Equity Research Initiation report Monday,15 October 2018 BUY Initiation Last price (IDR) 810 Target Price (IDR) 1,000 Upside/Downside +23.5% Previous Target Price (IDR) Stock Statistics Sector Bloomberg Ticker NA CONSUMER SIDO IJ No of Shrs (mn) 14,884 Mkt. Cap (IDRbn/USDmn) 12,056/793 Avg. daily T/O (IDRbn/USDmn) 3.5/0.2 Major shareholders (%) Hotel Candi Baru 81.6 Estimated free float 18.4 EPS Consensus (IDR) 2018F 2019F 2020F Danareksa 45.7 54.1 61.3 Consensus 41.7 47.2 54.7 Danareksa/Cons 9.6 14.5 12.0 SIDO relative to JCI Index Source : Bloomberg x Natalia Sutanto (62-21) 2955 5888 ext.3508 natalia.sutanto@danareksa.com SIDO MUNCUL (SIDO IJ) Healthy growth prospects Sido Muncul is on track to book solid earnings growth in FY18-20F given: (1) additional production capacity and (2) the full commercialization of its expanded extraction plant which will support higher margins. The plan to improve distribution and penetrate export markets will also drive growth. We initiate coverage on the stock with a BUY recommendation. Additional capacity, paving the way for higher growth. Sido Muncul is establishing a new factory in Semarang which will provide additional capacity of 100mn sachets/month, raising total capacity to around 180mn sachets/month. Combined with its expanded extraction plant which commenced operations in 4Q17, the company is optimistic it can record solid earnings growth in 2019. We view favorably the company s shift from its F&B product Kuku Bima to its herbal product Tolak Angin, noting the latter s higher margins which should underpin earnings growth going forward. Revamping its distribution, penetrating export markets. Additional capacity paves the way for higher revenues growth, supported by continued improvements to its sales force with a greater focus on Modern Trade (around 90% of revenues are still from General Trade). Continued product innovation should also help to mitigate the declining trend in powder energy drink sales. Furthermore, the company also encouragingly stated that it is getting positive feedback on several of its products launched in recent years (i.e. Tolak Linu, Kuku Bima with vitamin C). In export markets, meanwhile, the company has developed a subsidiary in Nigeria and a branch office in the Philippines. The company will continue to export Kuku Bima Energy Drink to Nigeria, currently the no.2 top brand in the country. In the Philippines, sales of SIDO s herbal products will be supported by that country s familiarity with herbal drinks. Solid growth potential and an attractive valuation - BUY. We estimate FY18-20F earnings CAGR of 19.6% with additional capacity supporting seasonally strong sales in the second half of the year. At the current share price, SIDO is trading at FY19F PE of 15x, below its consumer peers average of 19.8x. We initiate coverage on SIDO with a BUY call and target price of IDR1,000, based on DCF valuation (WACC 10.5%, TG 4%). The key risks to our recommendation include delays in adding capacity next year, obstacles to export sales of energy drinks, intense competition in the herbal market, and deteriorating macroeconomic conditions. Key Financials Year to 31 Dec 2016A 2017A 2018F 2019F 2020F Revenue (IDRmn) 2,561,806 2,573,840 2,810,520 3,230,021 3,733,452 EBITDA (IDRmn) 506,092 565,202 745,915 895,238 1,023,760 EBITDA Growth (%) 23.7 11.7 32.0 20.0 14.4 Net profit (IDRmn) 480,525 533,799 680,406 805,114 912,525 EPS (IDR) 32.3 35.9 45.7 54.1 61.3 EPS growth (%) 9.8 11.1 27.5 18.3 13.3 BVPS (IDR) 185.3 194.6 203.7 215.0 227.3 DPS (IDR) 24.8 29.0 36.5 42.8 49.0 PER (x) 25.1 22.6 17.7 15.0 13.2 PBV (x) 4.4 4.2 4.0 3.8 3.6 Dividend yield (%) 3.1 3.6 4.5 5.3 6.1 EV/EBITDA (x) 21.9 19.7 15.1 12.6 11.1 Source : SIDO, Danareksa Estimates www.danareksa.com See important disclosure at the back of this report 1
