Malindo Feedmill (MAIN IJ; BUY; TP IDR 7,450)

1Q11 results review - 1Q11 Results in line with surprise to revenue

1Q11 results within expectations. Malindo reported its 1Q11 results today, with net profit jumping more than two-fold (but fell 55% q-o-q) to IDR30.3bn. Although this met only 14% of our full-year estimate, we still feel comfortable with our forecast as 1Q seasonally the weakest quarter of the year. Last year, 1Q10 formed only 7% of FY10 net income. 1Q11 revenue was unexpectedly up by 12% q-o-q to IDR651bn driven mainly by 39% increase in Feedmill segment revenue to IDR406bn, which we believe is resulted from higher selling price and volume (we are still waiting for the detail breakdown from the company). 1Q11 operating profit more than doubled y-o-y to IDR47bn (although down 47% q-o-q on seasonality reason). The company managed to post operating margin of 7.2% in 1Q11 versus 5.0% in 1q10 and 15.4% in 4Q10. The company’s performances are seasonally higher in 2H as Malindo enjoys higher selling prices (margins) on rising demand ahead of Lebaran and Christmas festive seasons. Last year, 69% of full-year operating profit was booked in 2H10. Given that the results were in-line with our forecast, with upside risks on the revenue, we maintain our estimates for now.

· Declare a 5-for-1 stock split and rights issue plan may continue. The company may continue its non preemptive issue plan of up to 10%, although it was dropped from the discussion in the last EGM on 28 April. However, the new details of rights issue plan have yet to available. Malindo initially plans to raise around IDR151bn to finance next year’s capex on new feed mills and farms construction and for working capital. We view the plan as positive as it will help reduce debt level and have minimum dilution effect on existing shareholders. Meanwhile, Malindo’s EGM recently approved a 5-for-1 stock split to improve its share trading liquidity. The AGM also announced an IDR185 dividend per share, IDR70 of which was paid in Dec-10, or 35% of FY10 earnings.

· Outlook remains positive. Indonesia’s population of some 240m people and the low consumption of poultry per capita of 5.0 kg in 2010 (considerably lower compared with the Philippines’ 8.1kg, or Malaysia’s 37.3kg) provides for favorable growth prospects for the industry. We believe the oligopolistic nature of the industry gives the players pricing power, especially during a material (corn and soybean meal) costs price hike, which enable these companies to pass on at least the biggest portion of cost increase to customers. Their selling prices also tend to be relatively inelastic and do not go down significantly when commodity prices decline.

· Maintain our Buy call with TP of IDR7,450. We maintain our Buy rating on Malindo with unchanged GGM-based target price of IDR7,450/share, as we continue to like its growths story and attractive valuation and dividend yield. MAIN is trading at 8.7x its 2011 earnings as compared to CPIN’s and JPFA of 16.1x and 9.1x, respectively, based on Bloomberg consensus. Moreover, we are expecting Malindo to generate a superior 54% in ROE this year.

source: OSK Nusadana Indonesia dated 10 May 2011