Mis-pricing means substantial upside
opportunity
We believe the market’s misperception of Indofood’s earnings
provides substantial share price upside.
Indofood’s ownership of two listed CPO companies
has led the market to overemphasise their contribution and fail to see
the real underlying earnings driver. We
have actually increased our earnings estimates
following our significant cuts in CPO and wheat price assumptions. At
8.0x FY09E earnings, with robust earnings
driven by noodle recovery, there are significant rerating and earnings upgrades
prospects for Indofood.
Buy
CPO contribution less than meets the eye
Superficially, CPO-related earnings make up 60-70% of Indofood’s
EBIT, and this has led the market to
closely associate the company’s earnings with the CPO price, which explains the
stock’s recent
weakness. However, the correct way to
assess the earnings is at the net profit level given the significant
minority interest charges, as Indofood
only owns 60.4% and 38.7% of its original CPO assets and LSIP, respectively.
They make up less than
one-third of net profit. To be sure, its
recently acquired LSIP is barely earnings-accretive at the P&L
level.
Noodle recovery – highly leveraged
As Indofood is both a producer a and consumer of CPO and flour,
its earnings structure provides a natural
hedge against volatile commodity prices, which paves the way for a full and
highly leveraged impact
of instant noodle business recovery.
Indofood’s three core noodle brands still register 2-3% growth despite
its steep 55% price hikes; this highlights
its pricing power, improved competition and
favourable substitution. Weakness in its unprofitable brand, which only
caters to a small area of the country,
actually improves the company’s profitability.
DCF-based TP of Rp4,000; competition and affordability major
risks
At 8.0x on FY09 and 5.7x ex-edible oil, Indofood appears very
attractive and underlines the prospect of
value unlocking in the future. Its plan to acquire Indomilk also shows its
scope for growth, leveraging on its business set-up. Our TP of Rp4,000 is based
on our DCF, estimated
with WACC of 14.3% (valuation on page 8).
Earnings risks: competition, consumer affordability, rupiah
volatility.