Exhibit 1. Revenues and Growth Exhibit 2. Net Profits and Growth Source: Company, Danareksa Sekuritas estimates Source: Company, Danareksa Sekuritas estimates Exhibit 3. Margins Exhibit 4. Gearing Level Source: Company, Danareksa Sekuritas estimates Source: Company, Danareksa Sekuritas estimates Exhibit 5. PE Band Chart 40.0 30.0 20.0 10.0-1/3/2014 1/3/2015 1/3/2016 1/3/2017 1/3/2018 PE Average +1SD -1SD +2SD -2SD Source: Bloomberg, Danareksa Sekuritas estimates Exhibit 6. Relative share price performance % 60.0 50.0 48.3 40.0 30.0 20.0 9.2 10.0 3.6 - (10.0) 1M (4.9) 3M 6M Ytd Source: Bloomberg www.danareksa.com See important disclosure at the back of this report 2
Valuation Exhibit 7. Peers comparison Rec Target Price, IDR Upside % Avg daily TO, IDR bn We initiate coverage with a BUY call. We initiate coverage on SIDO with a BUY call and target price of IDR1,000 (based on DCF valuation and WACC of 10.5%, Terminal Growth 4%). We like the company given: a) Additional capacity which paves the way for higher growth By December 2018, the company plans to commercialize its new factory with capacity of 100mn sachets/month for herbal products. This will bring the total capacity up to 180mn sachets/month, facilitating deeper penetration of the General Trade and Modern Trade markets. b) with continued high margins Following the full commercialization of its new herbal extraction facility in 4Q17, the company has additional capacity for ingredients extraction with higher efficiencies in raw materials usage. It is also worth noting that the family has sold the secret recipe for its products to the listed company in March 2018. Previously, the company had agreed to pay 1.5% royalties on net sales to the Hidayat Family. Greater efficiencies in raw materials usage coupled with the absence of royalty expenses bodes well for higher margins in the future. c) Shift in revenues contribution from energy drinks to herbal products With a track record of more than 60 years, Sido Muncul is the market leader in modern medicine products. Robust growth in herbal medicines in the past 5 years (16.6% revenues CAGR) spearheaded by its Tolak Angin Brand means that herbal products are now the main revenues contributor (66% in 1H18). d) Improvements to its distribution system At present, around 90% of the company s products are distributed through General Trade, with Modern Trade accounting for the remaining 10%. With more capacity forthcoming, the company sees further room for growth in Modern Trade by increasing product availability. e) Good potential for higher export sales Tolak Angin is exported to more than 16 countries around the world. Going forward, the company plans to boost export sales by establishing a subsidiary in Nigeria and a branch office in the Philippines. The contribution from exports is expected to increase to 5% of revenues within the next 3 years. f) Attractive valuation At the current share price, SIDO is trading at FY19F PE of 15x, lower in comparison to the valuation of its consumer peers of 19.8x. Market EPS Growth, % ----- P/E, x ----- ----- P/B, x ----- ROE, % Cap, Rptn 2018F 2019F 2018F 2019F 2018F 2019F 2018F HMSP HOLD 3,800 (1.8) 69.8 444 4.0% 9.0% 34.2 31.3 12.9 12.4 38.2% UNVR HOLD 48,000 8.8 99.6 339 3.8% 6.7% 46.3 43.4 66.0 67.0 141.5% GGRM BUY 84,000 12.4 60.9 145 7.7% 11.2% 17.2 15.5 3.2 2.7 19.0% ICBP BUY 9,400 9.6 29.3 101 8.8% 7.3% 24.2 22.6 4.6 4.1 20.0% KLBF BUY 1,500 19.5 27.6 60 4.0% 9.0% 23.5 21.6 4.0 3.6 17.8% MYOR HOLD 2,790 8.1 3.7 59 9.5% 8.3% 33.0 30.5 6.9 6.0 22.4% INDF BUY 8,200 48.4 47.9 49 8.2% 10.6% 10.8 9.7 1.4 1.3 13.9% KAEF HOLD 2,170 (12.9) 0.4 14 16.7% 15.4% 36.3 31.4 4.9 4.4 14.4% SIDO BUY 1,000 25.8 3.5 12 27.5% 18.3% 17.4 14.9 3.9 3.7 23.0% KINO BUY 2,100 20.7 0.3 3 8.4% 21.9% 20.8 17.0 1.2 1.1 5.8% Sector 1,226 5.6% 8.7% 33.0 30.5 24.3 24.3 59.5% Exclude UNVR and HMSP 8.6% 9.9% 21.7 19.8 4.0 3.5 18.8% Source: Bloomberg, Danareksa Sekuritas estimates *Closing price 11 October 2018 www.danareksa.com See important disclosure at the back of this report 3
