Company update:
Nippon Indosari Corpindo (ROTI IJ, BUY, TP: IDR1,870),
A Good Start To 2017
Nippon Indosari Corpindo (ROTI IJ, BUY, TP: IDR1,870),
A Good Start To 2017
Early
2017 has seen two significant developments for Nippon, which came in the form
of lower input costs and the acquisition of a Philippines-based bread company.
The company signed a new 6-months (for Jan-Jun 2017) purchase contract on flour
– its main raw material – at a lower price. In addition, its JV SFC, acquired a
local bread company which we see as a strategic move for Nippon’s penetration
in Philippines market. Maintain BUY with a DCF-based TP of IDR1,870 (13%
upside), implying 25x FY17F P/E.
¨ Lower input costs. Nippon Indosari
Corpindo’s (Nippon) management revealed that its contracted flour price (for
purchase contract Jan-Jun 2017) is to decline by 4% from the price in the
previous 6-months(Jul-Dec 2016) contract. Since flour accounts for around 25%
of Nippon’s COGS, we see this lower input cost having a significant impact on
Nippon production costs.
We believe that Nippon is in better position
than its peers, which purchase flour at spot price. Nippon’s new purchase
contract was determined in Dec 2016 when international wheat price was still on
a declining trend, hence the company able to secure a good price. In the first
week of January, average international wheat price increased by 6%, compared to
that of thefull-month of December. Hence, its peers – bread makers – which buy
flour at spot price may face higher input cost.
¨ Room to increase
selling price. Nippon
has not increased its selling prices for 30 months. During this same period,
other domestic consumer food products like biscuits, snacks and instant noodles
have seen selling prices increase by 5-6% pa. The price gap between bread and
other consumer food products has widened, and we believe Nippon has huge room
to increase its prices. Lower input costs and higher selling prices should help
the company improve its EBIT margins.
¨ Development on
Philippines market expansion. Its JV company, Sarimonde Food Corporation
(SFC) (55%-owned by Nippon), has acquired All Fit & Popular Foods Inc.’s
brands. Notably, SFC does not acquire the Philippines company’s assets and
liabilities. Total acquisition costs is PHP174m (IDR47bn). Nippon did not
disclose the base of its acquisition value (because it is restricted on the
sale and purchase agreement). However, the acquisition cost is relatively small,
considering its potential business in the Philippines market. The acquired
company’s brand Walter Bread, which is well-known for its high quality
and healthy products including sugar free and high fibre breads and has more
than 33 years’ experience.
SFC began selling Walter Bread breads
in the Philippines in Dec 2016, hence Nippon is likely to start booking revenue
from its overseas business starting from its Dec 2016 accounting period.
¨ Maintain BUY. Our DCF-based TP
IDR1,870 implies 25x FY17F P/E, ie near to its 5-year average forward P/E. Key
risks to our call include rising competition, higher sales returns and weakened
consumer spending.
Kindly click the following link for the full
report: Nippon Indosari Corpindo : A Good Start To 2017
Andrey Wijaya
Senior Vice President
Research Analyst – Auto,
Consumer, Cement
PT. RHB Securities
Indonesia
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