Indofood Sukses Makmur - Looking past the PER - Macquarie Research

Event
§ INDF has recently announced a 2Q11A adjusted NPAT of Rp840bn, down 6.4% on the pcp despite the period benefiting from a low effective tax rate of 19.7% (2Q11A reported earnings grew 8.4% YoY only due to a cessation of goodwill amortisation). The decline was driven by a mean reversion in Bogasari’s operating margins and higher ICBP minority interests, which more than offset a higher contribution from the company’s agribusiness division.
§ We maintain our Underperform recommendation and lower our PT to Rp5,100 from Rp5,400, the former of which is in line with our Rp5,100 NAV-based valuation (which is unchanged, but with a different composition).

Impact
§ Bogasari’s margins mean-revert: INDF’s flour-milling division Bogasari reported a 55.5% YoY decline in 2Q11A earnings, as operating margins fell to 7.0% from the artificially-high 19.1% recorded in the pcp, partly due to higher input costs. Operating margins are now below the division’s 10-year average of 9.5% (FY10A margins were 14.1%). Meanwhile, volumes grew 7.4% YoY relative to a reasonably easy comp period. Our divisional Bogasari valuation utilises an 11.0x PER capitalisation multiple of margins normalised to 9.5%.
§ Marked-to-market (M2M) NAV declines from Rp5,300 to Rp5,100: The recent fall in ICBP’s share price has lowered INDF’s M2M NAV to Rp5,100 from Rp5,300 (utilising a Rp5,300 ICBP price and S$1.44 IFAR price). Our official Rp5,100 NAV valuation adjusts IFAR’s price upwards to S$1.70, in line with Macquarie analyst Conrad Werner’s valuation in his recent initiation, but this has been offset by our Rp5,000 ICBP valuation being below-market.

Earnings and target price revision
§ FY11–12E EPS upgraded by 13.1% and 15.4%, due to the inclusion of Conrad’s IFAR forecasts, which are materially above our previous estimates (and consensus); our recent 4.7% upgrade to our FY11E ICBP numbers (on higher short-term margin assumptions); and lower effective tax rates (23.5%).

Price catalyst
§ 12-month price target: Rp5,100 based on an RNAV methodology.
§ Catalyst: 3Q11E result (expected in late October).

Action and recommendation
§ Underperform maintained: INDF continues to trade at a substantial 16.7% premium to its NTA, and we therefore believe the stock remains materially overvalued. We believe investors who wish to get exposure to INDF’s underlying assets are better off investing in ICBP IJ (Rp5,300, Underperform, Rp5,000 PT) and IFAR (IFAR SP, S$1.44, Outperform, S$1.70 PT) directly.
§ While INDF’s 15.5x TTM PER and respective FY11–12E PERs of 14.8x and 14.2x may appear reasonably attractive at first glance, we note that these earnings encapsulate earnings from a mature noodle business (44%), lowvalue flour-milling earnings (21%), and CPO earnings enjoying robust commodity prices (27%). We also note that our FY11–12E EPS growth estimates of 5.9% and 4.2%, respectively, are materially below IDX averages.