IPS Stock Pick 30 Oktober 2009 - INDF (BUY TP Rp 3600)

Tasty Noodles, Tasty Stock

Strong Noodles Margin To Continue

After registering only 4% EBIT margin in FY04-08, noodles finally booked 11% margin in 1H09 as wheat prices subsiding and competition eases. We expect noodles to deliver 11% and 10.5% operating margin for FY09F and FY10F respectively, based on soft wheat price and substantial market share despite the price war that has occurred all these years. Indofood is the leader of instant noodles market and possess strong command over pricing, in our view. Moreover, Rp50 price hike back in August should also support our assumption.

Bogasari Facing Tough Times Ahead

We expect wheat price to remain benign in FY10F backed by favorable planting in major producing countries. Lower wheat price should translate to higher margin for Bogasari. However, since 1Q09, Bogasari has been producing more of lower protein flour (which generate lower margin) to anticipate strong competitor that is entering the market in FY10F. This has further pressed operating margin to 7% in 1H09 from its five year low (8% in FY08, compared to 11% in FY04-07). Management is emphasizing on retaining market share rather than defending its margin, in order to prevent another price war that has taken its toll to noodles. Thus we expect Bogasari to continously deliver low margin for FY10F.

Plantation To Book Higher Margin

Oil price just broke through its stubborn resistance level (USD 75) and CPO likewise will follow its rise. Since 2Q09, CPO has been climbing from its low US$500 to present US$650. This has boosted EBIT margin to 30% in 2Q09, from only 16% in 4Q08. Despite delivered low margin (compared to 46% in FY07), plantation still make up 34% of Indofood's operating profit in 1H09. Supported by robust CPO demand from India and China, which will spur CPO price higher, we foresee 40% EBIT margin for FY10F, compared to 33% in FY09F.

Initiating Coverage With BUY

We derived Indofood's target price at Rp3600/share with sum-of-theparts valuation. Our TP offers 25% upside potential, implying 16.2x PE 10F, inline with 4-year average at 16.6x. We believe the company deserves our TP given its robust noodles and plantation outlook. This recent correction should give investors good opportunity to collect the stock. Risks to our valuation : sharp CPO and Rupiah drop and rising wheat price.