MYOR:Margin squeeze - Mandiri

MYOR posted 1Q11 net profit of Rp91bn (-23.9%yoy, -44.1%qoq), in line with our projection, but only 17.5% of consensus estimate. The company suffered from commodity price pressure that squeezed its gross margin from 22.9% in 1Q10 to 18.7% in 1Q11, something we have expected, but the market has not. The margin contraction was similar with what happened in FY08. Looking at the recent commodity prices, we think the margin contraction risk is still imminent for the rest of the FY11F. Even though it may be mitigated by ASP increase, we estimate FY11F net profit may decline by 9.2%yoy due to limited volume growth. We maintain our Sell stance on MYOR which trades at PER11-12F of 22.0-16.5x.

1Q11 results were in line with ours but way below consensus FY11F estimates. MYOR posted 1Q11 revenue of Rp1.9tn (+28.6%yoy, -6.7%qoq). However, its net income was only Rp91bn (-23.9%yoy, -44.1%qoq). This net income figure represented 22.6% of our FY11F but only 17.5% of consensus estimate. We consider the net income figure was inl ine with our estimate as 2H sales is usually slightly stronger due to holidays.

Raw material cost pressures remain. The company’s gross margin declined from 22.9% in 1Q10 and 24.4% in 4Q10 to 18.7% in 1Q11 due to raw material cost pressures while the company maintained stable ASP. The four largest raw material prices are still rising presently, with: wheat having increased by 62%yoy, CPO by 43%yoy, sugar by 36%yoy, and coffee by 78%yoy. Therefore, we think the situation in 2Q11 will be as challenging as that in1Q11.

ASP increase may help, but at the expense of volume contraction risk. We think it will be very difficult to maintain profit margin by reducing products’ size as it did in the past because the sizes are already very small. On the other hand, ASP increase may cause a contraction in sales volume as the company’s target market is the low- to- mid income segment that is sensitive toward price. We estimate MYOR’s FY11F gross margin of 19.2% and net profit of Rp401bn.

Maintain Sell. Our DCF valuation with WACC of 12.6% and TG rate of 5.0% results in TP of Rp8,500/share. We maintain our Sell recommendation as the current PER11F of 22.0x looks pricey for MYOR that historically has been traded at 12.0x of average PER plus 1 standard deviation.