Exhibit 8. DCF Valuation (Rp bn) 2019F 2020F 2021F 2022F 2023F 2024F 2025F EBIT 969 1,106 1,237 1,358 1,520 1,645 1,839 Tax (223) (253) (282) (309) (345) (373) (416) After Tax Cash Flow 746 853 955 1,049 1,175 1,271 1,422 Depreciation & amortization 74 82 90 98 106 114 124 Change in working capital (74) (114) (88) (79) (104) (105) (134) Net capital expenditure (180) (208) (207) (227) (202) (222) (248) Free cash flows for the firm 567 613 749 841 975 1,059 1,164 Discount factor 1.00 0.90 0.82 0.74 0.67 0.61 0.55 PV of free cash flows 567 554 613 623 653 642 638 Value of FCF in the forecasted period 4,290 Terminal value 10,176 Value of firm 14,467 Net cash/(debt) 738 Value of equity 15,205 # of shares (mn shares) 14,884 Value of equity/share (Rp) 1,000 Source: Company, Danareksa Sekuritas estimates www.danareksa.com See important disclosure at the back of this report 4
19.6% earnings CAGR in 2018-20F We still expect herbal medicines to be the main growth driver in 2019. Note that the Tolak Angin brand accounted for the bulk of FY17 s herbal revenues (80-85% of the total). Additional capacity combined with continued efforts to broaden distribution coverage should help herbal revenues to grow by 21-22% yoy in FY19-20. In the F&B division, Kuku Bima accounted for 60% of the total FY17 F&B revenues. We conservatively estimate lower negative growth in F&B revenues in 2019 (-2% yoy), given better expected sales growth of other products including Kopi Jahe, Susu Jahe etc. Further ahead, growing export sales of Kuku Bima products to Nigeria should benefit the company. As such, we estimate flattish F&B revenues growth in 2020. Overall, revenues growth should reach 15-16% yoy in FY18-19F. Most raw materials are supplied locally. Therefore, the USD-linked raw materials are only the packaging - estimated to reach around 15-20% of the total costs of raw materials purchased. With a higher extraction rate, we estimate a slightly higher FY19-20F gross margin of around 51%. With strong brand equity (especially for Tolak Angin), we estimate stable opex to revenues at around 21% of total revenues in 2019-20. This will translate into FY18-20F earnings CAGR of 19.6%. Exhibit 9. Revenues growth for each division IDR tn 4.0 3.0 2.0 1.0-11% -17% 15% -4% Source: Danareksa Sekuritas estimates 22% 21% -2% 0% 25% 15% 5% -5% -15% -25% 2017 2018F 2019F 2020F Herbal (RHS) F&B (RHS) Pharmacy (RHS) Herbal (LHS) F&B (LHS) Exhibit 10. Revenues contribution by division 100% 80% 31% 27% 23% 20% 60% 40% 66% 69% 73% 77% 20% 0% 2017 2018F 2019F 2020F Herbal F&B Pharmacy Source: Danareksa Sekuritas estimates www.danareksa.com See important disclosure at the back of this report 5
Investment risks The company faces several key risks that may hinder growth: a) Delays in adding production capacity next year The management is optimistic that the new plant will commence operations in December 2018. Given the existing plant is already operating at full capacity, delays in the operation of the new factory due to technical issues or other factors - may prevent the company from tapping the potential market for herbal products. b) Continued stiff competition in the energy drinks market At present, Energy Drinks whether in powder or liquid form - face stiff competition in the beverages market. A persistently negative image on product ingredients may dampen sales going forward. c) Export market hurdles The company sees plenty of potential in the Nigerian market for energy drinks. Any obstacles to exporting energy drink products may