Deutsche Bank Indofood : Power of integration; raising target price to Rp6,700

Indofood {Ticker: INDF.JK, Closing Price: 5,150 IDR, Target Price: 6,700 IDR, Recommendation: Buy}

An even more integrated food company

Indofood’s earnings are now even more shielded from input price volatility after the listing of subsidiary Indofood CBP. INDF is a net beneficiary of higher CPO prices and is less affected by wheat price increases than ICBP. We recommend INDF over ICBP to investors who have a bullish view on CPO. INDF is also more liquid than its listed subsidiaries. We reiterate Buy.

Integration benefits and liquidity lead to minimal holding company discount

In our view, due to its integrated nature with businesses that complement each other, any holding company discount should be minimal. INDF still owns the majority of ICBP’s brands and controls its distribution, management and strategy. Hence it is unlike other conglomerates which often hold unrelated businesses. In addition, shares of INDF (ADVT of US$12mn) are more liquid than ICBP (US$7mn) and Indofood Agri Resources (US$6mn).

Growth on the back of higher CPO prices, pricing power and deleveraging

We adjust our earnings by 19–25% on higher margins and expect profit growth of 22% in FY11F due to: higher CPO prices, ICBP’s pricing power, and a lower net interest expense on the back of deleveraging. The earnings mix is more diversified with ICBP contributing 43% (previously 60%), agribusiness 30% and the parent company businesses (Bogasari flour, distribution, and brand royalty stream) 27%.

At 45% discount to regional consumers; raising target price to Rp6,700

Using a 10% holding company discount and the target prices of ICBP and IFAR, we derive a sum-of-the-parts target price of Rp6,700, implying 17.4x FY11F PER. We move to a sum-of-the-parts valuation from a DCF methodology as two of its main businesses are now listed. INDF is trading at 12.9x FY11F PER, implying a 16% discount to its SOTP. Our target price coincides with our DCF-valuation (WACC of 12.3%) Key risks: commodity prices and exchange rate.