Nippon Indosari: 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. (Andrey Wijaya)
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Regional
Monthly Compass - All About Brexit
Whilst
China and ASEAN’s trade links with UK are small – at ~2% share – a greater
concern is the adverse impact of Brexit on global economic growth. One of the
effects could be the weakened crude oil prices. With a flight to quality, the
consequent ASEAN currency weakness (vs USD) could benefit exporters, but will
be a drag for corporates with large import content or significant foreign
currency debt. On the HK market, we see a possible RRR cut and the
Shenzhen-HK Connect possibly driving the market. (Leng Seng Choon CFA)
Link to report: REG Monthly 20160629
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Telkom received
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Industrial land sale
reached 48.42ha
35,000 MW project
realisation update
Best regards,
Helmy Kristanto
Director
Head of Indonesia Research
PT. RHB Securities Indonesia
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