Company update:
Nippon Indosari (ROTI IJ, Neutral, TP: IDR1,510),
Lower Input Costs On New Contracts
Nippon Indosari (ROTI IJ, Neutral, TP: IDR1,510),
Lower Input Costs On New Contracts
Nippon Indosari’s
(Nippon) input costs are likely to decline, following lower flour prices
secured under its new 6-month purchase contracts effective July. However, we
expect 2Q16 earnings to be lower than 1Q levels, driven by seasonally weak
sales during the Ramadhan. Given lower 2H16 input costs, we upgrade our
earnings estimates and DCF-based TP to IDR1,510 (from IDR1,320, 1% upside).
Maintain NEUTRAL. Key downside risk to our call would be a slower-than-expected
consumer spending recovery.
¨
Lower
input costs in 2H16.
Nippon revealed that flour prices under its new 6-month flour purchase
contracts – which will be effective July – will decline by 4% on average,
compared to 1H16 purchase contract price. Flour is the largest input cost
component – accounting for around 23% of production costs. Hence, lower flour
prices should have a significant impact on Nippon’s earnings. We see that there
is a possibility of flour prices declining further. So far, the price of wheat
– ie the raw material of flour – is still trending down. Wheat prices have
declined to USD445/bushel at end-June – the lowest in the last five years. This
compares with USD470/bushel at end-Dec 2015.
¨
Seasonally
low 2Q16 earnings.
Although 2H16 outlook is promising, we expect 2Q16 earnings to decline, driven
by seasonally low sales during the Ramadhan. Indonesians typically
consume bread for breakfast and bread-based snacks in between lunch and dinner.
Hence, bread consumption is low during the fasting month of June this year. In
the past, quarterly earnings that include the Ramadan month contributed
merely 17-20% of total full-year earnings. We see a similar weak quarterly
earnings trend this year, given low quarterly sales coupled with high salary
expenses due to the extra 1-month salary for the Lebaran allowance in
June.
¨
Bread
market outlook still promising. Traffic congestion has prompted consumers to
opt for bread which is easier and faster to consume than other food products
such as rice and noodles. The growing middle class who has better buying power
and increasingly adopts the modern lifestyle which has created a huge market
for bread. In the last 10 years, baked goods grew 11.7% on average in value and
5.5% in volume. Its market potential is still huge, especially in expanding
smaller cities.
¨ Lifting earnings forecasts and TP. We increase our FY16-17F earnings by 3% and 7% to IDR295bn and IDR376bn respectively, driven by lower input costs especially flour prices. We also raise our DCF-based TP to IDR1,510 (from IDR1,320), implying a 1% potential upside. Key downside risk to our call would be a slower-than-expected consumer spending recovery, while the upside risks are a further sharp decline in input costs driven by lower wheat prices and the strengthening of the IDR
¨ Lifting earnings forecasts and TP. We increase our FY16-17F earnings by 3% and 7% to IDR295bn and IDR376bn respectively, driven by lower input costs especially flour prices. We also raise our DCF-based TP to IDR1,510 (from IDR1,320), implying a 1% potential upside. Key downside risk to our call would be a slower-than-expected consumer spending recovery, while the upside risks are a further sharp decline in input costs driven by lower wheat prices and the strengthening of the IDR
Best
regards,
Andrey Wijaya
Senior Vice President
Research Analyst – Auto,
Consumer, Cement
PT. RHB Securities
Indonesia
