Indonesia Company Guide Version 4 Bloomberg: UNVR IJ Reuters: UNVR.JK Refer to important disclosures at the end of this report DBS Group Research. Equity 9 Feb 2017 FULLY VALUED Last Traded Price ( 8 Feb 2017): Rp41,725 (JCI : 5,361.10) Price Target 12-mth: Rp36,200 (-13% downside) (Prev Rp30,700) Potential Catalyst: Stronger rupiah and lower raw material prices Where we differ: One of the lowest earnings forecasts on the street Analyst Tiesha PUTRI +6221 30034931 tiesha.narandha@id.dbsvickers.com Andy SIM CFA +65 6682 3718 andysim@dbs.com What s New Revise up net profit forecasts by 7-9% for better operating efficiency Facing higher cost inflation in 2017 Welcoming Wings Group as a new competitor in ice cream market Price Relative Forecasts and Valuation FY Dec (Rp m) 2015A 2016F 2017F 2018F Revenue 36,484 39,845 44,051 48,722 EBITDA 8,444 9,034 9,587 10,538 Pre-tax Profit 7,830 8,359 8,783 9,622 Net Profit 5,852 6,247 6,565 7,192 Net Pft (Pre Ex.) 5,852 6,247 6,565 7,192 Net Pft Gth (Pre-ex) (%) (1.3) 6.8 5.1 9.6 EPS (Rp) 767 819 860 943 EPS Pre Ex. (Rp) 767 819 860 943 EPS Gth Pre Ex (%) (1) 7 5 10 Diluted EPS (Rp) 767 819 860 943 Net DPS (Rp) 765 817 859 941 BV Per Share (Rp) 633 634 636 638 PE (X) 54.4 51.0 48.5 44.3 PE Pre Ex. (X) 54.4 51.0 48.5 44.3 P/Cash Flow (X) 50.5 46.1 44.5 40.8 EV/EBITDA (X) 37.8 35.4 33.5 30.5 Net Div Yield (%) 1.8 2.0 2.1 2.3 P/Book Value (X) 65.9 65.8 65.6 65.4 Net Debt/Equity (X) 0.2 0.4 0.5 0.7 ROAE (%) 121.2 129.1 135.3 147.7 Earnings Rev (%): 7 7 9 Consensus EPS (Rp): 847 942 1,066 Other Broker Recs: B: 8 S: 6 H: 15 Source of all data on this page: Company, DBS Vickers, Bloomberg Finance L.P No bang for your buck Maintain FULLY VALUED. We raise our FY16-FY18 net profit forecasts by 7-9% to account for better operational efficiency. UNVR currently trades at a lofty valuation of 48x PE 17F. The company is facing higher cost inflation in 2017 on the back of rising commodity prices, particularly palm oil. Demand recovery has remained nascent and with tightening competition in selected segments, we only forecast 5% earnings growth for FY17. This pace of earnings growth does not justify UNVR s lofty valuation, in our view. Our TP rises to Rp36,200, as we bump up our earnings forecast and roll over valuation base to 2017, though we maintain our FULLY VALUED call on the stock. Higher cost inflation is key challenge in 2017. Palm oil and its derivatives are UNVR s key raw materials. It is also worth noting that over half of UNVR s raw material costs are linked to USD. The recent rally in commodity prices, along with potential pressure on the rupiah, may crimp UNVR s margins going forward. We assume gross and EBIT margin contraction of 96bps in our FY17 model. Welcoming new competitor in ice cream market. The recent entry of Japanese consumer goods company Glico into the Indonesian ice cream market is something to keep an eye on, as it could affect UNVR s pricing power in the ice cream segment. Glico, which has teamed up with Wings Group, launched 16 variances of ice cream in November 2016 via Alfamart and Familymart, and will gradually expand its distribution channel to both modern and general trade across Indonesia. We also note that Indofood group (through ICBP) also plans to expand its ice cream business this year. Currently, UNVR dominates the Indonesian ice cream market with a market share of