UBS INDO: Nippon Indosari Corpindo (ROTI Buy PT 2,800): Entering expansion mode

Analyst Ronald Liem initiates coverage on ROTI – Indonesia’s largest mass-market bread producer that commands 90% market share. 

Ronald likes ROTI on the back of its:

1) Strong shareholder support – Salim Group, Jap Family (Founders of Bogasari Flour Mill), Sojitz and Shikishima Baking Co. Ltd. (Japan’s 2^nd largest bread producer);

2) Geographical and market share expansion – new factories in Medan and Makassar will commence production in April 2011 and end-2011 respectively (which should partially help earnings to grow at 30% CAGR in 2010-12); and

3) Ability to piggyback on mini-markets’ aggressive expansion trend – Major mini-market operators are targeting to add 800-1.000 new stores per year throughout Indonesia.

Though input cost inflation is a concern, Ronald believes that ROTI has the pricing power to pass on some of the cost increases. A case in point: ROTI raised its product prices by 28% in 2008, on the back of some 40% increase in wheat price, only to experience 20% sales volume increase and stable gross margin at 42%.

ROTI is an interesting small (US$230 mn) cap idea, in our view. The stock price has corrected since the beginning of the year due to broad market weakness, which presents attractive buying opportunities. Please let us know if you’d like a copy of the report.