Unilever Indonesia (UNVR IJ, Rp14,950 HOLD) Getting tougher - Danareksa

Downgrade to HOLD, TP of Rp15,000
With P&G and L’Oreal both planning to build new factories in Indonesia, competition will remain stiff in the home and personal care (HPC) products sector. Moreover, Unilever’s shampoo product sold under the Sunsilk brand will find it difficult to regain the number one spot in the market. As for the 1Q11 results, well, they look as if they are going to be weak according to our channel check, with flat volume growth in the HPC division, albeit supported by double-digit volume growth in the F&B division and February’s 5-8% price increases (with the selling prices of Unilever’s toilet soap expected to be hiked another 5% this month). Against this backdrop, and in view of the demanding valuation of 29.6x P/E or about 2.2x PEG by using 3-year EPS FY09-12F CAGR, we opt to downgrade our recommendation to HOLD with a lower TP of Rp15,000.

Regaining market share will be tough
Unilever’s shampoo product sold under the Sunsilk brand has already lost pole position to its main rival - P&G. And going forward, it will not be easy for Unilever to regain the market share it has lost since P&G plans to open a new facility in Java. This will cost P&G about US$100mn over the next 3 years. Similarly, L’Oreal plans to spend around US$100mn to build a cosmetic factory with a production capacity of 300mn units per year. P&G has strong brands and with Gillette has around an 80% market share, while in the market for shampoo products, its Pantene brand has a 23% market share. Once construction of the factories is complete, P&G and L’Oreal will benefit from lower costs, a quicker response time, and better accessibility. The ramifications, however, are that a price war will become more likely to break out since these companies have deep pockets to maintain lower prices.

FY11-12F EPS estimates trimmed by 5.1-4.7%
We cut our FY11-12F EPS estimates by 5.1-4.7% to take into account lower sales volume for HPC products and higher packaging costs. We assume a slight 4% volume growth in HPC products, on the back of 8% selling price increase. Note that at 30% of total costs, Unilever’s packaging costs are among the highest of the companies in our consumer universe. As a consequence, crude oil price volatility remains our biggest concern (the average ytd price is about US$96/barrel, or about 20% higher than its price last year). This is not good for gross margins which we expect to decline to 50.8% in FY11F from 51.8% last year. And as advertising expenses are expected to remain high at some 14% of sales, the FY11F operating margin is forecast to slip to 22.4%. All in all, we foresee 3-year FY09-12F EPS CAGR of 13.4%, or lower than the industry average of 15-20%.

The F&B division is performing well, but with lower margins
The F&B division is Unilever’s long-term growth driver, we believe. However, it should be appreciated that this is a lower margins business than the HPC business (FY10 operating margins of 16.8% and 31.8%, respectively). This year, the F&B division is expected to continue recording double-digit volume growth – underpinned by strong sales of its successful Magnum ice cream product thanks to an effective marketing strategy and its new “Magnum Café” concept. Our channel check indicates that Magnum Café could be selling as many as 500-600 ice creams per day, or about 0.5% of total sales. This product is particularly appealing to young people drawn by Magnum’s strong brand image and innovative concept and sales may be given a further boost in FY12F as there are plans to launch new variants of this product. Thus, the contribution from the F&B division is set to increase further, with it accounting for around 26.4-27.2% of total revenues in FY11-12F, respectively.