Indofood Sukses Makmur - An opportunity to lighten - Macquarie

Event
􀂃 Over the past few weeks, INDF’s share price has remained firm, in spite of a soft 1Q11A result (9.5% below our quarterly forecast), and the share prices of its two key investments ICBP (Rp5,200, Neutral, Rp5,700 PT) and IFAR (S$2.05, Not Rated) continuing to decline (collectively 75% of INDF’s NAV).
􀂃 We highlight that this divergence has increased the implied value of Bogasari to Rp14.5tr, and quite likely reflects anticipatory buying in the lead-up to the SIMP IPO. However, we believe the view that the IPO will act as a positive catalyst for INDF’s share price to be misplaced, and we expect the reverse to occur, and the stock to sell off after the IPO. We recommend investors utilise the current strength as a short term trading opportunity to lighten.

Impact
􀂃 We do not believe SIMP’s IPO will act as positive catalyst for INDF: While INDF’s share price has been strong in recent weeks, IFAR’s share price (the vehicle actually conducting the IPO) has continued to weaken, indicating that investors are concerned about the dilutionary consequences of the offer, and/or the transaction converting IFAR into a holding company. Certainly there are no indications from IFAR’s share price that the IPO is about to imminently crystallise value or trigger a positive re-rating. In addition, we would also flag that after a strong run in the lead-up to ICBP’s IPO, INDF’s share price collapsed by c10–15% in the days following the IPO. Successfully trading around the ICBP IPO required selling out before the IPO, not after.
􀂃 Valuation difficult to justify: INDF's share price relative to ICBP and IFAR’s is now implying a Rp14.5tr valuation for Bogasari – representing a 13.5x FY11E PER based on normalised (10-year average) margins of 9.5% (which is high by global flour-milling standard). We note that 1Q11A margins were below mid-cycle levels, at 8.0%, and could fall further in coming quarters with wheat prices remaining elevated. We believe Bogasari warrants a large PER discount to the JCI (c14x FY11E PER) given its relatively poor economics.

Earnings and target price revision
􀂃 No change. We expect to update our earnings forecasts following INDF’s recent 1Q11A result in coming weeks.

Price catalyst
􀂃 12-month price target: Rp5,300 based on a RNAV methodology.
􀂃 Catalyst: SIMP IPO (expected in early June).

Action and recommendation
􀂃 We maintain our neutral call on valuation grounds but flag a negative short term trading view: We believe INDF’s share price has remained buoyant in recent weeks as investors have been hesitant to take underweight positions pre SIMP’s IPO. However, as soon as the IPO occurs and removes this “event uncertainty”, we believe this artificial support will disappear and valuation considerations will resurface and become INDF’s primary share price driver. We believe this holds out scope for INDF’s share price to rapidly retrace to Rp5,000–5,500 (more in line with our Rp5,300 valuation).