c.67%. We estimate the ice cream business to contribute c.16% of UNVR s consolidated revenue. Valuation: We value UNVR at Rp36,200 per share, based on 42x PE FY17F (five-year average PE multiple). Key Risks to Our View: Recovery in domestic economy. A faster-than-expected pick-up in Indonesia s economy would likely translate to higher revenue growth for UNVR. A stronger demand environment would allow UNVR to pass through higher raw material costs without damaging sales volume. At A Glance Issued Capital (m shrs) 7,630 Mkt. Cap (Rpbn/US$m) 318,362 / 23,874 Major Shareholders (%) Holding BV 85.0 Free Float (%) 15.0 3m Avg. Daily Val (US$m) 6.4 ICB Industry : Consumer Goods / Personal Goods ed: CK / sa:ma, PY
60,000 Revenue trend and forecasts 25 CRITICAL DATA POINTS TO WATCH 50,000 20 Earnings Drivers: Domestic GDP growth. The health of the domestic economy is generally reflected in the consumption of basic necessities as well as Fast Moving Consumer Goods (FMCG). Our economist projects the economy to grow by 5.3% in 2017, accelerating from 5.0% in 2016. A recovery in manufacturing and commodity sectors, two sectors which had been sluggish in the past few years, would be positive for FMCG companies like Unilever. 40,000 30,000 20,000 10,000 0 2011A 2012A 2013A 2014A 2015 2016F 2017F 2018F Revenue, Rp bn (LHS) Growth y-o-y, % (RHS) 15 10 5 0 Strength of the rupiah against US dollar. 55% of Unilever s input costs are denominated in foreign currencies, which means a weaker rupiah will hurt its margins. Currently, the rupiah is trading at Rp13,300 to USD. Our in-house assumption for the rupiah is Rp13,876 to the dollar by end of 2016, suggesting some downside to earnings. CPO price. About 80% of Unilever s COGS are spent on raw materials, which mostly uses palm oil and its derivatives as ingredients. The quarterly average price of crude palm oil (CPO) rallied by 26% and 32% y-o-y in 3Q16 and 4Q16 respectively. This could put upward pressure on costs, and if the rupiah weakens simultaneously, margins could contract further. Earnings to grow by 7%/5% in FY16F/17F. We only project single-digit earnings growth of 7% in FY16F and 5% in FY17F. We expect the uptick in revenue growth in FY17F (from 9% in FY16F to 11% in FY17F) to be partially offset by margin contraction as key input cost rises. We do not expect UNVR to aggressively raise selling prices to pass through the increasing costs given the still nascent demand recovery. We assume 96bps contraction in UNVR s EBIT margin in FY17F. 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 7.0 6.5 6.0 5.5 5.0 4.5 2011 2012 2013 2014 2015 2016F 2017F 2018F Net profit, Rp bn (LHS) Growth y-o-y, % (RHS) Revenue and GDP growth trend 25.0 20.0 15.0 10.0 5.0 0.0 (5.0) 25 20 15 10 5 4.0 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 GDP growth y-o-y, % (LHS) UNVR revenue growth y-o-y, % (RHS) 0 CPO price 3,500 3,300 3,100 2,900 2,700 2,500 2,300 2,100 1,900 1,700 1,500 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 CPO price (MYR/MT) Quarterly avg. price Page 2
