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Minggu, 19 Juni 2011

Nippon Indosari Corpindo: Buy – Initiating Coverage; Rp2,725; TP Rp3,200; ROTI IJ Strong organic growth - DBS

• Beneficiary of Indonesia ’s growing urban population
• Rapidly expanding capacity to meet demand
• No debt, strong operating cash flow
• Initiate coverage with Buy call and Rp3,200 TP, offering 17% upside potential

Beneficiary of a growing urban population. We expect demand for prepared F&B products to grow along with Indonesia ’s large, young working-age population. Demand will also be supported by rising disposable income, which is normally higher in urban areas. As an established bread producer with a deep urban presence, Nippon Indosari (ROTI) is a natural beneficiary. Between 2005 and 2010, ROTI’s top-line registered solid 34% CAGR.

Expanding rapidly. ROTI’s sales are expected to register 22% CAGR over the next four years. Its strong organic growth would be underpinned by both larger geographical presence and capacity expansion. To date, ROTI has completed the construction of two factories and is planning to add another three by 2013.

Expanding with mini-markets. More than half of ROTI’s FY10 revenues are coming from sales to convenient stores (or mini-markets), which are themselves expanding rapidly within Indonesia ’s urban centres. This relationship should continue to deepen ROTI’s urban penetration, in our view.

Strong balance sheet to support rapid expansion. ROTI has no debt, and is generating strong operating cash flow despite rising raw material costs. This is due relatively large margin cushion, a no-return policy, and short receivables.

Initiating with a BUY. We value ROTI at Rp3,200/share based on DCF (WACC 14.0%, Rf 8.5%, Rm 13.5%, B 1.1, TG 3.0%), implying 17% upside from current levels. We believe stronger sales following its recently completed capacity expansions should raise confidence in management’s ability to execute its growth strategy, and would be a share price catalyst.

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