Indofood Sukses Makmur - The bulls are back in town - Macquarie Research

Event
§ INDF has reported a FY10A adjusted NPAT of Rp3,330bn, up 60.9% YoY, and 4.0% above our forecast, mostly due to a stronger-than-expected result from Bogasari. 4Q10A adjusted NPAT of Rp848bn was up 37.2% YoY, although down 8.2% QoQ. We analyse the result, and downgrade our recommendation to Neutral on valuation grounds, with INDF having now exceeded our Rp5,300 valuation/price target (which we have not changed).

Impact
§ Bogasari’s EBIT margins beat expectations, but for how long? Bogasari delivered surprising margin resilience during 4Q10A, with margins slipping just 70bp QoQ from 13.3% to 12.6%. For the full year, margins rose sharply from 9.9% to 14.1% to 10-year highs (and significantly above the division’s 10-year average of 9.5%). While this was a positive for FY10A, we believe the primary driver has been the existence of forward wheat purchasing contracts which have shielded the business from higher spot prices, thereby allowing its margin “spread” to rise. This unusual situation represents a poor basis for extrapolation, in our view, and with competition rising and these contracts likely to roll off during FY11E, Bogasari’s margins are likely to have peaked.

§ INDF’s normalised FY10A PER of 16.9x appears full: While INDF’s headline 14.1x FY10A PER appears attractive, INDF is coming off a year of earnings growth driven almost purely by margin expansion (with sales increasing just 3.4% YoY), and with Bogasari contributing 37% of adjusted earnings. After normalising Bogasari’s “windfall” FY10A margins to 10-year averages, as well as annualising the dilutionary impact of ICBP’s recent IPO, INDF’s FY10A PER increases to a much less attractive 16.9x. These factors also account for our relatively modest FY11E EPS growth forecast of 5.5%, despite the agribusiness division being expected to enjoy a large cyclical
tailwind (with CPO prices currently more than twice their long term average).

§ Gross M2M NAV currently Rp5,800 per share (+5.5% since 15 March): INDF is currently trading at an 8% discount to its NAV, but at a 0% discount if unallocated overheads are capitalised. Our updated NAV values Bogasari at Rp10.8tr (previously 10.0tr), mostly due to higher working capital levels, representing FY10A and FY11E PERs of 7.6x and 10.5x, respectively.

Earnings and target price revision
§ FY11E EPS upgraded by 5.8%, mostly due to the incorporation of our recent 13.7% upgrade to ICBP’s FY11E earnings. No change to our price target.

Price catalyst
§ 12-month price target: Rp5,300 based on a RNAV methodology.
§ Catalyst: 1Q11E result expected in late April 2011.

Action and recommendation
§ Downgrade to Neutral (from Outperform): INDF’s share price has risen 18% since January 21, and in our opinion the stock is now once again looking relatively fully priced. In addition, with Bogasari likely to be cresting peak margins, we believe overall FY11–12E EPS growth will remain lacklustre.