july 21, 2014 indofood sukses makmur · of these brands is not reflected in indofood’s assets....

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COMPANY FOCUS PT Trimegah Securities Tbk - www.trimegah.com 1 Diversification into non-alcoholic beverage market Indofood Branded Consumer Product (ICBP) is targeting the lucrative non-alcoholic beverage market in Indonesia. Growing at 11.5% CAGR 09 -12, ICBP targets its beverage segment to generate Rp5tr sales by 2017, up from Rp219bn in 2013. Current contribution from its noodle business to ICBP is at 68%. This reliance is expected to decrease to 58% by 2019 as its non-alcoholic beverage business takes off. Bakery product consumption is on the rise Indonesia spends $13.6 per capita for bakery product consumption. In the neighbouring areas, only Vietnam is lower with $10.5, with Singa- pore highest with $88.3. With rising income, it is expected bakery con- sumption will increase. Bogasari, with 50% market current market share, is ready to tap into the growing industry. Agribusiness turning around to growth Due to low CPO prices, Agribusiness was the only Indofood segment not to grow in 2013. It is forecasted to change in 2014 onwards due to the dry weather in Malaysia and Indonesia, 2 of the biggest CPO producers in the world being affected by El Nino. With El Nino expected to arrive later in the year and biofuel requirements, we expect demand for CPO to be on the rise for the foreseeable future. With EV/Ha of 103x compared to industry average of 128x, we believe it is still undervalued by 20%. China Minzhong full year contribution China Minzhong (MINZ)’s operating margin of 25% is a double of INDF’s second-highest operating margin segment of 12% from Agribusiness. With MINZ expected to maintain its margin and the earnings to be fully consolidated, we expect its operating profit contribution to increase from 9% to 15% in 2014E. Buy with 19% upside to TP Rp8,400 Our SOTP (Sum-of-the-parts) valuation of Rp8,400 implies 19% upside from current price. Based on our TP, its implied PE14 is at 18.4x with 17% EPS CAGR 14-17E. It is lower than JAKCONS’s PE of 26x, implying that its valuation is relatively attractive due to its status as market leader in its operating segments. We performed alternative SOTP to exclude the contribution from MINZ and arrived at TP Rp7,900, implying 12% upside and implied PE14E at 17.3x. Indofood is one of the most recognizable companies in Indonesia, with many of its products leading the market in their respective segments. Share Price Rp7,075 Sector Consumer Price Target Rp8,400(19%) Year end Dec 2012 2013 2014F 2015F 2016F Sales 50,202 57,732 69,841 77,512 86,040 Net Profit 3,261 2,504 4,004 5,129 5,668 EPS (Rp) 371 285 456 584 645 EPS Growth (%) 6.0% -23.2% 59.9% 28.1% 10.5% DPS (Rp) 175 185 142 227 291 BVPS (Rp) 2,415 2,693 3,153 3,848 4,734 P/E (x) 18 24 15 12 11 Div Yield (%) 2.6% 2.7% 2.1% 3.3% 4.3% Indofood Sukses Makmur Company Focus BUY Rp8,400 Reuters Code INDF.JK Bloomberg Code INDF.IJ Issued Shares (m) 8,780 Mkt Cap (Rpbn) 61,243 Average Daily T/O (m) 9.8 52-Wk range Rp7,800 /Rp5,350 CAB Holdings Ltd, Seychelles 50.1% Public 49.9% EPS 14F 15F Consensus (Rp) 474 546 TRIM vs Cons. (%) (3.8) 7.0 Instant brand recognition Company Update Stock Data Major Shareholders Consensus Stock Price Companies Data Joshua N.C. Tjeuw ([email protected]) July 21, 2014 - 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000 35,000,000 40,000,000 - 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Volume Price

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COMPANY FOCUS PT Trimegah Securities Tbk - www.trimegah.com 1

Diversification into non-alcoholic beverage market

Indofood Branded Consumer Product (ICBP) is targeting the lucrative

non-alcoholic beverage market in Indonesia. Growing at 11.5% CAGR 09

-12, ICBP targets its beverage segment to generate Rp5tr sales by

2017, up from Rp219bn in 2013. Current contribution from its noodle

business to ICBP is at 68%. This reliance is expected to decrease to

58% by 2019 as its non-alcoholic beverage business takes off.

Bakery product consumption is on the rise

Indonesia spends $13.6 per capita for bakery product consumption. In

the neighbouring areas, only Vietnam is lower with $10.5, with Singa-

pore highest with $88.3. With rising income, it is expected bakery con-

sumption will increase. Bogasari, with 50% market current market

share, is ready to tap into the growing industry.

Agribusiness turning around to growth

Due to low CPO prices, Agribusiness was the only Indofood segment not

to grow in 2013. It is forecasted to change in 2014 onwards due to the

dry weather in Malaysia and Indonesia, 2 of the biggest CPO producers

in the world being affected by El Nino. With El Nino expected to arrive

later in the year and biofuel requirements, we expect demand for CPO to

be on the rise for the foreseeable future. With EV/Ha of 103x compared

to industry average of 128x, we believe it is still undervalued by 20%.

