Company update:
Nippon Indosari Corpindo (ROTI IJ, BUY, TP: IDR1,870)
More Tailwinds In FY17
Nippon Indosari Corpindo (ROTI IJ, BUY, TP: IDR1,870)
More Tailwinds In FY17
Nippon
indicated that its monthly sales – which were hurt in Dec 2016 due to a
temporary products boycott – have returned to normal. This year, the company is
likely to raise its selling prices, since there have been no price hikes for
almost three years. On the flip side, flour prices (its main raw material
purchased under semi-annual contracts) have declined. This year, Nippon has
also started to move into new markets in Kalimantan and increased its GT sales
forces. Maintain BUY and DCF-based IDR1,870 TP (22% upside), which implies 25x
FY17F P/E.
¨ Better sales in
January after Dec 2016’s boycotts. Our channel checks on minimarts in Jakarta
suggest that Nippon Indosari Corporindo’s (Nippon) sales have started to
improve in January after a temporary products boycott in Dec 2016. Nippon’s
general trade (GT) distribution is also strengthening. This can be seen by the
number of Sari Roti hawkers (and their ubiquitous tricycle carts)
already back on the streets. This year, Nippon aims to increase its GT channel
sales force too by boosting the number of “Mbak Sari” (ladies selling Sari
Roti products from trollies) by 3x. The company also aims to increase its
GT sales contribution to 26% of total sales in FY17 (FY16: 24%).
¨ New markets in
Kalimantan. As
at January, Nippon started selling its products in cities in Kalimantan. These
urban centres include Pontianak, Banjarmasin and Samarinda. The firm delivers
its bread products – which produced at its Java plants – to Kalimantan via air
freight. Although the transportation costs are high, Nippon said its
Kalimantan’s EBIT margins are same as the Java market. This is because all
transportation costs are passed on to its customers.
¨ Likely to increase
ASPs while costs decline. Nippon has not increased its selling prices for almost
three years. During this same period, other domestic consumer food products
like biscuits, snacks and instant noodles have seen prices increase by 4-6% pa.
The price gap between bread and other consumer food products has widened, and
we believe Nippon has huge room for increasing its prices.
¨ On the flip side,
contracted flour price (for purchase contracts in January-June) is set to
decline by 4% from prices in the previous 6-month period, ie Jul-Dec 2016.
Since flour accounts for ~25% of Nippon’s COGS, we see this lower input cost
having a significant impact on its production costs.
¨ Softened FY16
earnings likely, but it should recover this year. The temporary Sari
Roti products boycott has caused sales disruption. Hence, some of its bread
products expired at the minimarts, which resulted in higher 4Q16 sales returns.
This could narrow its EBIT margins and conceivably soften earnings growth.
However, such growth should accelerate this year, driven by lower input
costs and higher selling prices. These factors should help Nippon improve its
EBIT margins.
¨ We maintain our call and DCF-based IDR1,870
TP
(22% upside), which implies 25x FY17F P/E, on this stock. 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 : More Tailwinds In FY17
Andrey Wijaya
Senior Vice President
Research Analyst – Auto,
Consumer, Cement
PT. RHB Securities
Indonesia
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