Balance Sheet: Low leveraged company. Unilever has strong operating cash flow as well as free cash flow, and has consistently pared down bank loans at the end of its fiscal year. The loans are mainly used to fund working capital and largely denominated in rupiah. This eliminates foreign exchange risks associated with its debt. And, the company s size and healthy balance sheet have allowed it to secure favourable lending rates. As at end of Sep 2016, its net gearing ratio stood at 0.12x and average loan interest rate was only 6.7%. Share Price Drivers: Recovery in economic growth. Recent macro datapoints indicate that consumer demand remains soft. A substantial pick-up in consumer confidence and GDP growth, which points to a firmer demand recovery, would be positive for UNVR as a proxy for Indonesia s consumer sector. Key Risks: Slower-than-expected economic growth A slower-than-expected economic recovery would slow consumption further and hurt the company s top-line and bottom-line. Leverage & Asset Turnover (x) Capital Expenditure ROE (%) Weaker rupiah, higher raw material prices These would pressure the company s margins, and in turn, our earnings estimates. Difficulty in passing on cost increases to consumers Slowing consumption and weak consumer sentiment are causing consumers to be more selective. This would limit the company's ability to pass on cost increases to consumers, which means margins would be eroded eventually. Forward PE Band (x) Company Background PT Tbk manufactures soaps, detergents, margarine, oil, and dairy-based foods, tea-based beverages, ice cream, and cosmetics. PB Band (x) Page 3
Segmental Breakdown FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (Rpbn) Home and Personal Care 24,634 25,419 27,452 29,923 32,616 Foods and Refreshment 9,878 11,066 12,393 14,128 16,106 Total 34,512 36,484 39,845 44,051 48,722 Gross Profit (Rpbn) Home and Personal Care 12,943 13,874 15,236 16,368 17,841 Foods and Refreshment 4,156 4,775 4,895 5,468 6,233 Total 17,099 18,649 20,131 21,835 24,074 Gross Profit Margins (%) Home and Personal Care 52.5 54.6 55.5 54.7 54.7 Foods and Refreshment 42.1 43.1 39.5 38.7 38.7 Total 49.5 51.1 50.5 49.6 49.4 Income Statement (Rpbn) FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 34,512 36,484 39,845 44,051 48,722 Cost of Goods Sold (17,305) (17,835) (19,714) (22,216) (24,648) Gross Profit 17,207 18,649 20,131 21,835 24,074 Other Opng (Exp)/Inc (9,194) (10,710) (11,645) (12,875) (14,240) Operating Profit 8,013 7,939 8,486 8,961 9,834 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (85.6) (110) (127) (178) (212) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 7,928 7,830 8,359 8,783 9,622 Tax (2,001) (1,978) (2,111) (2,219) (2,431) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 5,927 5,852 6,247 6,565 7,192 Net Profit before Except. 5,927 5,852 6,247 6,565 7,192 EBITDA 8,388 8,444 9,034 9,587 10,538 Growth Revenue Gth (%) 12.2 5.7 9.2 10.6 10.6 EBITDA Gth (%) 9.2 0.7 7.0 6.1 9.9 Opg Profit Gth (%) 11.8 (0.9) 6.9 5.6 9.7 Net Profit Gth (Pre-ex) (%) 10.7 (1.3) 6.8 5.1 9.6 Margins & Ratio Gross Margins (%) 49.9 51.1 50.5 49.6 49.4 Opg Profit Margin (%) 23.2 21.8 21.3 20.3 20.2 Net Profit Margin (%) 17.2 16.0 15.7 14.9 14.8 ROAE (%) 128.9 121.2 129.1 135.3 147.7 ROA (%) 41.5 37.2 37.8 36.6 37.7 ROCE (%) 89.9 81.3 82.2 79.5 82.2 Div Payout Ratio (%) 94.4 99.8 99.8 99.8 99.8 Net Interest Cover (x) 93.6 72.2 66.8 50.5 46.5 Page 4