China Minzhong full year contribution

China Minzhong (MINZ)’s operating margin of 25% is a double of INDF’s

second-highest operating margin segment of 12% from Agribusiness.

With MINZ expected to maintain its margin and the earnings to be fully

consolidated, we expect its operating profit contribution to increase from

9% to 15% in 2014E.

Buy with 19% upside to TP Rp8,400

Our SOTP (Sum-of-the-parts) valuation of Rp8,400 implies 19% upside

from current price. Based on our TP, its implied PE14 is at 18.4x with

17% EPS CAGR 14-17E. It is lower than JAKCONS’s PE of 26x, implying

that its valuation is relatively attractive due to its status as market

leader in its operating segments. We performed alternative SOTP to

exclude the contribution from MINZ and arrived at TP Rp7,900, implying

12% upside and implied PE14E at 17.3x.

Indofood is one of the most recognizable companies in Indonesia, with many of its products leading the market in their respective segments.

Share Price Rp7,075

Sector Consumer

Price Target Rp8,400(19%)

Year end Dec 2012 2013 2014F 2015F 2016F

Sales 50,202 57,732 69,841 77,512 86,040

Net Profit 3,261 2,504 4,004 5,129 5,668

EPS (Rp) 371 285 456 584 645

EPS Growth (%) 6.0% -23.2% 59.9% 28.1% 10.5%

DPS (Rp) 175 185 142 227 291

BVPS (Rp) 2,415 2,693 3,153 3,848 4,734

P/E (x) 18 24 15 12 11

Div Yield (%) 2.6% 2.7% 2.1% 3.3% 4.3%

Indofood Sukses Makmur Company Focus

BUY Rp8,400

Reuters Code INDF.JK

Bloomberg Code INDF.IJ

Issued Shares (m) 8,780

Mkt Cap (Rpbn) 61,243

Average Daily T/O (m) 9.8

52-Wk range Rp7,800 /Rp5,350

CAB Holdings Ltd, Seychelles 50.1%

Public 49.9%

EPS 14F 15F

Consensus (Rp) 474 546

TRIM vs Cons. (%) (3.8) 7.0

Instant brand recognition

Company Update

Stock Data

Major Shareholders

Consensus

Stock Price

Companies Data

Joshua N.C. Tjeuw

([email protected])

July 21, 2014

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Volume Price

PT Trimegah Securities Tbk - www.trimegah.com COMPANY FOCUS 2

Consumer Branded Products (ICBP) – upside from innovation and new products

ICBP has consistently leads the market in instant noodles, flour and cooking industries while maintaining respect-

able presence in dairy Given ICBP’s market position, we think ICBP’s strong brand power can be leveraged to

other food products, implying potentially lower than normal marketing cost in promoting new products. The value

of these brands is not reflected in Indofood’s assets.

ICBP contributes 43.2% to Indofood’s operating profit. ICBP’s own operating profit can be further dissected into

85% noodles, 13% dairy, -2% non-alcoholic beverage and 4% others. Unsurprisingly the biggest contribution is

from its noodle segment. While ICBP is expected to maintain its position as market leader, we believe the noodle

industry is entering its matured stages, as shown by the stagnant demand according to World Instant Noodles

Association (WINA) of 14.4bn packets in 2010 to 14.9bn packets in 2013, representing just 1% CAGR 09-13.

Despite that, we believe instant noodles will continue to keep posting strong results because despite the price

hike of 13% in 1Q14, its revenue and operating income grew +22% and +33% YoY respectively. We also see an

upside on the bigger-than-expected harvest for wheat globally, resulting in 5% lower wheat prices in 2014 thus

far compared to the daily average prices of 2013. Forecasts from Bloomberg also predict a 8% decrease in wheat

prices for 2014, a positive sign for instant noodles with wheat as one of its main materials.

Source: Euromonitor

Figure 1. Market Share for Selected Product Segments

Instant Noodle (%) Ready to drink Milk

(%) Flour (%)

Indomie 75.90% Ultra Milk 36.40% Segitiga Biru (Bogasari)

70.30%

Mi Sedaap 14.40% Indomilk 18.00% Cakra Kembar 11.30%

Supermi 2.80% Frisian Flag 15.80% Kompas 5.90%

Sarimi 2.20% Milo 9.10% Kunci Biru 5.70%

Bear Brand 5.60%

Milkuat 4.60%

Cooking oil (%)

Bimoli (Indofood)

