Unilever Indonesia (Underperform) - Still too expensive - MACQUARIE

Event
§ We update our investment thesis in light of UNVR's recent share price weakness (down 17% from Rp17,450 in late October). We maintain our view that UNVR is too expensive, notwithstanding its recent pullback, and we reiterate our Underperform rating and keep it on the MarQuee Sell list.
Impact
§ Multiple and margins have now topped out: It is a truism that only three things can drive a stock higher – sales growth, margin expansion and multiple expansion – and for UNVR, we believe the latter two factors have now peaked. More specifically, UNVR continues to trade at a FY10E EV/sales multiple of 5.5x (on its US$2.2bn sales base) and a FY10E PER of 32.7x, which we believe to be very full relative to UNVR's likely sales growth rate.
§ In addition, with UNVR now confronting an intensifying competitive landscape, we believe it is likely to face growing challenges to preserving its world class profitability (currently 17% NPAT margins and an 88% ROE), as it is forced to raise A&P spending and keep pricing tight to maintain market share against increasingly aggressive rivals (such as P&G). We therefore consider both UNVR's margin and multiple risks to be skewed towards the downside.
§ Sales growth likely to average only 10–13% pa: With respect to sales growth, we believe UNVR will continue to grow, but at an insufficient rate relative to its now-substantial ‘multiple overhead'. Specifically, we believe UNVR's sales growth is likely to average only 10–13% pa from here (modestly below its 13.5% CAGR since FY03), as it is forced to adopt sub-CPI pricing strategies and rely primarily on volumes for ongoing sales growth. In addition, UNVR's ‘excess growth' window remains a finite one, and we expect some categories to experience growing maturity as the decade progresses.

Earnings and target price revision
§ FY10 EPS -3.7%, FY11 EPS -8.2%, FY12 EPS -7.3%: Downgrades reflect a weaker short-term EBIT margin outlook due to rising A&P spending, and in FY11E, some impact from rising input costs (which are linked to oil prices).
§ Price target lowered from Rp14,000 to Rp13,000, due to relatively minor refinements in our core margin and revenue growth rate assumptions. We continue to view our valuation as a bull case, which utilises full assumptions.
Price catalyst
§ 12-month price target: Rp13,000 based on a DDM methodology.
§ Catalyst: 4Q10E results (expected in mid-to-late March).

Action and recommendation
§ Macquarie MarQuee Underperform maintained: We still cannot justify UNVR's current price on maturity issues alone (ie, assuming Indonesia grows to developed-world levels of HPC spending by FY30, and assuming UNVR suffers no adverse market share or margin impacts from rising competition). In our view, therefore, UNVR remains too expensive and an unattractive risk/reward proposition for investors at current levels.