Macquarie Indofood: milk input price coming down

Nestle Indonesia is taking down its milk purchase price from domestic farmers by Rp300/liter (8%), from Rp3,785/liter to Rp3,485/liter. Director general for agro and chemical industries has approved the plan, that will be effective on 1 May 2009. Nestle is the biggest buyer of domestic milk, absorbing 80% of the 1.3mn liter annual production. The development follows the ministrial decree no.119/2009 which brought down import tariff for milk to 0%.

My take – a positive development for Indofood (INDF IJ), who acquired milk company Indolakto at the beginning of 2009. Indolakto’s main cost item is raw milk, split between import (70%) and domestic (30%). Looking at the competitive landscape among Indonesia’s milk producers, Indolakto could be in a position to keep the margin gains from falling input prices in 2009. Indofood trades on 9.3x FY09 consensus EPS, and I would advice investors look at the stock more closely. Investors and Street analysts have been negative on the Indolakto acquisition because of the in-appropriate timing (tight liquidity, high borrowing costs, risks on the Rp/US$). But as the global liquidity and risk appetite improves, the market may start to appreciate the rationale and LT benefits of the acquisition. Not Rated by Macquarie.