46.10%

Tropical 12.20%

Filma 11.50%

Sania 9.80%

Sunco 5.90%

Avena 3.60%

Fortune 2.70%

Kunci Mas 2.50%

Source: Company

Figure 2. ICBP EBIT Breakdown in 2013 Figure 3. Instant Noodles Growth in 1Q14

Instant

Noodle

82%

Dairy

12%

Snack Foods

1%

Food

Seasonings

3%

Nutrition/Spec

ial foods

0%

Beverage

-2%

4,216

646

5 ,125

861

0

1,000

2,000

3,000

4,000

5,000

6,000

Revenue EBIT

1Q13 1Q14

PT Trimegah Securities Tbk - www.trimegah.com COMPANY FOCUS 3

ICBP will also benefit from non-alcoholic beverage industry’s strong potential growth through its JV with Asahi

that was formed in 2013. The JV has introduced a new bottled green tea product called “Ichi Ocha” that claims

Japanese technology helps it make better green tea than its competitors (there are more than 15 branded bottled

green tea in the market). In addition to acquiring the “Club” bottled water, the no. 2 brand in Indonesia, we see

this industry as another contributor to ICBP’s revenue stream. This is a market that grew by 12% CAGR 09-12

despite its price index growing slower than GDP except in 2012.

Source: Euromonitor

Figure 4. Food and Non-Alcoholic Beverage Expenditure

Source: Euromonitor

Figure 5. Growth: GDP vs Food & Non-Alchoholic Beverage Price Indices

Aside from instant noodles and non-alcoholic divisions, we see a potential upside in Dairy division from ICBP.

Indonesia’s current milk consumption per capita is only at 11.7 litres per annum, significantly lower than Philip-

pines at 22 litres and Thailand at 31 litres. However Indonesia’s milk consumption is the fastest growing at 4.8%

p.a in 2006-10. We see this trend to continue in the future as the local production is unable to meet fully the

local needs. In Indonesia, there are approximately 500,000 dairy cattle concentrated mainly in Java (97%) with

a minority in Sumatra (3%). However due to a low capital investment, less knowledgeable farmers and lower

quality of animal feeds, the average productivity is only at 12-14 litres per day, compared to international stand-

ard at 30 litres per day. Due to the low output, local production can only meet 25% of the demand nationally,

with the remaining 75% coming from Australia and New Zealand. Government subsidies and superior quality/

productivity from these nations allow their milk to be more competitive in local market despite the import duties

and VAT. Therefore imported milk is the main component of the supply chain, with Indonesia’s milk playing a

supplementary role.

23%

14%

22%

8%

13% 12%

10%

0%

5%

10%

15%

20%

25%

-

200

400

600

800

1,000

1,200

1,400

1,600

2006 2007 2008 2009 2010 2011 2012

Expenditure Growth

15%

6%

9% 8%7%

18%

5%

32%

19%

4%

0%

5%

10%

15%

20%

25%

30%

35%

2008 2009 2010 2011 2012

F&B Price Indices GDP

PT Trimegah Securities Tbk - www.trimegah.com COMPANY FOCUS 4

Bogasari – intensifying competition

Bogasari has 51% market share in Indonesia’s wheat market in 2012, despite new entrants as the number of

wheat mills has increased from 11 in 2009 to 21 in 2013. Bogasari’s current wheat milling capacity of 3.3mn tons

still remains the largest in the country. National production capacity is at 7.7mn tons. We expect competitive

environment in Indonesia’s domestic flour market to remain benign. Indonesia’s flour is mostly used to make

noodles (55%) followed by bakery and biscuits (41%) and lastly, households (4%). We believe flour demand is

likely to experience robust growth, particularly from bakery industry. Indonesia’s bakery products consumption

per capita is lower than most of other countries in the region (see chart below).

Source: Aptindo

Figure 6. Flour Usage in Indonesia

The Bogasari’s division grew 15% CAGR 10-13, with 2013 posting the strongest growth in terms of volume and

ASP. Sales volume grew by 9% in 2013 YoY compared to just 4% p.a. for the past 3 years. Supported by 10%

ASP growth in 2013, the Bogasari division grew by 19% YoY. However with the entrance of Wilmar into the flour

business in Indonesia, we predict it will intensify the competitiveness of flour industry. Recently a Protective

Quota Scheme for wheat import flour is implemented to limit flour import from May-Dec’14 by 441k tonnes,

limiting the amount of flour import based on source country. While total wheat flour import in 2012 was below

the threshold, we still see a potential upside for Bogasari due to the different wheat flour needs (hard vs soft

wheat flour). Indonesia imports wheat flour the most from Turkey for its soft wheat and it is the main ingredients

to make biscuits. However for hard wheat, Bogasari hold a significant competitive advantage in Indonesia due to

its status as one of the few big flour mills. In order to meet the hard wheat flour local requirement, Bogasari has

higher pricing power against its consumers. In 1Q14 Bogasari grew by 20%, supported by 6% growth in volume

YoY. Despite the decrease in revenue, its EBIT in 1Q14 grew 19% YoY attributing to better EBIT margin from

6.7% to 8.6%. We are optimistic Bogasari will be able to keep its EBIT margin at ±9%.