negatively impact the company s revenues. d) Higher oil prices that may lead to higher packaging costs With herbal products increasingly using modern packaging, the company is relying heavily on packaging that is mostly oil-based and USD related. The continued uptrend in global oil prices may push the company to raise its selling prices or face lower margins in the face of stiffer competition. e) Heightened competition in the herbal market At present, there are only several products which compete against Tolak Angin. Strong growth in this market segment may, however, encourage more players to enter the segment, creating more competition. This may squeeze the company s market share going forward. www.danareksa.com See important disclosure at the back of this report 6
Additional capacity paving the way for higher growth Sido Muncul s existing production facilities are located in Klepu, Semarang (Central Java) on 30ha of land. The existing production capacity is 80mn sachets/month. The company is currently establishing a new plant at its existing location in Semarang which incorporates a modern and automatic system to ensure accurate and integrated production. The new plant, which is expected to be operational in December 2018, will boost capacity by 100mn sachets/month to 180mn sachets/month. As the existing plant is running at near full-capacity, the additional capacity should help the company to boost sales going forward by ensuring product availability, especially in the modern trade channel. Exhibit 11. New production facilites fully computerized and modern Source: Company www.danareksa.com See important disclosure at the back of this report 7
2017: Full commercialization of its extraction plant; higher margins The company s expanded extraction plant was fully commercialized in 4Q17, raising capacity to 13,500kg/day from 4,500kg/day. This should give a boost to margins this year. It is also worth noting that the gross margin started to gradually pick up as of 1Q17. At present, the current utilization of this extraction plant has only reached 60%. As such, there is adequate capacity to support the company s higher production capacity which is being raised to 180mn sachets/month. There are at least 96 herbal ingredients used by the company in its production process. Exhibit 12. Quarterly gross and operating margins, 1Q14-2Q18 60% 50% 40% 30% 20% 10% 0% Gross margin Operating margin Source: Company Shift in revenues contribution from energy drinks to herbal products Sido Muncul s major brands are Tolak Angin and Kuku Bima. The former is a herbal medicine/remedy which is one of the original products sold by the company as of 1951. As the market leader, this product has enjoyed solid sales volume growth in the past few years, allowing the company to adjust selling prices based on inflation or 2x inflation in a good year. Seeing good potential in the herbal medicines market, the company introduced a similar product called Tolak Linu in 2014. The strong sales growth of Tolak Linu, which reached 135% ytd in volume terms this year, demonstrates that the company has the capability to mix/create traditional products using a modern concept. www.danareksa.com See important disclosure at the back of this report 8
