 – about a 4% price increase. This more than offsets the 7% ytd increase in the wheat price that currently hovers around US$6.3/bushel. A rough calculation suggests that the company needs to raise selling prices by around 3% for every 10% increase in the wheat price to maintain its margins. Hence, if the average wheat price surpasses US$5/bushel, Indofood will have to make further price hikes – else the 1Q11 margin will be sacrificed. Note also that we align our average exchange rate assumption with our economists’ estimate, reflecting the stronger rupiah. This, coupled with the company’s stronger pricing power, bodes well for Indofood’s non-agri business.

Stronger contribution from agribusiness
Many parts of Indonesia have experienced poor weather conditions this year. As a result, inflation may exceed 6% in 2010, in our view, since the bad weather - which has raised supply concerns - is forecast to persist. This may mean higher input prices. As such, margins may be lower in the non-agri division: we forecast 13.0-11.5% EBIT margins in FY11F for the noodles and flour segments, respectively. Overall, the EBIT contribution from the CBP division is expected to decline to 35% in FY11F from 40% this year. On the flip side, however, Indofood’s agribusiness division stands to make a stronger contribution – due to firm CPO prices - and we believe this division will contribute around 35% of EBIT, or up from 30% in FY10F.

What’s next after the ICBP listing?
Well, we think ICBP will leverage further - be it for organic expansion or to make acquisitions. Note that its balance sheet is strong with a net cash position of around Rp140bn, after paying down the shareholder loan. Therefore, ICBP will have greater flexibility compared to its holding in raising more debts. With a debt covenant of 3x debt-to-EBITDA ratio, Indofood could only add another Rp4tn debt, while ICBP could raise as much as Rp8tn or twice of Indofood. Factoring this, ICBP has a huge opportunity to acquire new business in order to create more synergy, a beverage company perhaps.