Source: Euromonitor

Figure 7. Bakery Products Consumption Per Capita

Big and

Modern Indus try

33%

Small and

Medium

Enterprises (SME)

63%

Households

4%

Noodles

55%Bakery and

Biscuits

41%

House

holds4%

$10.5 $13 .6

$18.6

$29.8

$54 .3

$88 .3

0

10

20

30

40

50

60

70

80

90

100

Vietnam Indonesia China Malaysia Thailand Singapore

PT Trimegah Securities Tbk - www.trimegah.com COMPANY FOCUS 5

Source: Company, TRIM Research

Figure 8. LSIP Nucleus Yield (Tons/Ha)

Agribusiness

INDF owns 177,099 ha of palm oil plantation, 16,996 ha of rubber, 2,686 ha of other plantations, all mature

areas. INDF has the license to approximately 490,000 ha of land. The majority of Indofood’s palm oil plantation

is on 7 – 20 years old cycle, implying there is upside in yield (palm oil plantation yield curve typically flattens

after 14 years old). Agribusiness’ profitability is very sensitive to soft commodities prices particularly palm oil

price. Palm oil price benchmark (Malaysia) fell by 17% in FY2013 (daily average) to RM2,411/ton but has re-

bounded by 11% to RM2,686/ton in 2014 (YTD daily average as per 24 April). We expect palm oil price for

FY2014 to be RM2,700/ton. There is upside risk to our palm oil price estimate if government’s biodiesel conver-

sion program is achieved and a stronger-than-predicted El Nino. We expect a slightly lower palm oil price of

RM2,600/ton from 2015 onward. Since 2009, new planting by large plantations is significantly lower after gov-

ernment issued more strict prohibitions on planting on land designated for forestry. This implies that supply

growth from 2015 onward is likely to be lower as palm oil companies typically mature in four years and yield

improvement starts to slow down in the tenth year.

LSIP recorded higher yield for FFB, CPO and PK in 1Q14, compared to 1Q13, positive signal with the upward

trend of CPO price in 1Q14.

The latest CPO report in Malaysia by Bloomberg on May 2014 showed CPO inventory increased +10% MoM to an

eight-month high of 2.2mn m2 tonnes. Imports by India, top CPO buyer fell in May as record soybean crop re-

sulted in narrowing premium over CPO and thus India purchased more soybean and sunflower oil. This is in-line

with the CPO report in Indonesia that showed while export was up 23% in May MoM, the price level decreased by

1.7%. With Australia recently delayed its expectation of El Nino occurrence from July14 to Sep14, thus reducing

the impact of El Nino on CPO price increase, we believe there is a downward pressure on CPO price in the short

future. There is a psychological barrier at RM2,400/ton that if the CPO price is below that, it is more profitable to

refine the CPO and sell the finished products. However, only SIMP has these facilities and they are not relatively

quick to get to.

3.6

0.8

0.2

4.1

1.0

0.2

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

FFB CPO PK

1Q13 1Q14

PT Trimegah Securities Tbk - www.trimegah.com COMPANY FOCUS 6

We compare the EV/Ha for publicly listed plantation companies in Indonesia and noted that IFAR, the holding for

the plantation side for INDF, has an EV/Ha of 103x, while the average of the other plantation companies is at

128x EV/Ha. Currently its EV/Ha is 20% lower than industry’s average, indicating there is still room for growth

for its plantation business. From its 1Q14’s results, we expect its performance to exceed those of 2013.

While the EV/Ha 103x also implies that IFAR is not utilizing its assets to its full potential, the trend of CPO prices,

which we believe is gravitating to RM2,700 should have a positive outlook on SIMP and LSIP (as direct/indirect

subsidiaries).

Figure 9. IFAR EV/Ha Comparison

Source: Bloomberg, TRIM Research

EV Ha EV/Ha

SMAR IJ Equity 23,361,266 138,914 168

BWPT IJ Equity 8,951,266 69,330 129

AALI IJ Equity 46,103,689 281,378 164

SGRO IJ Equity 5,655,586 83,987 67

TBLA IJ Equity 6,490,329 58,510 111

Average 128

IFAR 18,210,681 177,099 103

2014E 2015E 2016E 2017E 2018E 2019E

Revenue (Rp tr) 16.8 18.7 20.8 23.2 25.8 28.7

Volume (bn tonnes) 3.0 3.2 3.3 3.5 3.7 3.9

ASP (Rp/Kg) 5,729 6,073 6,437 6,823 7,232 7,666

Figure 10. Forecasted Bogasari’s Financial Performance

Bogasari expected to remain a major player in the flour business

From 2014 - 2019, Bogasari's division is expected to grow by 11.3% CAGR. This is supported by 5% volume

growth and 6% ASP growth CAGR in the same period. Both growths are lower than 2013's growth of 8.8% and

10% respectively, but we expect future growth to remain stable. The removal of 20% emergency import tariff

and the application of flour import quota are not expected to impact the flour market SIGNIFICANTLY. The quota

for import is higher than the current imported flour consumption of 14%, with the rest being met by local flour

producers. Bogasari is currently leading the market at 51% market share.

