Indofood CBP Sukses ICBP IJ / ICBP.JK

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1 68.3% 67.0% 64.6% 64.5% 63.6% 62.3% 59.5% 17.5% 18.0% 17.0% 18.1% 19.2% 20.8% 22.6% Vol (mn) Equity Research Indofood CBP Sukses ICBP IJ / ICBP.JK Company Updates BCAS Vignette Consumer Sector Stable set of results Facts: FY16 net profit of IDR3.6tn (+20% YoY), in line 4Q16 net profit slipped to IDR768bn, making 4Q16 the softest quarter in 2016, but still growing robustly YoY. 4Q16 also marked the softest net margins in 2016, at 9.6%. We note that historically 4Q is the most lukewarm quarter in terms of margins was the year of healthy margins revenue came in at IDR34.5tn (+8.6% YoY), while gross profit increased by 12.9% YoY. Margins were buoyed by softer commodities prices (i.e.: wheat & skimmed milk powder (SMP)). Dairy Division is also performing better, prompting some deleveraging, which helps in interest expense savings. We note that gross, EBIT and net margins are at their peak in 2016, following its IPO. Even healthier balance sheet with cash cycle in check. With higher cash balance and some debt repayment, ICBP s balance sheet is even a notch stronger than it was in DER slid to 12.8%, from 14.5% in 9M16. Cash cycle also hovers at 42 days (9M16: 41 days). Outlook: Gross margin compression is inevitable With several commodities prices inching up from low levels in 2016, we believe that margin compression is in the cards. We believe that dairy segment is more prone to margin drops on higher SMP (liquid milk) and sugar (condensed milk) prices. We are also of the view that increasing existing ASP may be challenging, partially due to the gradual increase in household electricity tariff. That said, we think that volume growth would be the main propeller for New product launches and relaunches will still be plenty, with ICBP tapping more into the premium segment (i.e.: Real Meat, Chef Cuisine) to increase its overall ASP without putting price increase pressure on its existing SKUs, in our view. We note that ICBP has also begun to aggressively promote its ice cream division. While we think that ice cream may offer high growth, its contribution to overall dairy segment will be small. However, we still think that COGS will rise higher than top line, with our gross margins projecting to reach 30.9% in 2017F. Helped by streamlining in distribution, we are expecting an improvement in opex, pushing 2017 net profit growth (+10.8% YoY) and margin (10.5%) upwards. Recommendation: Adjusting TP to IDR9,700 Still a Buy As we adjust our numbers for 2016 due to our previous expectation of lower margin compression, our target price sinks to IDR9,700 (13% upside). Our target price is derived from 28.3x 2017F PE (+1.5 std), but we think that ICBP still deserves a Buy for its stronghold against any storms as well as continuous rerating to a higher multiple of its shares. Risks: higher commodities prices, unable to prompt volume growth and unsuccessful ventures. Exhibit 1. Revenue contribution, F 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Instant noodles Food Seasoning Snack Food Nutrition and Special Food Dairy Beverage F 2018F 12M PRICE PERFORMANCE (IDR) 11,000 10,000 9,000 8,000 7, ICBP IJ (LHS) STOCK PERFORMANCE (Unchanged) 27 March 2017 Jennifer F Yapply jennifer.yapply@bcasekuritas.co.id ext 179 Current Price: IDR8,600 Target Price: IDR9,700 (IDR10,050 previously) Upside potential: 12.8% YTD 1M 3M 12M Absolute 0.3% 3.3% 13.9% 13.0% JCI Return 5.1% 3.4% 10.7% 15.3% Relative -4.8% -0.1% 3.2% -2.4% FINANCIAL HIGHLIGHT EV/EBITDA EPSG P/E P/BV (x) (%) (x) (x) F F Source: BCA Sekuritas MARKET DATA 12M price range (IDR) : 7,250-10,000 12M PE range (x) : Outstanding shares (mn) : 11,662 Market cap (IDRbn)/(USDmn) : 100,292 / 7,526 Avg daily turn. (IDRbn/USDmn) : 39.9 / 3.0 SHAREHOLDERS PT Indofood Sukses Makmur Tbk : 49.7% Public (each below 5%) : 50.3% BUY (10.0) Rel. to JCI performance (RHS) - Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 - (%)

