BUY, TP raised to Rp6,000
While we believe some of the positives are already in the price, we continue to like INDF for its exposure to domestic consumption and because of potential recovery in commodity prices; hence our BUY recommendation. The stock has done well of late – gaining 11% in just 2 weeks – moving higher on account of the recent IPO price indication of ICBP. Indeed, the premium valuation of ICBP – at around 22.9-20.9x P/E 10-11F would create scope for trading arbitrage. The valuation gap, we think, should be narrowing further. Our TP already takes into consideration the imminent ICBP listing, which in a way also leads to a 2-3% dilution in our FY10-11F EPS estimates. Higher minority interest, although largely offset by greater royalty income received and lower interest expenses, explains our lower EPS. Valuation upside, however, still exists with INDF’s PE/ROE ratio still around 0.5x for FY11F, below the industry’s average of 0.7x.
ICBP: nearing the top-end
ICBP, the company’s branded consumer subsidiary, is priced at Rp5,395/share, near the top range of its fair value. It is about 22.9-20.9x FY10-11F, above INDF’s current valuation and also that of the consumer sector (excluding Unilever), which is currently trading at 18.4-16.2x and 19.7-17.0x P/E10-11F. ICBP’s IPO will basically raise some Rp6.3trn, of which around Rp4.1trn shall be used to repay shareholder loans – due at YE10, with the balance for expansion purposes. Net cash will be maintained, as a consequence. The expansion, which will cost the company around Rp1.8trn, could easily be financed, should there be any additional costs incurred. In fact, with the current net cash, we may see some potential acquisitions take place going forward. The imminent listing of ICBP will lower INDF’s net gearing to 0.5x this year from currently 1.0x (excluding the minority).
Minimal earnings dilution in 2010-11F
Earnings dilution due to the ICBP listing would be around 2-3% for FY10-11F, according to our estimates. The minority interest increase shall largely be offset by royalty fees and a reduction in interest expenses. Note that ICBP should pay royalty fees to Indofood for brands usage (except dairy) – amounting to 1.5% of sales, aside from a management fee of 0.25% from ICBP’s net sales. For FY10F, we estimate royalty and management fees of around Rp175bn, hence additional minority interest of around Rp70bn – or 1.7% earnings dilution. While for FY11F, we estimate a reduction in interest expenses of some Rp300bn, translating into 2.9% dilution. This assumes the full amount of Rp4.1tn obtained by Indofood will be used for de-leveraging purposes.
Flour price may surge 10-15% in 4Q10
While ICBP is remarkably profitable, margins may be squeezed slightly in the following quarters as: 1) Bogasari has indicated 10-15% selling price increases after the Idul Fitri celebrations, according to our channel check, 2) cost pressures still persist as wheat production remains low. The production forecast dropped significantly for the EU-27 and Russia, albeit partly offset by increases for Canada, Morocco, and Moldova. The wheat price, according to USDA, is projected at US$4.95-5.65/bushel, up from US$4.70-5.50/bushel last month. As such, the noodle operating margin would be around 13.6% as of YE10, according to our estimates, down from 15.5% in 1H10. The flour division, on the other hand, could deliver an operating margin of 13.5% in YE10, or above its historical range of 8-11%.
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