Indofood CBP, Still lacking upside catalysts, Macquarie

Event

􀂃 We analyse ICBP’s FY11A result (released on 20/3) in detail, and take the

opportunity to update our investment thesis, earnings forecasts/outlook, and

valuation. We maintain our Underperform call, but raise our valuation and PT

to Rp5,100 from Rp4,900, and raise our FY12E earnings estimates by 7.2%.

􀂃 While ICBP is trading only modestly above our fair value estimate, we believe

the story remains unexciting on account of the company’s relatively weak

growth prospects, coupled with its premium operating margins. We view the

stock as a fully-valued “cash cow” that is likely to continue to tread water, and

in a growth market, significantly underperform on a relative basis.

Impact

􀂃 ICBP delivered 4Q11A adjusted earnings growth of just 4.6% YoY, while

adjusted FY11A operating income (excluding minorities) increased by a

meagre 1.7% YoY. This relatively lacklustre earnings growth was a function of

the relatively high level of maturity of ICBP’s core noodle business (which

comprised 87.4% of FY11A earnings), coupled with that fact that ICBP’s

heady run of margin expansion during FY07–10A now seems to have ended.

􀂃 Moving forward, we expect ICBP to deliver only single-digit EPS growth in the

next few years (and 3.7% in FY12E), despite our forecasts incorporating

strong growth in ICBP’s dairy and other smaller divisions. Key to this outlook

is that noodle revenue growth is only expected to average 5–10% pa, while

noodle operating margins – 16.2% in FY11A (down from 16.5% in FY10A) –

are likely to trend down towards ICBP’s guided 15.0% sustainable level (we

are forecasting 15.8% in FY12E). We expect input cost relief during FY12E to

be offset by lower ASP hikes and higher promotional spending. Without

further margin expansion, ICBP’s earnings growth will likely remain lacklustre.

􀂃 The main upside risk we foresee is ICBP making an attractive non-relatedparty

acquisition with its cash hoard (which has increased to Rp624/share).

However, to date ICBP has failed to identify attractive reinvestment

opportunities, and 4Q11A capex dispersion also remained disappointing.

Earnings and target price revision

􀂃 FY12–13E EPS estimates raised 7.2% and 9.8%. About c1.5% has been

technical and due to a switch to the assumed tax treatment of amortisation

(see overleaf). The balance reflects slightly higher noodle volume and ASP

estimates, and stronger dairy top line growth assumptions (we have given

ICBP the benefit of the doubt regarding its upcoming capacity additions).

Price catalyst

􀂃 12-month price target: Rp5,100 based on a Sum of Parts methodology.

􀂃 Catalyst: 1Q12E result (expected in late April).

Action and recommendation

􀂃 Underperform: While ICBP is trading largely in line with our fair value

estimate, we believe its relatively weak organic growth and reinvestment

prospects render the stock’s prospects inferior to other Indonesian consumer

names. We maintain a preference for MAPI, ACES, GGRM, and ASII.