Indofood CBP (ICBP.IJ) Target price Rp6,850

Indofood CBP
Bright Future with Strong Cash Position
Revenues grew 6 percent y-o-y to Rp9.4bn in 1H11, broadly in line with our estimate and the consensus. Strong growth was seen in the company’s three small units - Food Seasonings, Snack Foods and Nutrition & Special Foods (NSF) - although the two main contributors, Instant Noodles and Dairy, recorded only single-digit growth due to capacity constraints. To address the capacity constraints problem, expansion plans are being prepared. Balance sheet wise, ICBP is very strong and the company enjoys a huge net cash position of nearly Rp4tr with no major debts outstanding.
Given the company’s bright prospects amidst firm economic growth and improving consumer purchasing power, we raise our TP to Rp6,850, offering more than 29.2% upside potential. Mantain BUY.

Higher revenues from all divisions
Total revenues rose 6 percent y-o-y to Rp9.4tr in 1H11, or about 47 percent of our full year target of over Rp20tr, i.e. in line with our estimate. Among the individual divisions, Food Seasonings recorded outstanding revenues growth of 49% whilst Snack Foods revenues rose 16.1%. Sales of instant noodles and NSF, as well as of the dairy division were inline with our estimates, whilst snack foods and food seasonings exceeded expectation at 51% and 59% of the respective full year sales
targets.

Lower contribution from Noodles
The company’s decision to hike noodle prices by Rp100 per pack in January has seemingly had some negative impact on sales. In 1H11, revenues from noodles grew by only 4.2% YoY, with the division’s contribution declining to 68% in 1H11 from 69.3% in the same period last year. This reflects a 7% drop in sales volume to 5.4bn packs from 5.8bn packs last year. Allaying concerns over the lower noodle sales, the management explained that the lower sales could be expected since, in the noodles sales cycle, sales typically fall in the second quarter before they rebound in the
following quarter. Nonetheless, the sharp decline in noodles sales volume in 2Q11 at 13% q-oq was the sharpest quarterly decline since 2008 when sales dropped nearly 10%.

Strong Dairy demand Dairy
revenues reached Rp1.8tr in 1H11, or 46.5% of our full year target of Rp3.9tr. Demand for the company’s dairy products is strong, but the company reported only 2.5%volume growth to 139,000 tons. This is due to capacity constraints which restricts sales.

Brighter outlook in the smaller divisions
The three smaller divisions - Food Seasonings, Snack Foods, and NSF – performed very well. Volume growth in these three units reached 15.2%, 17.1%, and 7.2%, respectively, in the current period exceeded our target in this year. Nonetheless, the strong growth in these three divisions does not have a large impact on the company overall since their combined revenues in the current period was less than 13%of the company’s total revenues. For snack foods, the company’s management explained that sales were being supported by the newly-introduced soybean snack and biscuit products, whilst, for Food Seasonings, strong sales have been recorded during the fasting month of Ramadhan thanks to higher sales of syrups and instant seasonings.

Margins to improve on easing commodity prices
Rising raw material costs have hit ICBP’s EBIT margin – although not significantly. It fell to 14% in 1H11 from 14.4% in 1H10. While Dairy and Snack Foods experienced lower EBIT margins, the EBIT margin for Instant Noodles, Food Seasonings, and NSF actually managed to improve. According to the management, the margins pressure came from a higher sugar price, rising packaging costs and higher cooking oil prices. Next year, however, we believe that commodity prices shall see some downward pressures. This should translate into a better EBIT margin for ICBP next year with lower raw material costs.

Valuation rolled over: maintain BUY
We like the company for its strong cash position and growth potential following the
capacity expansion at its two main units - Instant Noodles and Dairy. Another positive would be the lower expected commodity prices next year, boosting margins. Performance in the two main units was admittedly nothing special in 1H11, but we are still encouraged since our sales targets across the divisions have been reached. Our valuation is rolled over to 2012 and our TP raised to Rp6,850, offering more than 29.2% upside potential. Maintain BUY

source: Danareksa dated 26 August 2011