Unilever Indonesia (UNVR IJ), facing strong headwinds - Cut to Sell from Buy TP 12500

Consumer analyst Merlissa cut our recommendation for Unilever Indonesia (UNVR IJ) to Sell and TP Rp12,500 (from BUY with TP of Rp22,480).The TP of Rp12,500 implies 2.0x PEG. Unilever now trades at 30.0x P/E11CL, a 30% premium to its five year average of 23x.

Merlissa forecasts slower earnings growth amid intensified competition. We cut earnings forecast by 14.9% and 16.3% for 2011 and 2012 respectively. We also expect earnings to grow by a mere 11% CAGR in FY10-13CL, down from its 20% CAGR earnings growth in 2007-10 and also below its average peers of 20%.

Other key points from the report:

Tough to maintain margin. We believe price war is more likely than not, with consumer companies expanding their capacity to Indonesia - chiefly with P&G having decided to build US$100 mn factory here. Hence, this will likely limit Unilever's ability to raise price and will push ad spending higher.

P&G even without local factory, has been able to seize Unilever's market share, reducing it from 65% in 2005 to 51% in 2010.

Deteriorating cash flow. We believe Unilever will see a slower inventory turnover as market is saturated with competing products. We expect inventory days to stay at 55-60days, like what we have seen in 2004. Cash needed for working capital shall increase and Unilever will potentially borrow ST debt like it did in 2010. Hence, we expect the company to be in net debt position by 2012.