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Rabu, 05 Januari 2011

JPM Indo: the case for Indofood, CPO tax thoughts

Indofood – the case to buy after crashing from Oct-2010 high
What went wrong since ICBP IPO? A number of reasons come to mind: (1) Negative trading momentum on subsidiary ICBP, as on its IPO debut the stock was hit by the news that Taiwanese retailers had banned the sale of its instant noodle products due to health concern, (2) Margin concerns, as wheat price (along with other soft commodities) rallied after ICBP’s IPO.

What went right recently? (1) Since 6 Dec, Taiwan authorities have allowed Indomie instant noodle products to re-enter Taiwan market. (2) CPO price rallied along with the wheat price, (3) Buying interests on ICBP have started to emerge at 20% discount to IPO price, co-inciding with Indofood buying back 26.9mn shares of ICBP during week of 20 Dec 2010.

What could go right from here?
(1) Indonesia’s GDP number (and inflation) on the upside bias, with strong FDI.

(2) ICBP showing the ability to manage cost and passing through the cost increase – for every 10% increase in wheat price, ICBP only needs to hike noodle price by 3% to maintain margin. The price of rice as substitute for instant noodle has spiked by as much as 7% since Indofood last hiked instant noodle price in Oct-2010. In the whole of year 2010, ICBP hiked instant noodle price by 4.5% in total.

(3) Indofood showing EPS benefit in the environment where CPO and wheat prices are rising together. If both CPO and wheat prices are 10% higher than base assumption, FY11 EPS will move up by 2.4% assuming full cost pass-through on instant noodle. Assuming no cost pass-through, FY11 EPS impact is almost neutral if both CPO and wheat prices go up by the same magnitude.
Posted by Saham Pilihan at 09.49

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