Indofood Sukses Makmur - Time to call it a day - Macquarie

Event
􀂃 We downgrade our recommendation to Underperform from Neutral, following INDF’s c20% share price rally in recent weeks (which has come partly in response to softening international wheat prices, but also due to resurgent consumer sector and JCI generally). We believe INDF’s share price is now stretched and offers investors limited upside potential, and also that the market may be overestimating the positive impact of lower wheat prices.

Impact
􀂃 Challenging valuation calculus: INDF is now trading at a 10.9% premium to its marked-to-market NAV – even with ICBP marked to Rp5,700 per share (ICBP comprises 56% of INDF’s M2M NAV). We highlight that the market value of INDF’s listed shareholdings now implies a Rp16.6tr valuation for Bogasari – equivalent to a 15.9x normalised FY11E PER – which we believe is too rich for a wheat miller facing rising competition.
􀂃 We also believe that ICBP’s valuation (16.4x FY11E PER, and 18.4x if noodle margins are normalised from 17.2% to 15.0%) is now very full. We reiterate that 85% of ICBP’s earnings come from the relatively mature instant noodle segment, and the division had negative 0.7% volume growth in 1Q11A. While the company has a powerful instant noodle franchise and will derive some benefit from lower wheat prices, we feel this is now more than priced in.
􀂃 Falling wheat prices good for INDF? Falling wheat prices are perceived to be a major positive for INDF. However, we highlight that there has in actual fact been a very low statistical correlation between Bogasari’s margins and spot wheat prices in the past (even allowing for an inventory lag). We believe this has been partly due to the time-shifting impact of forward purchasing contracts (which have also been utilised in recent quarters), and also the relatively rapid pass-through of input costs into end-product prices.
􀂃 Also often forgotten is the fact that CPO prices do correlate with wheat prices, and INDF’s CPO interests (19% of M2M NAV) will suffer in an environment of falling commodity prices. This also mitigates the benefit of lower wheat prices.

Earnings and target price revision
􀂃 FY11E and FY12E EPS revised by +1.8% and –8.4%, respectively. We have incorporated the dilutionary impact of the SIMP IPO and recent ICBP earnings revisions. Price target raised by 8% to Rp5,400 from Rp5,000, in line with INDF’s current M2M NAV, but valuation raised by just 2% to Rp5,100.

Price catalyst
􀂃 12-month price target: Rp5,400 based on a RNAV methodology.
􀂃 Catalyst: 2Q11E result (expected towards the end of August).

Action and recommendation
􀂃 Downgrade to Underperform (from Neutral): On FY11–12E PERs of 16.8x and 16.4x, and at a 10.9% premium to NAV (which incorporates a premium value for ICBP), we believe INDF is now too expensive, offering investors a limited margin of safety and relatively limited upside. Astra (ASII, Rp70,000, Outperform, Rp70,000 PT) remains our preferred large cap consumer pick.