PT Trimegah Securities Tbk - www.trimegah.com COMPANY FOCUS 7

Financials

We expect INDF’s revenue to grow at 11.2% CAGR 14-19E, driven by 11.6% CAGR in ICBP, 11.3% CAGR in

Bogasari (flour business), 9.1% CAGR in Agribusiness, 13.7% CAGR in processed vegetables (MINZ), and 11.0%

CAGR in distribution business. For ICBP, we expect instant noodle to register steady revenue growth of 9.8%

CAGR 14-19E, driven by 3.0% of volume growth (versus 5-year historical CAGR of 3.6%) and 6.0% of annual

price increase (versus average price increase of 6.2% in past five years and 6% expected inflation rate for next

five years).

2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E

ICBP 19,880 21,618 24,648 30,132 33,644 37,564 41,940 46,821 52,261

Bogasari 11,716 12,563 14,914 16,810 18,710 20,824 23,177 25,796 28,711

Agribusiness 12,088 11,514 13,007 14,067 15,213 16,694 18,318 20,101

Distribution 3,208 3,933 4,548 5,096 5,646 6,256 6,954 7,729 8,591

MINZ 0 2,108 4,796 5,446 6,183 7,036 8,002 9,097

Total 50,202 57,732 69,841 77,512 86,040 95,800 106,667 118,761

10,964

0

45,768

Figure 11. Forcasted Revenue Per Division

Source: Company, TRIM Research

ICBP’s non-instant noodle business is expected to post stronger growth with revenue CAGR of 16.1% in 2014-

19, predicting diversification into non-noodle businesses.

The sale of instant noodles currently contributes 68% to ICBP's revenue, and we expect its contribution to de-

crease to 58% by 2019. The expected decline in contribution is due to ICBP's growth acceleration on non-noodle

business. The JV acquisitions of PepsiCo and CLUB bottled water brand are aimed to accelerate its non-noodle

business, in which Indonesia's market is expected to grow at 16% CAGR 14-17E. ICBP targets its beverage

segment to generate Rp5tr in sales by 2017, up from Rp219bn in 2013.

Source: TRIM Research

Figure 12. CAGR 14-19E Per Division

11.6% 11.3%

9.1%

11.0%

13.7%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

ICBP Bogasari Agribusiness Distribution MINZ

Source: TRIM Research

Figure 13. Contribution from Noodle vs Non-noodle Products

65.7%

64.2%62.8%

61.3%59.8%

58.4%

54%

56%

58%

60%

62%

64%

66%

68%

0%

20%

40%

60%

80%

100%

2014E 2015E 2016E 2017E 2018E 2019E

Instant noodle Non-instant noodle % to revenue ICBP

Diversification of ICBP leads to growth in non-noodle products

PT Trimegah Securities Tbk - www.trimegah.com COMPANY FOCUS 8

The combination of increasing CPO prices and the decline in wheat prices are not expected to last in the long

term. The company's gross margin is projected to remain stable in the range of 25.3-26.8%. Although Indofood

is faced with soaring palm oil prices due to dry weather and El Nino, we expect these causes to be short/ medium

-term. The price drop in wheat is due to the overabundance of wheat, especially in Canada and the United

States. Indonesia imports 26% of the needed wheat from these countries. The current oversupply is not ex-

pected to last in the long term. We expect the Rupiah to remain stable in the long term.

Operating margin is expected to remain within 10.9-11.9% for period 2014 - 2017, supplemented by the stable

gross margin in the same period. The increase in salary expense has been priced in 2013's margin, as shown by

the decrease from average of 13.5% to 10.5%. We expect its operating margin to be incrementally more effi-

cient as an economy of scale is achieved.

Source: Company, TRIM Research

Source: Company, TRIM Research

Figure 14. Margins Expectation

0%

5%

10%

15%

20%

25%

30%

2011 2012 2013 2014F 2015F 2016F 2017F 2018F 2019F

Gross Margin (%) Opr. Margin (%) EBITDA Margin (%)

Strong free cash flow and debt repayment

Free cash flow in 2013 was negative due to the numerous expansion plans, particularly the acquisition of China

Minzhong in the amount of Rp7tr. Its FCF for 2014 is expected to be Rp1.4tr, with it increasing to Rp4.4tr by

2019. Our estimates expect its capital expenditure to be used for maintenance with 10% increase p.a. Its FCF to

Int. Coverage is expected to increase to 0.8x in 2014 and steadily increases to 4.0x by 2019 due to the reduction

of debt.

The issuance of Indofood Bond VII will be used to repay Bond V and the remaining to pay bank loans in IDR.

With the issuance of the bond, total bonds obligation becomes Rp4.0tr. Due issuance of Bond VII, the DER for

2014E is 0.83x, and the if the bonds are refinanced while the bank loans are repaid, DER for 2019E is 0.15x. Its

current ratio is expected to be 1.73 in 2014 with declining ratio over the next 4 years due to the repayment of

bank loans. It is expected to go back to 1.75 by 2019.

