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1 Equity Research Consumer Monday,23 July 2018 OVERWEIGHT Maintain GGRM relative to JCI Index Source : Bloomberg INDF relative to JCI Index Consumer Better days ahead Based on our recent discussions with several companies in the consumer sector, we note that sales performance improved in April and May 2018, both on a yearly basis and also compared to 1Q18. Despite this, the sector has underperformed the JCI by 14. over the past two years. Nonetheless, we believe that the bottom has now been reached and that the recent weakness in the sector actually presents investors with a good opportunity to BUY. Maintain Overweight. Signs of improvement in April and May Consumer stocks, which are considered to be resilient and a safehaven in times of turmoil, have historically outperformed the JCI over the long term (510 years). Nonetheless, weighed down by soft purchasing power, foreign outflows and unfavorable global developments, the Jakarta Consumer Index has underperformed the JCI by 14. over the past 2 years. We believe, however, that the bottom has now been reached. Our optimism is supported by indications of better sales performance in April and May 2018, both on a yearly basis and also compared to 1Q18. Pickup in spending expected. As a result of supportive government policies ahead of the presidential elections in 2019, we expect consumption to pick up in the coming months. To sustain purchasing power, the government will seek to control the prices of staple goods, as well as increasing fuel subsidies and providing better access to healthcare and education. This should translate into higher consumer spending, we believe. Source : Bloomberg Higher earnings growth in In our view, consumer companies will seek to maintain market share this year as purchasing power recovers. As a result, the rupiah s depreciation and volatility in raw material prices that pushed up costs will be absorbed by consumer companies. This, in turn, will put pressure on margins. For 2018, we estimate top and bottom line growth of 8.2% yoy and 5.6% yoy, respectively, for the consumer sector. For 2019, we expect stronger growth: 9.8% yoy at the top line and 10.4 % yoy at the bottom line. x Natalia Sutanto (6221) ext.3508 natalia.sutanto@danareksa.com Top picks: GGRM and INDF. The Jakcons is down 15.6% ytd, a sharper decline than the JCI s (7.6%). However, we believe the current weakness should provide opportunities to BUY consumer stocks. Our top pick in the sector is GGRM given its attractive valuation and lower exposure to currency volatility. We also like INDF as a valuation play and consumer proxy to ICBP. Target Price Market Cap. P/E (x) P/BV (x) ROE (%) Company Ticker Rec (Rp) (RpBn) 2018F 2019F 2018F 2019F 2018F HM Sampoerna HMSP HOLD 3, , Unilever Indonesia UNVR HOLD 48, , Gudang Garam GGRM BUY 80, , Indofood CBP ICBP BUY 9, , Kalbe Farma KLBF BUY 1,500 60, Indofood Sukses INDF BUY 8,000 55, Mayora Indah MYOR HOLD 2,790 66, Kimia Farma KAEF HOLD 2,170 12, Kino Indonesia KINO BUY 2,100 2, Source: Bloomberg, Danareksa estimate

