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Good morning,
Food & Beverage
Products – Potential Impact Of Recent Wheat Price Jump
The recent jump in
the spot price of wheat may negatively impact the earnings of Indonesian
consumer food companies – especially for those that produce flour, noodles
and bread like Indofood Sukses Makmur, Indofood CBP and Nippon Indosari.
However, it is still not certain whether the high price of wheat would be
sustained. In the past three years, wheat prices have typically returned to
normal levels in just a few weeks, after jumping suddenly. In addition, we
believe there is room for consumer companies to manage wheat price
fluctuations. Indofood Sukses Makmur and Indofood CBP commonly have around
three months of raw materials in its inventory as a buffer, while Nippon
Indosari mainly purchases flour based on 6-month contracts. We maintain our
OVERWEIGHT rating on the sector.
¨ Can
wheat prices be sustained after a jump? The wheat spot price jumped by 15%
in the last three days, driven by dry conditions across Southern Australia
and a forecasted drop in supply. Recently, the price of the commodity has
been close to levels recorded in mid-2016. However, it is still uncertain
whether these high prices would be sustained. In the past three years, sudden
jumps in wheat prices also led to normalisation after just a couple of weeks.
¨ There
is room to manage raw material costs. We believe consumer companies have room to
manage the price fluctuations. Indofood purchases wheat at spot price levels,
but usually has around three months’ worth of raw materials in its inventory
as a buffer to manage price fluctuations. Meanwhile, Nippon Indosari
purchases flour based on 6-month contracts that are largely renewed in
December and June every year.
¨ Earnings to be
negatively impacted if wheat prices stay high. If the high prices
of wheat are sustained, it would negatively impact Indonesian consumer
companies that produce noodles and bread, such as Indofood Sukses Makmur,
Indofood CBP and Nippon Indosari. Flour accounts for a major portion of
Nippon Indosari’s cost – about 20% of its bread COGS is related to flour
purchases. For Indofood CBP’s noodle segment, we estimate around 20% of its
COGS is also related to flour. Noodles account for 79% of the Indofood CBP’s
EBIT. In 1Q17, Indofood CBP and Bogasari Flour Mills contributed 68% of
Indofood Sukses Makmur’s EBIT. (Andrey
Wijaya)
Link to report: Potential Impact Of Recent Wheat Price Jump
Link
to daily report: Indonesia Morning Cuppa 060717
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Best regards,
Helmy Kristanto
Director
Head of Indonesia Research
PT RHB Sekuritas Indonesia
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