Mayora, downgrading earning and TP - CLSA

Mayora Indah (MYOR IJ), cookie warrior, from Jessica Irene, downgrades 2011CL by 10% and TP from Rp18,000 to Rp13,500. BUY maintained.

While larger business scale and an appreciating Rupiah will help offset cost increase, MYOR is facing cost pressures from rising commodity prices that is expected to compress margins in the near term. Hence, Jessica Irene downgrades MYOR’s 2011 earnings by 10% on compressed margin.

Extrapolating past events can be dangerous. Back in 2008-2009, consumer companies increased their prices in their effort to pass on the rising cost burden to consumers. And when commodity prices fell substantially towards the end of 2009, margins for the consumer companies nicely expanded.

Will the same cycle be repeated this time? Obviously very difficult to forecast, but if the commodity prices stay elevated we are going to see margin squeeze for consumer companies, esp. the one targeting mass market (limited purchasing power) like MYOR.

Export is growing very fast at MYOR (growing 90% CAGR for the past 5 years and already 30% of sales). This is a good achievement since they are using their own brands in the overseas market. However, in the environment of weak US$ and stronger rupiah, this will exacerbate pressures on margin.

Key points from the report:
· Trading cheaply at 9.8x 12CL PE vs. regional peers at 17.5x
· 34% Cagr profit growth over past five years; expect 30% Cagr for the next two years
· Export market grew at 90% Cagr for past five years, now accounting for 30% of total sales. Mgmt expects to grow to 40% of sales
· 25-30% expansion to capacity expected by end 2011
· 10% downgrade of 11CL earnings due to higher than expected raw material prices and advertising expenses
· Upgrading 2012’s earnings by 7% on the expectations of margin recovery when commodity prices normalize.
· Food & candies to be key growth driver as Coffee inputs sees significant price hikes
· Rapidly rising commodities prices is a risk to margins unless Mayora starts increasing prices
· Cut TP to Rp13,500, 36% upside. Based on 25% discount to 12CL regional peers P/E. Maintain BUY