2 GGRM (BUY TP IDR80,800). With low dependency on imported raw materials, we believe GGRM s earnings should be resilient supported by moderately higher ASP to maintain sales volume. Downside risks: less free cash flow for big dividend payouts ahead given the company s plans to build an airport. INDF (BUY TP IDR8,000). We continue to like ICBP for its strong product portfolio and dominant market share in the country. However, the upside is limited to our TP (IDR9,400). As such, we prefer INDF as a valuation play. KLBF (Upgrade to BUY with a lower TP of IDR1,500). The share price of KLBF has been severely punished (down 23.7% ytd) due to its high dependency of USD linked raw materials (around 67% of total COGS). However, with 48% of its revenues coming from nutrition and consumer health products, we believe Kalbe should also be seen as a consumer play, benefiting from improved economic growth despite headwinds in the pharmaceutical business. Based on the median value of DCF valuation and lower PE (average 2year of 30.9x), we lower our TP to IDR1,500 (FY18F PE of 27.8x). With 16.3% upside potential, we upgrade our recommendation to BUY. At the current share price, KLBF is trading at FY18F PE of 23.4x, slightly below its 2SD average 2y PE of 24.5x. KINO (Upgrade to BUY with an unchanged TP of IDR2,100). The share price of KINO has tanked 20. ytd and 22.4% in the past 12 months. However, the revamping of the company s distribution which began in mid2017 has yielded positive results, as reflected in solid 1Q18 revenues with the receivable and inventory days ratio trending down in recent quarters. We see upside from the expectation of improving quarterly results. Upgrade to BUY given its attractive valuation. UNVR (Maintain HOLD with a lower TP of IDR48,000). The share price of UNVR has declined by 19. from its peak in the past few years. Nonetheless, it is still trading at a premium valuation of FY1819F PE of 47.8x and 41.4x, respectively. Tougher competition with more new product launches may lead to tepid earnings growth this year. Maintain HOLD with a lower TP of IDR48,000 based on DCF valuation and +1SD average 2 year PE of 50.7x. HMSP (Downgrade to HOLD with an unchanged TP of IDR3,800). In 2Q18, HMSP reported better sales volume (+0.7% yoy) with market share of 33.2% (similar to 1Q18 but higher than 2Q17 s 32.8%). We believe the new products launched in recent years supported the higher sales volume. However, bear in mind that these new products provided lower margins. As such, we estimate tepid earnings growth of just 4% yoy in FY18. With limited upside to our TP, we downgrade our recommendation to HOLD. MYOR (Maintain HOLD with a TP of IDR2,790). Our recent meeting with the company reveals that the 5M18 revenues grew by a brisk 17% yoy (4M18: 14% yoy). With raw material prices volatility and currency depreciation, the company may record higher costs especially in packaging. However, with significant export revenues, we estimate FY18 top and bottom line growth of 13.6% and 9. yoy, respectively. 2

3 Jan15 Apr15 Jul15 Oct15 Jan16 Apr16 Jul16 Oct16 Jan17 Apr17 Jul17 Oct17 Jan18 Apr18 Exhibit 1. Revenues and Household consumption yoy Exhibit 2. Retail Sales Index F&B, Tobacco and Total (yoy) % % 5.4% 5.2% % 4.6% 4.4% Revenue yoy growth rolling 2Q (RHS) Household consumption real yoy growth (LHS) 10.0 F&B and Tobacco Retail sales index Total Source: BPS Source: Bank Indonesia May 2018 retail sales showed an improvement. The retail sales survey conducted by Bank Indonesia showed that in May 2018, retail sales increased by 8.4% yoy, higher than in the previous month (April +4.1% yoy) and last year in the same period (May % yoy). In May 2018, retail sales were supported by fashion sales (+16. yoy) and also Food, Beverages and Cigarette sales (+11.7% yoy). The F&B and cigarette retail sales were also higher on a monthly comparison (April yoy) and last year (May % yoy). Exhibit 3. Packaging cost to total COGS (%) Exhibit 4. Rupiah movement and KLBF s gross margin ,000 14,000 12,000 10,000 8,000 6,000 4,000 2, Rupiah LHS KLBF's gross margin RHS Source: Danareksa Sekuritas estimates, Danareksa Sekuritas estimates 3

4 Exhibit 5. Relative share price performance Ytd (%) Exhibit 6. Relative share price performance 12M (%) (20) (30) 4 KLBF KINO KAEF UNVR HMSP INDF GGRM ICBP MYOR (8) (13) (13) (16) (21) (25) (20) (30) (40) INDF KAEF KLBF KINO UNVR GGRM HMSP (1) ICBP (0) MYOR (9) (8) (24) (23) (29) (28) Source: Bloomberg Source: Bloomberg Exhibit 7. Quarterly growth yoy (%) Exhibit 8. Quarterly margin (%) Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 Revenue Gross profit Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 Operating profit Net profit Gross Operating Net Exhibit 9. Yearly growth (%) Exhibit 10. Sector s Gearing ratio (%) F 2019F % 41% 3 36% 34% Revenue Gross profit Operating profit Net profit F, Danareksa Sekuritas estimates 4

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