Exhibit 13. Tolak Angin and Tolak Linu Source: Danareksa Sekuritas, Various sources Exhibit 14. Competitors products and prices Products Company Price/sachet (IDR) Tolak Angin SIDO IJ 3,600 Antangin JRG Deltomed 2,900 Bintang Toedjoe Masuk Angin KLBF IJ 2,800 Source: Danareksa Sekuritas, Various sources The company s other major brand, Kuku Bima, is also an original brand. It used to be Sido Muncul s major revenues contributor, accounting for more than 50% of revenues in 2013 just after sales of energy drinks peaked. However, negative campaigns on energy drink products coupled with stiff competition in the beverages market put energy drink sales under pressure. As a result, the sales of Kuku Bima especially the products in powdered form, have booked negative volume growth. Note, however, that Kuku Bima is still an important product for the company, accounting for 60% of the company s F&B revenues in FY17. Yet thanks to strong growth of the Herbal segment, it only accounted for 18% of FY17 s total revenues. On a consolidated basis, the contribution of F&B sales to total revenues fell to only 31% in 2017. Exhibit 15. Kuku bima Source: Company, Danareksa Sekuritas estimates The strong performance of Tolak Angin/Tolak Linu has buoyed SIDO s revenues in recent years. In 2012-17, sales of herbal medicine booked solid CAGR of 16.6% while sales of F&B products booked -13.1% CAGR in the same period. However, in the past two years, the F&B division managed to maintain flat sales thanks to the solid sales growth of other traditional products such as Kopi Jahe and Susu Jahe. Sales of these products have partially offset the decline in sales of Kuku Bima. www.danareksa.com See important disclosure at the back of this report 9
Exhibit 16. Kopi susu jahe Source: Danareksa Sekuritas, various sources The other division which only provides a small contribution is PT Berlico Mulia Farma, a pharmaceutical company in Jogjakarta. The company works with 50 large pharmacy traders to distribute its products to more than 16 cities in Indonesia. SIDO acquired the company back in 2014 as part of plans to broaden its portfolio of Over-The-Counter products. Berlico currently produces more than 80 pharmaceutical products under several brand names including Anacetine, Combicitrine and Berlosid. Exhibit 17. Products under the pharmaceutical division Source: Danareksa Sekuritas, various sources www.danareksa.com See important disclosure at the back of this report 10
Exhibit 18. Revenues contribution: Herbal, F&B and pharmacy 100% 75% 50% 45% 38% 31% 50% 25% 49% 52% 59% 66% 0% 2014 2015 2016 2017 Herbal medicine and suplement F&B Pharmacy Source: Company Exhibit 19. Herbal revenues and growth 2,000 50% 42% 40% 1,500 34% 31% 33% 30% 1,000 22% 20% 500 11% 4% 6% 10% - 0% 2010 2011 2012 2013 2014 2015 2016 2017 Exhibit 20. F&B revenues and growth 2,000 1,500 1,000 500-2010 2011 2012 2013 2014 2015 2016 2017 50% 40% 30% 20% 10% 0% -10% -20% -30% Revenue Growth Revenue Growth Source: Company Source: Company www.danareksa.com See important disclosure at the back of this report 11
Improvements to the distribution system Through its subsidiary, PT Muncul Mekar, the company works with 122 subdistributors in the general and modern trade and also with big pharmaceutical distributors to distribute its products. Around 90% of its products are channeled through General Trade (GT) and the remaining though Modern Trade (MT). With additional capacity, the company will continue to broaden its distribution coverage, seeking to increase the availability of its major products, especially in modern trade. The management plans to make improvements to its sales force division as well as hire more professionals to penetrate more markets. Exhibit 21. Indonesia s distribution network Source: Company Room for improvement in the exports market The company s products are already exported to more than 16 countries across the globe through 3 rd party distributors. The contribution of exports to total revenues is still very small at less than 2% in 2017. In 2018, the company will focus on increasing export revenues. In Nigeria, the company has set up a subsidiary to market its products. With a total population of 190mn, Kuku Bima has received a positive response in Nigeria. Supported by the new subsidiary, higher revenues growth is expected in Nigeria next year. In the Philippines where herbal remedies/medicines are also popular - the company has set up a new branch office. In September 2018, the company made the first shipment of Tolak Angin products to the Philippines. A higher export revenues contribution of 5% of total revenues is expected within the next 3 years. www.danareksa.com See important disclosure at the back of this report 12
