Danareksa Sekuritas Unilever Indonesia (UNVR IJ Rp15,050 BUY) The storm has passed by

Upgrade to BUY, TP of Rp17,500
We raise our FY11-12E NPAT estimates by 3.4-6.6%, respectively, given Unilever’s stronger pricing power and the effectiveness of its more aggressive advertising strategy. Our confidence in the company’s prospects is supported by: 1) its plans to raise selling prices by 8-12% for home and personal care (HPC) products in February 2011, 2) its ability to seize growth opportunities in the middle market segment, supported by a mushrooming number of retailers including Indomart and Alfamart, and 3) the adoption of a more flexible advertising budget this year. Against this backdrop, we forecast much brisker sales growth of 22.9% in FY11E compared to last year’s paltry 11.0%. The price increases, we believe, could largely offset the increases in the prices of raw materials – of which around 50% are linked to the oil price. In effect, operating margins should stand relatively firm at around 22.1%, supported by the stable rupiah. Our new TP is Rp17,500, implying 32.5-26.9x P/E11-12E. Upgrade to BUY.

Capturing growth in the middle market segment
Unilever is targeting sales volume growth of over 20% in its distribution arm, reflecting its strong confidence in the purchasing power of the middle-class segment. The mushrooming number of retailers – Indomart, Alfamart, 7-Eleven etc – should also help. This year alone, Indomart, Alfamart, and 7-Eleven aim to open 800, 800, and 36 new stores respectively. For Indomart and Alfamart this translates into new additions of 15-16% while for 7-Eleven the figure is 171% of its currently opened stores – aggressive, yet achievable, we believe. This is aside - it should be noted - from the new mini markets coming to Indonesia. Same-store-sales growth, therefore, is expected at around 5-7%, underpinned by aggressive new product launches and an effective marketing strategy.

Raising prices by 8-12% for the HPC segment
Better pricing power is reflected in Unilever’s plans to raise its HPC selling prices by 8-12% in February 2011. Note that in the past Unilever has been reluctant to hike selling prices above the inflation rate and that the planned hikes in February 2011 are well above the forecast inflation for FY11E of 6.2%. For food products, we believe price increases may take place in 2Q11. Rising crude oil prices present a challenge since around 50% of the company’s raw materials, chemicals and packaging are closely linked to the crude oil price (with 70% US-dollar related), but we think the impact can be largely offset by higher selling prices assuming a 13% increase in the price of crude oil this year. In effect, the gross and operating margins should be maintained at a healthy level, we believe.

Excellent margins maintained
We now estimate the operating margin to reach 22.1%, helped by a stable exchange rate in addition to the relatively large price increases in the HPC segment. More aggressive advertising shall also help this year, albeit at the cost of high promotional expenses – around 14% of sales, according to our estimates. Our sensitivity analysis suggests that for every 100 rupiah appreciation, the company’s gross margin would increase by 30bps.  In view of Unilever’s rosier prospects, we raise our TP to Rp17,500, implying 32.5x P/E11E. This is justified, we believe, by the company’s savvy management, robust EPS growth of 18% 3-year CAGR, stable margins, and tremendous ROE. Yes, the company is now trading at a 35% premium to its average 5-year P/E, but it is still lower than the consumer sector’s average premium of 45%.