Equity Research

PT NIPPON INDOSARI CORPINDO TBK 

Soared Earnings Led By Cut in Return Rate

The dream duo: Robust demand & effective forecasting tool

During 1H19, ROTI recorded a solid sales growth of 24.4% YoY from Rp1.28 trillion in 1H18 to Rp1.59 trillion, on the back of strong demand both in MT and GT in Indonesia and Philippines in line with rapid expansion of distribution outlets in both countries. This is slightly above our expectation (49.4% of FY19F Rp3.2 trillion), as the company manage to gain 0.5% QoQ sales growth in 2Q19, while normally, 2Q is the lowest season of the year, related to fasting month and school holiday – thanks to intensive marketing campaign and promotion during holiday season. We also highlight the improvement in sales return rate that dropped from 23.1% in 1H18 to 13.6% (12.9% in 2Q19), which resulted from successful implication of management’s forecasting tool. On the bottomline, the net profit boosted by 153.8% YoY to Rp101.4 billion, which as expected (formed 47.2% of FY19F Rp219.4 billion) due to better sales return, better GPM and further opex efficiencies. Note that as of Jun19, Sari Roti has maintained 95% penetration of MT channels in Indonesia or translated to 33,340 stores (from 29k as of 2018) and covered 61k Point of Sales GT channel (from 44kPoS as of 2018). Recently, the company established a new entity PT Indosari Nusantara Niaga with Rp12.38 billion equity injection, which fully concern in distributorship business to further extend coverage and fulfilling white spaces that has not been covered by existing distributors.

GPM Maintained at All-Time High Level

Profitability-wise, the GPM hiked by 170bps YoY to 54.6% (all time high) as a result of some production efficiency in spite of ~3% YTD price increase in wheat flour (due to decline of production in Australia). Furthermore, despite the higher transportation cost (+59.1% YoY) and marketing cost (+67.3% YoY), due to company’s effort to boost sales as well as customer acquisition particularly in Philippines through TVC and other promotional campaign, as well as higher salary cost (+29.9% YoY) which in line with company’s expansion both in Indonesia and Philippines, the EBIT margin jumped by 410bps YoY to 7.0%, thanks to 1) lower expired/ defective inventory cost by 37.7% YoY (ratio to sales from 12.4% in 1H18 to only 6.2% in 1H19), which in line with much lower sales return rate during the period; 2) efficiencies in GA expense (ratio to sales declined by 120bps YoY from 8.0% to 6.8%).

Choco & Cheese Sandwich as New PH Booster

During the period, the sales in Philippines of Rp65.2 billion jumped by 93.7% YoY from Rp33.7 billion in 1H18 with attributable loss of Rp23 billion. Today, Sari Roti is currently available in more than 1,800 modern stores (vs 1,280 as of 2018). Recently in July, it has launched new chocolate and cheese filled sandwich bread, which we believe will be a new sales booster particularly for convenience store, plus another 3 new white bread products in 3Q19. By the end of FY19, the company estimated the attributable loss from Philippines will be around Rp40 bn (drop from Rp54.5bnloss as of FY18).

More Improvement Expected

We believe there will be further GPM improvement in 2H19, as the company has locked a 3% lower wheat flour price for 2H19, following the better harvest in US and stable Rupiah. In terms of expansion, we highlighted the first Kalimantan plant in Balikpapan that just commercially operated in Jun19 has already fully utilized due to massive demand in the area, while currently the company is constructing 2 new plants in Banjarmasin (South Kalimantan) and Pekanbaru (Riau) which expected to be commercially operated in 2020. These expansions, in our view, should benefit the company in terms of transport cost, which is currently peaking. We expect the transport cost to sales ratio should reduce to 8% in 2020 (vs current 9.5% in 1H19), and gradually normalized to ~7.2% in 2021 onwards. The company is currently reviewing its price policy for potential yearly price hike of 5-6% in average (from previous once-in-3 year hike of 8-9%) in order to improve its revenue quality. In our view, however, this is a quite risky move particularly on customer segment B & C who are more price sensitive.

Upgrade TP to Rp1,600/ share – BUY

We made slight adjustment in FY19F sales assumption to reflect better than expected 1H19, while in 2020F onwards we see potential improvements in opex. Using 2020F as base year, our TP on the stock is now Rp1,600/ share (from previous Rp1,400/ share), offers 24.0% upside based on yesterday’s closing price. Our TP implies 28.9x PER and 17.3x EV/EBITDA 2020F,while currently the stock is traded at 23.6x PER and 13.3x EV/EBITDA 2020F.