Quarterly / Interim Income Statement (Rpbn) FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 8,745 8,937 9,988 10,757 9,356 Cost of Goods Sold (4,311) (4,252) (4,968) (5,287) (4,544) Gross Profit 4,435 4,685 5,021 5,470 4,812 Other Oper. (Exp)/Inc (2,732) (2,397) (2,874) (3,139) (2,814) Operating Profit 1,703 2,288 2,147 2,331 1,998 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (25.2) (56.7) (40.7) (22.1) (48.9) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 1,678 2,231 2,106 2,309 1,949 Tax (425) (562) (536) (581) (497) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Profit 1,253 1,669 1,570 1,728 1,452 Net profit bef Except. 1,253 1,669 1,570 1,728 1,452 EBITDA 1,859 2,424 2,274 2,598 2,404 Growth Revenue Gth (%) (6.8) 2.2 11.8 7.7 (13.0) EBITDA Gth (%) (4.3) 30.4 (6.2) 14.2 (7.4) Opg Profit Gth (%) (8.2) 34.3 (6.2) 8.6 (14.3) Net Profit Gth (Pre-ex) (%) (6.5) 33.2 (5.9) 10.1 (16.0) Margins Gross Margins (%) 50.7 52.4 50.3 50.9 51.4 Opg Profit Margins (%) 19.5 25.6 21.5 21.7 21.4 Net Profit Margins (%) 14.3 18.7 15.7 16.1 15.5 Balance Sheet (Rpbn) FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 7,348 8,321 9,173 9,946 10,443 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 596 786 786 786 786 Cash & ST Invts 859 628 293 190 112 Inventory 2,326 2,298 2,555 2,880 3,195 Debtors 3,052 3,602 3,634 4,017 4,443 Other Current Assets 99.8 95.2 95.2 95.2 95.2 Total Assets 14,281 15,730 16,536 17,914 19,075 ST Debt 1,250 1,700 2,100 2,800 3,300 Creditor 4,632 4,842 5,236 5,900 6,546 Other Current Liab 2,983 3,585 3,585 3,585 3,585 LT Debt 0.0 0.0 0.0 0.0 0.0 Other LT Liabilities 817 775 775 775 775 Shareholder s Equity 4,599 4,827 4,840 4,853 4,868 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 14,281 15,730 16,536 17,914 19,075 Non-Cash Wkg. Capital (2,137) (2,433) (2,537) (2,494) (2,398) Net Cash/(Debt) (391) (1,072) (1,807) (2,610) (3,188) Debtors Turn (avg days) 32.3 36.0 33.3 33.3 33.3 Creditors Turn (avg days) 99.9 102.0 99.7 99.8 99.8 Inventory Turn (avg days) 50.1 48.4 48.7 48.7 48.7 Asset Turnover (x) 2.4 2.3 2.4 2.5 2.6 Current Ratio (x) 0.7 0.7 0.6 0.6 0.6 Quick Ratio (x) 0.4 0.4 0.4 0.3 0.3 Net Debt/Equity (X) 0.1 0.2 0.4 0.5 0.7 Net Debt/Equity ex MI (X) 0.1 0.2 0.4 0.5 0.7 Capex to Debt (%) 80.6 84.1 66.7 50.0 36.4 Z-Score (X) 23.5 21.0 19.8 18.7 17.6 Page 5
Cash Flow Statement (Rpbn) FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 7,928 7,830 8,359 8,783 9,622 Dep. & Amort. 375 505 548 627 704 Tax Paid (2,001) (1,978) (2,111) (2,219) (2,431) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 277 123 104 (43.4) (95.2) Other Operating CF (116) (181) 0.0 0.0 0.0 Net Operating CF 6,463 6,299 6,900 7,148 7,800 Capital Exp.(net) (1,007) (1,429) (1,400) (1,400) (1,200) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.0 0.0 0.0 0.0 0.0 Net Investing CF (1,007) (1,429) (1,400) (1,400) (1,200) Div Paid (5,127) (5,592) (6,235) (6,551) (7,177) Chg in Gross Debt 273 450 400 700 500 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 0.0 0.0 0.0 0.0 0.0 Net Financing CF (4,854) (5,142) (5,835) (5,851) (6,677) Currency Adjustments (4.3) 41.6 0.0 0.0 0.0 Chg in Cash 598 (231) (335) (103) (77.1) Opg CFPS (Rp) 811 809 891 942 1,035 Free CFPS (Rp) 715 638 721 753 865 Target Price & Ratings History Source: DBS Vickers Analyst: Tiesha PUTRI Andy SIM CFA Page 6
DBS Vickers recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 9 Feb 2017 08:07:18 (WIB) Dissemination Date: 9 Feb 2017 14:44:20 (WIB) GENERAL DISCLOSURE/DISCLAIMER This report is prepared by PT DBS Vickers Sekuritas Indonesia. 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