2 Exhibit 2. ICBP Financial Summary Income Statement Revenue 30,022 31,741 34,466 37,943 41,019 Costs of revenue 21,963 22,122 23,607 26,206 28,254 Gross profit 8,060 9,619 10,859 11,738 12,765 Operating profit 3,063 3,908 4,936 5,717 6,094 Interest income Interest expense (221) (314) (179) (271) (315) Forex gain/(losses) (33) (16) (8) Other income/(expense) 36 (38) (239) (374) (191) EBITDA 3,400 4,456 5,447 5,934 6,562 Income before tax 3,389 4,010 4,989 5,521 6,084 Tax expenses (857) (1,086) (1,358) (1,503) (1,656) Minority interests (31) (31) (31) Net income 2,604 3,001 3,600 3,988 4,397 EPS (IDR) Balance sheet Cash and equivalents 7,343 7,658 8,372 9,171 10,670 Account receivables 2,696 3,198 3,721 3,994 4,318 Inventories 2,822 2,547 3,110 3,448 3,718 L-T Invest & receivables 655 1,119 1,632 1,707 1,723 Fixed assets 5,839 6,556 7,114 7,571 8,085 Other assets 5,556 5,484 4,952 5,735 6,286 Total assets 24,910 26,561 28,902 31,627 34,799 S-T liabilities 1,061 1, ,045 Other S-T liabilities 5,170 4,762 5,500 5,907 6,375 L-T liabilities 3,153 2,848 1,749 1,574 1,417 Other L-T liabilities 486 1,324 2,183 2,450 2,632 Total liabilities 9,870 10,174 10,401 10,827 11,469 Equity 14,078 15,455 17,564 19,751 22,155 Minority interest ,049 1,175 Total liabilities & equity 24,910 26,561 28,902 31,627 34,799 Cash Flows Statement Net Income 2,604 3,001 3,600 3,988 4,397 Depreciation Change in working capital 1, ,184 1,385 1,465 Operating cash flow 4,072 3,961 5,295 5,589 6,329 Capital expenditure (2,248) (1,596) (1,284) (1,169) (1,376) Others 551 (245) 42 (232) (83) Investing cash flow (1,698) (1,841) (1,242) (1,401) (1,459) Dividend paid (1,108) (1,294) (1,493) (1,800) (1,994) Net change in debt (815) (162) 71 Others (24) (543) (1,030) (1,427) (1,448) Financing cash flow (558) (1,805) (3,338) (3,389) (3,371) Change in cash 1, ,499 Beginning cash flow 5,526 7,343 7,658 8,372 9,171 Ending cash flow 7,343 7,658 8,372 9,171 10,670 Key Ratios F 2018F Gross margin (%) EBITDA margin (%) EBIT margin (%) Pretax margin (%) Net margin (%) ROAE (%) ROAA (%) Current ratio (x) Acid ratio (x) Gearing (%) Net gearing (%) net cash net cash net cash net cash net cash AR turnover (days) Inventory turnover (days) AP turnover (days) We are expecting a stable F top line CAGR of 10%... ICBP to remain as a net cash company Margin drops are inevitable in 2017F, but we are expecting a slower increase in commodities prices in 2018F Key assumptions F 2018F Noodle revenue growth (%) Dairy revenue growth (%) Source: Company, BCA Sekuritas 2

3 Exhibit 3. ICBP s 2016 result Profit and loss statement (IDRbn) 4Q15 3Q16 4Q16 QoQ (%) YoY (%) FY15 FY16 YoY (%) FY16/BCAS FY16/Cons. Revenue 7,645 8,296 7,995 (3.6) ,741 34, COGS 5,418 5,596 5,596 (0.0) ,122 23, Gross profit 2,227 2,700 2,399 (11.1) 7.7 9,619 10, EBIT 784 1, (19.8) ,908 4, Other income/(expenses) Net interest income/(expense) 90 (31) 228 n.a. n.a Net forex gain/(losses) 11 (4) 48 n.a. n.a. 28 (33) n.a. Others (8) 68 (247) n.a. n.a. (38) (239) n.a. Pre-tax profit 876 1,257 1,009 (19.7) ,010 4, Net profit (9.9) ,001 3, Gross margin (%) EBIT margin (%) Pre-tax margin (%) Net margin (%) Balance sheet (IDRbn) Dec-15 Sep-16 Dec-16 Cash and equivalents 7,658 7,331 8,372 Total assets 26,561 28,189 28,902 Total liabilities 10,174 10,369 10,401 Interest bearing liabilities 3,040 2,439 2,243 Equity 16,387 17,820 18,501 ROA (%) ROE (%) Gearing (%) Net gearing (%) n.a. n.a. n.a. Exhibit 4. Earnings changes Year-end Dec F 2018F (IDRbn) Old New Chg (%) Old New Chg (%) Revenue 40,183 37,943 (5.6) 43,610 41,019 (5.9) Gross profit 12,909 11,738 (9.1) 13,912 12,765 (8.2) EBIT 5,679 5, ,252 6,094 (2.5) Net profit 4,111 3,988 (3.0) 4,690 4,397 (6.3) Gross margin (%) EBIT margin (%) Net margin (%) Following the result, we adjust our F earnings by -3/- 6.3% Exhibit 5. Global wheat prices, 2016-ytd (US cent/bushel) 600 Wheat prices have currently inched up to 2016-ytd average Jan-16 Apr-16 Jul-16 Oct-16 Jan-17, BCA Sekuritas 3

4 Exhibit 6. CPO prices, 2016-ytd (MYR/tonne) 3,200 CPO prices peaked in 1Q16 and have come down since then, but are still above 2016-ytd average 3,000 2,800 2,600 2,400 2,200 2,000 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17, BCA Sekuritas Exhibit 7. Electricity tariff increase in VA electricy tariff, per kwh (IDR) % increase Before As of Jan As of Mar , As of May , Source: Tribun News, BCA Sekuritas 900VA household electricity tariffs will see a ~31% increase every 2 months 4

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