INDF: Sweet sugar - Mandiri

INDF released 1H11 net profit of Rp1.58tn (12.0% YoY; 14.9% qoq), which in-line with our expectation (47.6%), but slightly below consensus (47.3%). Bogasari’s margin contraction to 7.5% (vs. 1H10 15.2%) was rather seen as a return to its normal level given unusually high achievement in 10A. Overall margin should sustain in the next quarters as lower cost pressure given easing trend of wheat flour price. While sugar contribution to triple in 12F, we expect sustainable margin trend to continue given its high margin incurred (GPM 40-70%). We see sugar should become long term growth catalyst for the company given the attractive margin while the contribution is expanding. We reiterates BUY on INDF with new TP of Rp6,900/share, implying PE12F 16.7x.

1H11 net profit increased 12.0% yoy, in-line with ours. INDF posted 1H11 net profit of 1.58tn (12.0% yoy; 14.9% qoq), which in-line with ours but slightly below consensus. Overall sales grew, with notable growth seen from agribusiness and bogasari by 42.9% yoy and 18.5% yoy, respectively. Growth in agribusiness was underpinned by higher sales volume and ASP pick-up both in CPO and rubber. Meanwhile, GPM was slightly corrected to 28.9% (vs. 1H10 32.5%), mainly due to increase in raw material that slid into bottom-line of 7.2% (vs. 1H10 7.5%).

Margin should sustain, given easing wheat flour price and flat ASP. Unusually high Bogasari’s EBIT margin in 1H10 came from sizeable inventory INDF made during low price season in 09. As now margin is back to its normal level, the trend towards year end is seen sustainable looking at current easing wheat flour price trend. Volume should pick-up that will also be supported from flat ASP increase due to high competition from import, in our view.

Sugar contribution to triple in 12F and expanding. We forecast margin to continue to sustain in 12F, given contribution from sugar that we expect to triple (to 120,000 tons/year production). Recent discussion with SIMP revealed that the company aims for 500,000 tons/year production in the medium term that we think is attainable given its low net debt position (0.2x) at SIMP level as at Jun11. Sugar business should become long term growth catalyst because of (1) high 40-70% gross margin, and (2) a limited margin erosion risk due to huge domestic sugar production deficit and government regulation on sugar floor price.

Maintain BUY with TP: Rp6,900/share. We reiterates BUY on INDF with TP Rp6,900/share, implying to PE12F 16.7x and PBV12F 2.9x. Main risks: 1. Adversely wheat flour price trend; and 2. Pricey acquisition (if any).