UNVR (TP Rp13,000) : Where for art thou upside? - Macquarie

Event
§ We reiterate our Macquee Underperform call on UNVR ahead of the company's 4Q10E result (expected mid next week), where we see tangible risks of another earnings disappointment (our forecasts are shown overleaf).

Impact
§ Weak earnings momentum and a rich multiple: UNVR enters its 4Q10E result announcement with a combination of weak YTD earnings momentum and rising cost pressures, and a share price that has also staged a significant recovery off its lows (from Rp13,800) in recent times. We therefore believe the risks of another earnings disappointment to be relatively high (and at the very least, that UNVR's risk/return profile is skewed to the downside).
§ We would remind investors that 3Q10A revenues grew just 4.5% YoY and triggered a sharp sell-off. Barring an aberration in retailer reordering patterns being the cause, we believe the explanation must lie in either the impact of rising food and fuel costs on HPC spending (UNVR's belief), growing market maturity, or market share pressures (our belief). None of these factors are likely to have abated QoQ, in our view. Also, rising raw material prices during 2H10A also hints at scope for emergent margin pressure during the quarter.
§ FY11E price increases to be of little avail: In February, UNVR instituted price increases of 5–10% pa across many HPC categories, which has also been received positively by the market. However, we believe these price increases came only reluctantly in response to rising cost pressures (and too late to aid 4Q10A), and importantly, we understand that P&G has not followed suit in several key categories (such as hair care and laundry detergent). This hints at growing industry competitive intensity, and we expect rising A&P spend to offset any residual benefits from these price hikes. All told, we believe FY11E is shaping up to be a relatively challenging year for margins.

Earnings and target price revision
§ No change – we are already 6.0% and 10.9% below 4Q10E and FY11E consensus expectations, respectively.

Price catalyst
§ 12-month price target: Rp 13,000 based on a DDM methodology.
§ Catalyst: 4Q10E result expected next week. In our view, a continuation of the weak earnings momentum evident in 3Q10A could result in UNVR relinquishing a material proportion of its recent share price recovery.

Action and recommendation
§ Underperform maintained: UNVR is currently trading on a FY10E PER of 36.7x and FY10E P/sales of 6.3x, despite FY10E revenue growth being just 8.2% YoY. Bearing in mind that it is primarily changes in opinion that drive stock prices (in our view), and UNVR's premium pricing, we believe growing competitive risks and decelerating revenue growth pose much greater scope for investors' appraisal of UNVR to become materially more bearish than more bullish from current levels. We therefore expect UNVR to Underperform.