Indofood Sukses Makmur (INDF IJ) (Outperform) - Bogasari's 4Q10A margins surprise on the upside - Macquarie Research

Event
· INDF has announced a consolidated "core" NPAT of Rp2,979bn, up 72.5% YoY. This was 4.6% above our adjusted NPAT forecast of Rp2,849bn excluding our goodwill add-back (INDF has not yet disclosed its goodwill charge, which is also not added back in its core NPAT computation). The major contributors to the above-expectation result were a robust 4Q10A result from Bogasari, and also a slightly stronger-than-expected ICBP result.
· The three major contributors to INDF's consolidated results are its wholly-owned flour-milling subsidiary Bogasari, and its listed satellites ICBP and IFAR. We have already discussed ICBP's result (also out today) separately via our ICBP flashnotes, while IFAR reported its results to the SGX several weeks ago. We therefore focus exclusively on Bogasari's result here.

Impact
· Bogasari's 4Q10A result was significantly stronger than expected at the margin level, with operating margins softening only modestly QoQ from 13.3% to 12.6%, and remaining materially above the business' 10-year average of 9.3% (by comparison, we had expected margins to soften sharply to just 7.5%). Consequently, divisional EBIT actually rose 6.5% YoY to Rp401bn (although fell 11% QoQ), and significantly exceeded our Rp266bn forecast.
· This strong margin performance is not consistent with the large increases in spot wheat prices we have seen and the relatively limited 5.1% QoQ increase in ASPs reported during the period. We believe the explanation lies in the existence of longer-dated wheat purchasing contracts that we had not previously allowed for, which continued to shield the business from higher spot wheat prices during the quarter. INDF noted at its result briefing that the business had indeed continued to enjoy the realisation of cheap feedstocks during the period, but given that Bogasari typically holds only three months' inventories, the benefit of warehoused inventories alone should have been fully realised by the end of 3Q10A. These contracts are likely to roll-off at some stage, and therefore we believe the 4Q10A result should therefore be considered to have relatively limited predictive value moving into FY11E.
· In addition, from a volume and revenue perspective, the result was less robust, with FY10A volumes increasing just 2.1% YoY, and headline sales declining 7.7% YoY on the back of lower ASPs. This rate of volume growth is likely below the overall market growth rate, implying that margins may have also been supported during the quarter/year at the expense of volumes/market share.
· Separately, INDF's parent company net interest bearing debt (excluding IFAR and ICBP) was Rp2,070bn as at YE FY10A - up from adjusted 3Q10A levels of cRp1.3tr - possibly due to higher wheat prices now flowing through into higher nominal inventory balances.

Action and recommendation
· This is a stronger than expected result from Bogasari, but one that has limited value implications in our view, and we remain comfortable with our Rp10tr divisional valuation (albeit that it represents a FY10A divisional PER of just 7.0x).
· At Rp4,900, and wit h ICBP at Rp5,000, INDF is currently trading at a c13% discount to its M2M NAV.