Figure 15. Long-term Debt Repayment Schedule

LT Debt Due 2015E 2016E 2017E 2018E 2019E 2020E

IDR (bn) 931.8 834.8 764.4 575.0 519.6 504.0

USD (IDR bn) 871.5 1,667.9 1,311.3 868.5 76.2 0.0

SGD (IDR bn) 0.0 770.2 770.2 770.2 770.2 770.2

JPY (IDR bn) 0.0 0.0 0.0 0.0 0.0 274.5

Bonds (IDR bn) 2,000.0 2,000.0

Source: Company, TRIM Research

PT Trimegah Securities Tbk - www.trimegah.com COMPANY FOCUS 9

Source: Bloomberg, TRIM Research

Figure 16. SOTP Calculation

We use sum-of-the-parts (SOTP) in our valuation for INDF and came up with a TP of Rp8,400/sh. This is assum-

ing 0% conglomerate discount because we have been conservative in our estimation and that the discount factor

differs per investor. Hence we reserve the discount factor to readers. In our valuation, we arrived at a 19%

upside to TP8,400/sh.

Our valuation takes into account MINZ as a contributor to INDF. We also created an alternate valuation that does

not take into account contribution from MINZ. In this case, we disregard the investment opportunity cost or the

benefit coming from MINZ. Without MINZ, the upside from our revised TP of Rp7,900/sh becomes 12%, without

the conglomerate discount, which changes our recommendation from BUY to HOLD.

We valued the ICBP with PE Band and it made up 57% of the subtotal EV. While for the listed divisions of IFAR

and MINZ, we used their current stock price from Singapore Stock Exchange, assuming they are currently fairly

valued. For the unlisted divisions of Bogasari and Distribution, we used the EV/EBITDA multiples from similar

companies across the regions (Malaysia, China, Thailand and Philippines) to obtain the valuation. We then com-

bined them all to arrive at total valuation.

Valuation

Stake (%) Method Price Multiple (x) Valuation

ICBP 81% DCF Rp10,200 47,896

Bogasari 100% Implied EV/EBITDA 10.0 19,187

IFAR 60% Market Price SGD0.980 7,921

Distribution 100% Implied EV/EBITDA 13.0 4,465

MINZ 83% Market Price SGD0.845 4,332

With MINZ Without MINZ

Subtotal 83,801 Subtotal 79,469

(-) Net Debt 10,090 (-) Net Debt 10,090

NAV 73,711 NAV 69,379

No of shares 8.78 No of shares 8.78

NAV/Sh 8,395 NAV/Sh 7,902

Discount 0% Discount 0%

F NAV/Sh 8,400 F NAV/Sh 7,900

Current Price 6,975 Current Price 6,975

Upside 20% Upside 13%

TP PE14 18.42 TP PE14 17.33

PT Trimegah Securities Tbk - www.trimegah.com COMPANY FOCUS 10

Source: Bloomberg, TRIM Research

Figure 17. 5-Year PE Band

The 5-year PE Band puts its average PE at 14.2x. Based on our TP, we expect the PE to move from the current

position of below the average line to approach the +1 Std. Dev. PE of 17.9x. Both PEs with or without MINZ are

in that region. We believe it is reasonable considering after the PE Band goes downwards; the expectation is that

it will rebound back to +1 Std. Dev.

Source: Bloomberg, TRIM Research

Figure 18. Re-rated PE Band

Based on the 5-year PE Band, we noticed a rerating in the middle of 2012. Hence we modified the PE Band to

show the timeframe since the rerating and obtained the average Fw-PE of 17.2x. Since our PE14E 18.4x is in-line

with the 2-yr historical PE, we believe our target price is reasonable.

14.2

17.9

10.5

0

5

10

15

20

25

Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14

P/E (x)

Fw-PER Fw-PER Avrg Fw-PER + 1 STD Fw-PER - 1 S TD

5

10

15

20

25

Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14

P/E (x)Fw-PER Fw-PER Avrg Fw-PER + 1 STD Fw-PER - 1 STD

19 .9

17.2

14.5

PT Trimegah Securities Tbk - www.trimegah.com COMPANY FOCUS 11

Risk

Cost of production fluctuates depending on the price of raw materials in international market and

fluctuations of Rupiah against foreign currencies

Cost of production for INDF is significantly affected by the price of wheat since it is direct raw material for ICBP

and Bogasari. Since Indonesia is unable to grow its own wheat, all wheat requirements are imported. The big-

gest source of wheat imports are from Australia (70%), Canada (15%) and US (11%). Current wheat prices in

1Q14 are on the decline due to the overabundance of wheat production, especially in Canada and US. However

the supply of wheat cannot be expected to remain high and hence its price is affected by the supply and de-

mand of wheat internationally. CPO prices affect INDF due to its Agribusiness. Declining CPO prices will decrease

Group Indofood’s profitability, as was the case in 2013. Fluctuating Rupiah will impact the cost of purchase and

selling price for Group Indofood.

