MYOR:Margin hit in 2Q11 - Mandiri

MYOR’s disappointing 1H11 results justify our Sell rating and below-consensus estimates. Rising input costs caused net income to contract by 27.6% yoy and 30.8% qoq. Net income only represented 38.0% and 31.2% of our and consensus’ FY11F. The 1H11 gross margin also declined to 17.8%, the lowest level in the last 10 years. Although margins should rebound in 2H11 due to demand seasonality, ASP increase, and use of cheaper inventory, the stock is trading on demanding PER11-12F of 28.9-21.1x, an unjustifiable premium to other consumer companies. We re-iterate Sell on MYOR.

1H11 results were below our and consensus’ FY11F estimates. MYOR posted 1H11 revenue of Rp4.2tn (+27.1%yoy, +14.7%qoq). However, its 1H11 net income was only Rp153bn (-27.6%yoy, -30.8%%qoq). While the top-line figure was in line with our and consensus’ estimate, the bottom-line figure was way below estimates by representing only 38.0% of our FY11F and 31.2% of consensus’ FY11F estimate.

The lowest gross margin in a decade. The company experienced margin pressure from the surge in input costs. In 1H11, gross margin was only 17.8%, compared with a 10-year average of 23.9%. However, as the company kept focusing on market share, it maintained stable selling-expense-to-revenue ratio of 9.3% (vs 10-year average of 9.4%). Lower gross margin amidst sticky discretionary expense resulted in short term pain with 1H11 operating margin of only 6.5%, which is lower than our and consensus’ FY11F expectation of 7.6% and 9.2% (10 years average was 10.5%)

2H11F should be better. We think the company’s performance will be better in 2H11F. Upside in net income may happen due to (1) strong demand during Muslim festive in 3Q11, and (2) 3-5% ASP increase in July 2011 that will take fully into effect by 4Q11. At the same time, downside risk is minimized as the company has built sufficient inventory balance in June 2011 to mitigate raw material costs volatility. Note that the company’s inventory balance as of June 2011 has increased by 70.9%yoy, which was faster than revenue growth rate.

Maintain Sell. At the current price, MYOR is trading at PER11-12F of 28.9-21.1x, which is above its average PER+1 standard deviation, and at premium to other consumer sector companies. Our DCF valuation with WACC of 10.4% and TG rate of 6.0% results in TP of Rp12,000/share. We maintain our Sell recommendation for MYOR.