Exhibit 22. Income Statement Year to 31 Dec (IDRmn) 2016A 2017A 2018F 2019F 2020F Revenue 2,561,806 2,573,840 2,810,520 3,230,021 3,733,452 COGS (1,494,142) (1,411,881) (1,396,616) (1,543,109) (1,798,192) Gross profit 1,067,664 1,161,959 1,413,903 1,686,912 1,935,260 EBITDA 506,092 565,202 745,915 895,238 1,023,760 Oper. profit 559,443 625,738 813,281 969,266 1,105,762 Interest income 50,945 42,241 36,516 34,548 31,017 Interest expense (140) (588) (642) (738) (853) Forex Gain/(Loss) 0 0 0 0 0 Income From Assoc. Co s 0 0 0 0 0 Other Income (Expenses) 18,834 14,498 20,014 25,398 29,758 Pre-tax profit 629,082 681,889 869,168 1,028,474 1,165,684 Income tax (148,557) (148,090) (188,763) (223,360) (253,159) Minority interest 0 0 0 0 0 Net profit 480,525 533,799 680,406 805,114 912,525 Core Net Profit 480,525 533,799 680,406 805,114 912,525 Exhibit 23. Balance Sheet Year to 31 Dec (IDRmn) 2016A 2017A 2018F 2019F 2020F Cash & cash equivalent 997,135 902,852 780,478 738,432 662,961 Receivables 387,218 431,502 471,181 541,510 625,910 Inventory 317,082 267,915 265,018 292,816 341,220 Other Curr. Asset 87,690 26,632 29,081 33,422 38,631 Fixed assets - Net 1,051,227 1,215,176 1,390,483 1,496,215 1,621,991 Other non-curr.asset 142,262 314,121 368,558 404,864 448,434 Total asset 2,987,614 3,158,198 3,304,799 3,507,259 3,739,147 ST Debt 0 0 0 0 0 Payables 183,323 135,991 134,521 148,631 173,200 Other Curr. Liabilities 32,363 72,516 79,184 91,003 105,187 Long Term Debt 0 0 0 0 0 Other LT. Liabilities 14,043 53,826 58,776 67,549 78,077 Total Liabilities 229,729 262,333 272,481 307,183 356,464 Shareholder'sFunds 2,757,878 2,895,858 3,032,311 3,200,069 3,382,676 Minority interests 7 7 7 7 7 Total Equity & Liabilities 2,987,614 3,158,198 3,304,799 3,507,259 3,739,147 www.danareksa.com See important disclosure at the back of this report 13
Exhibit 24. Cash Flow Year to 31 Dec (IDRmn) 2016A 2017A 2018F 2019F 2020F Net income 480,525 533,799 680,406 805,114 912,525 Depreciation and Amort. 0 0 0 0 0 Change in Working Capital 0 0 0 0 0 OtherOper. Cash Flow (50,805) (41,653) (35,874) (33,810) (30,165) Operating Cash Flow 429,720 492,146 644,532 771,304 882,361 Capex 0 0 0 0 0 Others Inv. Cash Flow 50,945 42,241 36,516 34,548 31,017 Investing Cash Flow 50,945 42,241 36,516 34,548 31,017 Net change in debt 0 0 0 0 0 New Capital 0 0 0 0 0 Dividend payment 0 0 0 0 0 Other Fin. Cash Flow (140) (588) (642) (738) (853) Financing Cash Flow (140) (588) (642) (738) (853) Net Change in Cash 480,525 533,799 680,406 805,114 912,525 Cash - begin of the year 836,975 997,135 902,852 780,478 738,432 Cash - end of the year 997,135 902,852 780,478 738,432 662,961 Exhibit 25. Key Ratios Year to 31 Dec 2016A 2017A 2018F 2019F 2020F Growth (%) Sales 15.5 0.5 9.2 14.9 15.6 EBITDA 23.7 11.7 32.0 20.0 14.4 Operating profit 16.9 11.9 30.0 19.2 14.1 Net profit 9.8 11.1 27.5 18.3 13.3 Profitability (%) Gross margin 41.7 45.1 50.3 52.2 51.8 EBITDA margin 19.8 22.0 26.5 27.7 27.4 Operating margin 21.8 24.3 28.9 30.0 29.6 Net margin 18.8 20.7 24.2 24.9 24.4 ROAA 16.6 17.4 21.1 23.6 25.2 ROAE 17.9 18.9 23.0 25.8 27.7 Leverage Net Gearing (x) (0.4) (0.3) (0.3) (0.2) (0.2) Interest Coverage (x) 3,996.0 1,064.2 1,266.7 1,313.5 1,296.4 Source : SIDO, Danareksa Estimates www.danareksa.com See important disclosure at the back of this report 14
www.danareksa.com See important disclosure at the back of this report 15