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ICBP - Feeding the Nation
December 17, 2014 09:23

As one of the largest F&B companies in Indonesia, ICBP’s brands have become household names across much of the country thanks to their mass market appeal and easy availability at many stores. As such, we believe that the company represents a safe shelter in Indonesia’s consumer sector at the present time, especially since inflation has gone up recently. Furthermore, in valuation terms, the shares look enticing in view of the company’s lower PE relative to the JAKCONS. We reinitiate coverage on ICBP with a Target Price of Rp13,400. BUY.

Defensive products with extensive distribution and market penetration
As purchasing power may wane due to a higher cost of living, we think that ICBP is one of the most defensive stocks in the market that can weather the challenging macro conditions. The company’s defensive characteristics are exemplified by its best-selling instant noodles, which have low selling prices and high brand awareness among Indonesian consumers. Benefiting from Indonesia’s young demographics and the burgeoning middle-class, ICBP’s other product segments also offer some potential upside. To support its operations, the company also has an extensive distribution network across Indonesia.

Margins projected to improve in 2015 onwards
We note that margins have taken a hit since 2013, and while the weakness may have been protracted into 2014, we are more upbeat on 2015-16F. In our view, commodity prices should remain soft going forward, paving the way for margins improvement. We also believe that the Rupiah will strengthen in 2H15, with every Rp100 increase in the average USD/IDR exchange rate leading to an increase in the net profit by about 4.5%. We estimate net margins in 2015-16F of 9.8%- 10.3%.

The balance sheet remains healthy
We have ascertained the healthiness of ICBP’s P&L and balance sheet in terms of profitability, solvency and liquidity ratios. Margins are expected to improve (profitability), while sufficient cash should keep ICBP in a net cash position (solvency). In terms of liquidity, the company’s cash conversion cycle is expected to remain stable, at marginally below 40 days, with working capital turnover at about 4 days.

Valuation at its 5-year average as market conditions are less conducive
While ICBP’s PE ratio has on average been at 31% above the JCI, compared to its peers, ICBP’s PE is at a discount (16.6%). Currently, ICBP is trading at around 20x 12-month forward PE, or around its 3-year PE average and at a 14% discount to its regional peers. Under the current conditions, we believe a higher valuation is warranted. We derive our Rp 13,400 Target Price from 22.9x 2015PE, at par to its regional peers.