INDF - Prefer pure consumer plays Downgrade to Hold - BNPP

CHANGE Downgrading recommendation to HOLD
We downgrade Indofood to a HOLD as the stock trades on to its NAV, which we believe is fair assuming the premium is attributed the brands which are still held under Indofood. We believe it is b have exposure to ICBP at 13.7x (32% upside) vs exposure through Indofood at 21.0x 2012 earnings for the consumer branded

CATALYST
Net cash position could fuel acquisitions As a result of the de-leveraging exercises in recent years, spinning off ICBP and SIMP in 1H11, Indofood achieved a net cash position. Management openly admits that it is evaluating option acquire viable businesses which will fit well with their existing businesses.

VALUATION
Fair value of IDR5,900 based on SoTP Our SoTP valuation shows a fair value of IDR 5,900, hence our HOLD recommendation. Furthermore, there is also downside risk to earnings if CPO prices remain at current levels as earnings are highly geared to CPO prices (see Exhibit 6).
Upside risk: commodity prices hold up
down risk: weaker IDR.

KEY CHART
Indofood now trades at 27% premium to its NAV

Key Earnings Drivers & Sensitivity
Earnings are quite sensitive to both wheat prices and CPO prices
Rising wheat prices negatively affect earnings, since it accounts for around 45% of total COGS for instant noodles
Rising CPO prices are positive for Indofood due to its significant exposure to the upstream industry through Indofood Agri

The Risk Experts
Our starting point for this page is a recognition of the macro factors that can have a significant impact on stock-price performance, sometimes independently of bottom-up factors.
With our Risk Expert page, we identify the key macro risks that can impact stock performance.
This analysis enhances the fundamental work laid out in the rest of this report, giving investors yet another resource to use in their decision-making process

Downgrading Indofood to a HOLD
We are downgrading our recommendation on Indofood to a HOLD from a BUY since the stock now trades at a 27% premium to its NAV, which we believe is fair if one assigns the 27% premium to the value of the consumer branded brands which still lie within the parent company, Indofood. For Indofood, we believe the NAV could be easily generated since the two biggest businesses, namely the consumer brand products and the agriculture are both listed.