New regulations may have negative impact on Indofood’s business outlook and financials

New regulations may impact the Group’s operational activities. In 2014, a quota of wheat flour import is to be

implemented, limiting wheat flour import to 441,000 tons from May to Dec 2014. However this regulation is not

expected to impact the wheat flour business in Indonesia significantly because the quota is higher than the

imported wheat flour volume and local wheat flour production are able to meet the national flour demand. The

regulation will instead boost local producers, intensifying competition and potentially decreasing Bogasari’s

market share.

More intense competition from existing competitors and/or from new entrants

Most of the Indofood Group products face competition from both local and international companies. There is no

certainty that competitors will not optimize its efforts in competing for market share, or that will be no addition-

al domestic and foreign competitors who enter the market in which the Group operate. Increased competition

may affect the ability of the Indofood Group to maintain or increase revenue.

Weather impact

Some business activities and operations INDF depend on the climate and weather conditions. In addition there

are seasonal productions which are also affected by the climate and weather conditions. Risks associated with

climate and weather conditions have been rising due greenhouse effects that have adverse impact on global

temperatures and natural disasters levels. Climate change and extreme weather can have a negative impact on

the productivity of the INDF and this condition can lead to a decrease in production.

Changes in labor law, labor disputes, and higher than expected minimum wage increase may nega-

tively affect company’s operations and costs

Employees is one important asset for a company, therefore Indofood Group Management always abide by the

rules and regulations in the areas of employment, including minimum wage and comply consider carefully the

welfare of employees. Although it has created a good relationship between the Indofood Group Management

with its employees, there is no certainty that there will be no labor strike at a later date, which may affect the

business activities and operations of the Indofood Group.

Changes in Indonesia’s economic outlook

Operations of the Indofood Group are affected by the Government’s economic policy as well as changes in poli-

cies, rules and regulations in the country. These conditions can negatively impact the Indofood Group. As a

company engaged in integrated food processing and plantations in Indonesia , the Company's business activity

is strongly influenced by changes in the economic, social , political , and security in Indonesia , including the

impact of rising fuel prices . When occurring within a certain time of economic instability, social, political, and

security in Indonesia, then this may have an impact on the activities and financial performance of the Indofood

Group. Since 2002 there have been several incidents of terrorism in Indonesia. There is no certainty that that

terrorism will not occur again in the future, which if it happens, it can create affect the stability of the country.

These things can negatively impact business activities of the Indofood Group.

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Company background

PT Indofood Sukses Makmur (INDF), initially incorporated as PT Panganjaya Intikusuma in 1990, changed its

name and went public in 1994. It acquired Bogasari in 1995, and its Agribusiness and Distribution in 1997. Over

the years, INDF has transformed itself to become a Total Food Solutions company and currently operate five

Strategic Business Groups:

Consumer Branded Products (ICBP): Listed in 2010, ICBP is one of the leading packaged food producers in Indo-

nesia with wide brand recognition. Some of its brands include Indomie, Pop Mie, Chitato and Indomilk.

Bogasari: A producer of wheat flour and pasta, its business operations are supported by shipping and packaging

units. Some of its recognized brands include Segitiga Biru, Lencana Merah and La Fonte.

Agribusiness: Through Indoagri, listed in Singapore Stock Exchange, the business ranges from R&D, seed breed-

ing, palm oil cultivation and milling, as well as production of cooking oils, margarine and shortening. It is also

involved in the cultivation and processing of rubber and sugar cane among other products.

Distribution: One of the most extensive distribution network in Indonesia, it distributes the majority of INDF’s

and its subsidiaries’ consumer products.

Vegetable processor: The latest acquisition by INDF, it grows and packages processed vegetables to be used in

its own products or sold domestically.

Figure 19. Indofood Group

Source: Company

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Income Statement (Rpbn) Balance Sheet (Rpbn)

Cash Flow Key Ratio Analysis

Interim Results Capital History

Date

14-Jul-94 IPO @ Rp6,200

Year end Dec 2012 2013 2014F 2015F 2016F

Revenue 50,202 57,732 69,841 77,512 86,040

Growth (%) 9.7% 15.0% 21.0% 11.0% 11.0%

Gross Profit 13,591 14,330 17,335 19,240 21,356

Opr. Profit 6,753 6,089 8,335 9,319 10,434

EBITDA 8,242 8,023 10,778 11,956 13,423

Growth (%) 2.7% -2.7% 34.3% 10.9% 12.3%

Net Int Inc/(Exp) (390) (656) (1,344) (1,571) (1,598)

Gain/(loss) Forex (144) (1,568) (614) 243 0

Other Inc/(Exp) 98 802 434 482 535

Pre-tax Profit 6,317 4,667 6,811 8,473 9,371

Tax (1,531) (1,252) (1,703) (2,118) (2,343)

Minority Int. (1,518) (913) (1,104) (1,226) (1,360)

