Macquarie Research: Indofood Sukses Makmur - An opportunity to lighten

Macquarie Research: Indofood Sukses Makmur - An opportunity to lighten

Event

􀂃 Over the past few weeks, INDF’s share price has remained firm, in spite of a

soft 1Q11A result (9.5% below our quarterly forecast), and the share prices of

its two key investments ICBP (Rp5,200, Neutral, Rp5,700 PT) and IFAR

(S$2.05, Not Rated) continuing to decline (collectively 75% of INDF’s NAV).

􀂃 We highlight that this divergence has increased the implied value of Bogasari

to Rp14.5tr, and quite likely reflects anticipatory buying in the lead-up to the

SIMP IPO. However, we believe the view that the IPO will act as a positive

catalyst for INDF’s share price to be misplaced, and we expect the reverse to

occur, and the stock to sell off after the IPO. We recommend investors utilise

the current strength as a short term trading opportunity to lighten.

Valuation difficult to justify: INDF's share price relative to ICBP and IFAR’s

is now implying a Rp14.5tr valuation for Bogasari – representing a 13.5x

FY11E PER based on normalised (10-year average) margins of 9.5% (which

is high by global flour-milling standard). We note that 1Q11A margins were

below mid-cycle levels, at 8.0%, and could fall further in coming quarters with

wheat prices remaining elevated. We believe Bogasari warrants a large PER

discount to the JCI (c14x FY11E PER) given its relatively poor economics.

Earnings and target price revision

􀂃 No change. We expect to update our earnings forecasts following INDF’s

recent 1Q11A result in coming weeks.

Price catalyst

􀂃 12-month price target: Rp5,300 based on a RNAV methodology.

􀂃 Catalyst: SIMP IPO (expected in early June).

Action and recommendation

􀂃 We maintain our neutral call on valuation grounds but flag a negative

short term trading view: We believe INDF’s share price has remained

buoyant in recent weeks as investors have been hesitant to take underweight

positions pre SIMP’s IPO. However, as soon as the IPO occurs and removes

this “event uncertainty”, we believe this artificial support will disappear and

valuation considerations will resurface and become INDF’s primary share

price driver. We believe this holds out scope for INDF’s share price to rapidly

retrace to Rp5,000–5,500 (more in line with our Rp5,300 valuation).