Nippon Indosari Tbk Fundamentally Strong - Sinarmas Sekuritas

Third quarter results are on track with our expectation
By the end of September 2010, the company has booked unaudited net profit of Rp 63.2 billion, up 63.7% YoY. Increase in net profit is supported by the growth in revenue with revenue growing 22.5% YoY to Rp 428.8 billion, and an improvement in company’s margin. Revenue and net profit has achieved 65.6% and 75% of our 2010 FY estimates. Economic condition remained strong in 4Q2010, and thus we are confident that FY2010 results will be in line with our estimate.

Penetration into untapped market
Nippon Indosari is in the process of finalizing the development of its two new factories in Semarang—expected to start operation in February 2011, and Medan. New factory in Medan will give the company access to Sumatra, which is previously untapped, as it currently only serves Java, Lampung and Bali area. In 2012, the company is looking to start the process of building a new factory in West Java. Once
these new factories start to operate, the company will be able to extend its products to a wider population.

We do not expect significant margin erosions
Main concern for the company is the rising cost of raw material as it accounted for almost 80% of the company’s cost of production. Sugar has risen 40.4%, whilst wheat—main ingredient for flour has risen 50% since January 2010. However it seems that the company has been able to pass on the rising cost by increasing the selling price of its products. It has increased its selling price by ±10% since mid 2010.
As a result, the company’s margin remain strong as of 3Q2010. Although selling price has been increased, price still remains affordable for its customers, judging by the ability of the companies to increase revenue which partly also
driven by increase in sales volume.

Maintaining BUY recommendation—TP upgrade to Rp 3,000
We have revised and upgrade our valuation of Nippon Indosari in 2011 to Rp 3,000. At current price, ROTI is trading at 21x P/E 2011 and 16x P/E 2012 based on our forecast. We see the company’s growth prospect remaining intact, especially with the opening of new factories which enables Nippon Indosari to tap new market potential, and the company’s proven ability to maintain margin in a period of rising
cost of raw materials driven by rising commodities price. The company also has robust balance sheet with no interest bearing debt to support its expansion plan. In addition, the company is currently trading at a discount, thus we recommend buy.