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Good morning,
Nippon Indosari
Corpindo - 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. (Andrey
Wijaya)
Link to report: Nippon Indosari Corpindo : More Tailwinds In FY17
Link to Daily report: Indonesia Morning Cuppa - 240217 |
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Best regards,
Helmy Kristanto
Director
Head of Indonesia
Research
PT. RHB Securities
Indonesia
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