Extra. Items (7) 2 0 0 0

Reported Net Profit 3,261 2,504 4,004 5,129 5,668

Core Net Profit 3,369 3,679 4,464 4,947 5,668

growth (%) 8.1% 9.2% 21.3% 10.8% 14.6%

Dividend per share 175 185 142 227 291

growth (%) 31.6% 5.7% (23.2%) 59.9% 28.1%

Div. payout ratio 49.9% 49.8% 49.8% 49.8% 49.8%

Year end Dec 2012 2013 2014F 2015F 2016F

Cash and equivalents 13,346 13,666 12,493 15,035 18,730

Other curr asset 12,890 18,798 21,895 24,300 26,974

Net fixed asset 15,805 23,028 28,853 32,236 35,928

Other asset 17,348 22,600 25,639 27,445 29,415

Total asset 59,389 78,093 88,881 99,017 111,047

ST debt 3,114 7,928 9,032 9,404 9,751

Other curr liab 9,692 11,543 12,885 13,912 15,013

LT debt 8,354 15,324 17,840 19,025 20,257

Other LT Liab 4,090 4,924 5,608 5,836 6,048

Minority interest 12,934 14,725 15,829 17,054 18,415

Total Liabilities 38,183 54,444 61,194 65,232 69,483

Shareholders Equity 21,206 23,649 27,687 33,785 41,563

Net (debt) / cash 1,878 (9,586) (14,379) (13,394) (11,278

Total cap employed 46,584 58,621 66,963 75,700 86,283

Net Working capital 3,199 7,255 9,010 10,388 11,961

Debt 11,468 23,253 26,873 28,429 30,008

Year end Dec 2012 2013 2014F 2015F 2016F

Core Net Profit 3,369 3,679 4,464 4,947 5,668

Depr / Amort 1,489 1,934 2,443 2,637 2,989

Chg in non-cash

Working Cap (1,536) 4,057 1,755 1,377 1,573

Others 4,096 (2,742) 3,944 5,595 6,035

CF's from oprs 7,419 6,929 12,606 14,556 16,264

Capex (5,215) (10,930) (7,706) (5,485) (6,033)

Others 121 (3,472) (4,216) (4,687) (5,210)

CF's from investing (5,093) (14,402) (11,921) (10,172) (11,244)

Net change in debt (58) 11,785 3,276 1,544 1,607

Others (2,251) (4,994) (4,240) (3,700) (3,439)

CF's from financing (2,309) 6,791 (964) (2,157) (1,832)

Net cash flow 17 (682) (279) 2,228 3,188

Cash at BoY 13,055 13,346 13,666 12,493 15,035

Cash at EoY 13,346 13,666 12,493 15,035 18,730

Free Cashflow 2,875 (8,485) (766) 2,764 3,208

Year end Dec 2012 2013 2014F 2015F 2016F

Profitability

Gross Margin (%) 27.1% 24.8% 24.8% 24.8% 24.8%

Opr Margin (%) 13.5% 10.5% 11.9% 12.0% 12.1%

EBITDA Margin (%) 16.4% 13.9% 15.4% 15.4% 15.6%

Core Net Margin (%) 6.7% 6.4% 6.4% 6.4% 6.6%

ROAE (%) 16.1% 11.2% 15.6% 16.7% 15.0%

ROAA (%) 5.8% 3.6% 4.8% 5.5% 5.4%

Stability

Current ratio (x) 2.0 1.7 1.6 1.7 1.8

Net Debt to Equity (x) 0.1 (0.4) (0.5) (0.4) (0.3)

Net Debt to EBITDA (x) 0.2 (1.2) (1.3) (1.1) (0.8)

Interest Coverage (x) 7.2 5.5 4.6 4.7 4.9

Efficiency

A/P (days) 32 36 36 36 36

A/R (days) 27 27 27 27 27

Inventory (days) 71 67 67 67 67

Year end Dec 1Q13 2Q13 3Q13 4Q13 1Q14

Sales 12,856 14,006 14,417 16,453 16,366

Gross Profit 3,106 3,349 3,572 4,302 4,291

Opr. Profit 1,328 1,433 1,554 1,774 2,007

Net profit 722 981 219 582 1,373

Gross Margins (%) 24.2% 23.9% 24.8% 26.2% 26.2%

Opr Margins (%) 10.3% 10.2% 10.8% 10.8% 12.3%

Net Margins (%) 5.6% 7.0% 1.5% 3.5% 8.4%

PT Trimegah Securities Tbk

Gedung Artha Graha 18th Floor

Jl. Jend. Sudirman Kav. 52-53

Jakarta 12190, Indonesia

t. +62-21 2924 9088

f. +62-21 2924 9150

www.trimegah.com

DISCLAIMER

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purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. This report has

been produced independently and the forecasts, opinions and expectations contained herein are entirely those of Trimegah Securities.

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Trimegah Securities makes no representation as to its accuracy or completeness and it should not be relied upon as such. This report is

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