CLSA Indo : Indofood (INDF IJ) – grainy picture – UPF maintained by Swati Chopra

Swati puts Indofood under the microscope.  INDF recently increased its noodle prices by 7% but she forecast vols to expand by only 1.5% this year.  Noodle profitability has fluctuated sharply with soft commodity prices.

Interestingly, the 30% YoY growth in Ebit last year was primarily driven by margin expansion.  The high noodle margin of 16% in 3Q10 doesn’t appear to be sustainable while the consumer branded business is significant, contributing 42% of INDF’s profits.

It is tough to pass on higher prices to INDF’s consumers as its target market is the mass segment, evident by previous inflationary cycles.  Vals have come off from its recent high (19-20x) but is still around 15x earnings with only 4.5% earnings growth this year.  Swati reiterates UPF and is the only analyst with a negative rec on the stock.

In the consumer space, we prefer Gudang Garam (GGRM) at 13x earnings with almost 20% earnings growth in 2011.

Key points:
We maintain an UPF even though we increase 2011CL earnings by 12.5% to account for lower interest expenses and higher earnings from agri business. Yet we forecast only 4.5% yoy growth this year.
There is little volume growth as rising inflationary pressures will impact purchasing power. We forecast 1.7% volume growth in noodles and 5% dairy and 2% in Bogasari.
In the past, Indofood has not been able to defend its margins during inflationary period.
Last year revenues grew by 7% yoy and margins grew from 13.5% to 16.3%.
While we believe that noodle margins will not collapse like 2007-2008, we do not expect noodle margins to sustain at 18-19% level.
We apply a P/E of 15x 2011CL earnings (1std above 3 year historic average). There is little visibility of Indofood earnings given sharp increase in wheat, milk, sugar, palm oil prices.