Unilever Indonesia When to avoid buying the dips… - Macquarie Research

Event
§ UNVR has reported a 4Q10A adjusted NPAT of Rp842bn, up 9.7% YoY, and 1.6% above our forecast, but 4.9% below consensus. The result benefited from a reduction in Indonesia’s corporate tax rate, with operating EBIT rising a lesser 7.2% YoY, with revenues up just 5.7% YoY – a very weak result in our view. We reiterate our Marquee Underperform call and Rp13,000 price target.

Impact
§ Deceleration in sales growth continues: 4Q10A revenues grew at a very modest rate of just 5.7% YoY – only marginally better than the 4.5% delivered in 3Q10A. This data-point is significant in confirming that the slowdown evident in UNVR’s 3Q10A result was not merely due to an aberration in retailer reordering patterns, but rather reflected a genuine slowdown in underlying sales momentum. Notable is that FY10A sales growth of 7.9% was only marginally ahead of Indonesia’s 2010 CPI inflation rate of 7.0%.

§ UNVR believes that this slowdown primarily reflects the cyclical impact of rising food and fuel prices monopolising consumers’ “wallet share”. However, we remain sceptical that this was the major driver, given the strong results delivered by other Indonesian consumer companies during 2H10A, and we believe the most likely cause to be competitive pressures on market share. It is also possible that the slowdown reflects growing maturity in certain core categories. Both of these factors are only likely to intensify moving forward.

§ Operating margins nevertheless remain robust: 4Q10A margins were nevertheless stronger than expected, with EBIT margins increasing to 22.7% from 22.4% in the pcp and 22.0% in 3Q10A, and were above our 21.6% forecast. Given the likely lift in input costs during the period, we believe this robust margin outcome was possibly a function of an improved product mix. Also contributing was a sharp QoQ reduction in unallocated overheads from Rp297bn to Rp209bn. FY10A EBIT margins at 23.1% were flat YoY.

Earnings and target price revision
§ We have actually upgraded our FY11E EPS slightly by 2.1%, by raising our FY11E EBIT margins forecast to 22.5% (from 22.0%), offset by a 1.3% trim in our revenue forecast. We note that we were previously already 11% below consensus, and we consider UNVR’s earnings risk to be on the downside.

Price catalyst
§ 12-month price target: Rp13,000 based on a DDM methodology.
§ Catalyst: 1Q11E result (expected in late April 2011).

Action and recommendation
§ Marquee Underperform call maintained: We believe UNVR's premium valuation metrics (5.9x FY10A P/sales, 34.3x FY10A PER) are becoming increasingly untenable in light of the sharp slowdown in UNVR’s growth rate, and the associated competitive risks that are now becoming evident in its results. We therefore see growing risks of a material de-rating, whereas we believe the scope for any major upside surprises/catalysts to be largely absent at this point. Accordingly, we reiterate our Marquee Underperform call.