Indofood CBP (ICBP IJ) upgrade by Merlissa Trisno - CLSA

ICBP is arguably this is the most pure domestic consumption play for the group. Stock has not done well since its listing last Oct at times when their key raw material input were spiking. However our newly on board consumer analyst Merlissa thinks the worst is behind us. Softening commodity prices, coupled with strengthening of currency should bode well for its strong margin. WE expect 1) ICBP’s near term potential price increase, 2) better-than-expected noodle margin and 3) potential margin expansion on its dairy products. At 14x 12CL and Rp3.4trn of net cash, risk reward its looking good.

Few key points:

· Potential noodle price increase in 3Q by around 3-4%. This should bode well for noodle’s operating margin which we foresee about 15.6% this year (from 1Q11’s of 14.5%). They will likely taking the momentum of Lebaran to raise noodle selling price, aside from the fact that volume remains resilient despite a strong 7-9% increase in ASP in 1Q11.

· Margin expansion on dairy business, helped by greater economies of scale post 40-50% capacity expansion in 2012 and better pricing scheme from SIMP’s sugar business.

· Acquisition to drive growth. Its net cash position of Rp3.4tn in 1Q11, coupled with its slow capex realization and stable payout ratio suggested that potential acquisition is likely. Any acquisition will complement its existing consumer products, whose raw materials could be secured from its parent company

· We upgrade our recommendation to a O-PF. TP6,000