BNP Paribas Indofood Value for money

ƒConsensus too bearish; our 2011E EPS still 15% above market
ƒRising CPO is positive for the bottom line
ƒPricing power intact; margin compression risk looks overdone
ƒAt 12x 2011E P/E, Indofood offers cheaper exposure than ICBP


Consensus is too bearish
The consensus earnings forecasts for Indofood have increased 2% for 2010 and 4.5% for 2011 since late last year, but we believe the numbers still are very conservative. While we acknowledge concerns about the rapid increase in raw material prices, it is unlikely to result in a 40-50% drop in 4Q10 earnings from the previous three quarters. Put differently, consensus assumes that 4Q10 will contribute only 17% to 2010 earnings
(Exhibit 1). To reflect the rising raw material costs, we assume margins will contract 3.2% for instant noodles, 4.8% for flour and 1.1% for cooking oil, which we believe are reasonable assumptions.

Rising CPO price is positive for the bottom line
We highlight that CPO prices have increased 24% q-q in 4Q10, which was higher than the price increases in other raw materials such as wheat, sugar and milk powder (Exhibit 2). This should provide further support to
Indofood’s earnings. Our sensitivity analysis indicates that every 10% increase in prices of CPO, wheat, sugar and milk powder would increase the company’s earnings by 3.9%


Instant noodles price raised 7-10%
A recent price increase of 7-10% (or IDR100/pack) by ICBP (ICBP IJ, BUY, TP: IDR6,600, CP: IDR4,725) earlier this month, following the last hike in August 2010 of IDR50/pack on its instant noodle, reflects its strong pricing power, in our view. This should bode well for instant-noodle margins in 1Q11, as prices of flour and cooking oil have yet to be raised after the last 5% price hike in September 2010. Overall, we believe Indofood has raised selling prices more than the increase in input costs to date. From a sensitivity perspective: For every 10% increase in flour and cooking oil prices, the selling price would need to be raised by 5.5%.

Valuation looks attractive: BUY
Indofood is trading on a 2011E P/E of 11.9x, which is at the low end of its historical trading range, while we expect strong earnings growth of 24% in 2011. Our SoTP-based TP of IDR6,350 implies 32.3% upside potential, and assumes a fair value of IDR6600 for ICBP, based on a 2011E P/E of 22x, in line with its regional peers we cover. For investors keen for exposure to ICBP, we believe Indofood also provides a cheaper entry point as the market seems to be valuing Indofood’s stake in ICBP on a 2011E P/E of 12.6x (see Exhibit 10) despite the fact that Indofood still holds the brands and distribution. Downside risks: weaker IDR, higher raw material prices and new entrants in consumer-branded products.