Equity Research

PT NIPPON INDOSARI CORPINDO TBK 

Worth a bite!

ROTI is on track to achieve higher revenues growth this year and higher gross margins following lower sales returns rate, translating into stronger earnings.  We upgrade our FY19F-20F net earnings by 26.3-12.1% with higher TP to Rp 1.700, implying 29.0x-21.1x FY19-20F. Recommendation BUY!

Sales return rate improving, stronger net profit

ROTI recorded 9M19 net sales Rp2.46 trillion growth of 24.0% YoY, 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 inline our expectation representing 75.3% full year estimates. In 3Q19 ROTI manage to gain 10.0% QoQ sales growth, thanks the commencement of new plants in Balikpapan facility, which is almost at full capacity. ROTI has also improved its market penetration in Eastern Indonesia, which should further boost sales and enable to test the potential of new markets. We also highlight the improvement in sales return rate that dropped from 18% in 9M18 to 12.5% in 9M19 and 11.6% in 3Q19, which resulted from successful implication of management’s forecasting tool. On the bottom-line, the net profit boosted by 105.8% YoY to Rp211.7 billion, due to better sales return, better GPM and further OPEX efficiencies.

GPM Maintained at All-Time High Level

The GPM hiked by 250bps YoY to 55.5% (all time high) as a result of some production efficiency in spite of ~4% YTD price increase in wheat flour (due to decline of production in Australia). 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 9M18 to only 6.2% in 9M19), 2) increasing from scrap sales +22% YoY to Rp 51.3 billion, 3) biannual wheat contracts as the company has locked a 3% lower wheat flour price for 2H19, following the better harvest in US. ROTI will continue to benefit from the weakness in wheat prices, as flour makes up~40% of its raw material costs. Given weak wheat prices, we anticipate strong GPM in 4Q. In terms of YoY comparison, 4Q will look stronger due to the ASP hike of ~8% in 4Q19.

Remains the best proxy for growing bread market

ROTI remains the only option to investors to gain exposure for growing bread market in Indonesia, given its dominant position in the mass market segment. 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. In our view, these expansions should benefit the company in terms of transport cost. We expect the transport cost to sales ratio should reduce to 8% in 2020 (vs current 9.5% in 9M19), 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, we quite more conservative only estimates 4-5% for yearly price hike.

Raise earnings estimates, maintain BUY TP tp Rp 1.700/share

In our view, upside potential stems from higher-than-expected bottom line growth with higher gross margins following lower sales returns rate, translating into stronger earnings. We upgrade our FY19F-20F net earnings by 26.3%-12.1% % on the back of potential upside its extensive networks, three new plants will fulfill demand especially from outer islands regions which have plenty of room for expansion and higher sales volume supported by higher ASP.  We offers 26.4% upside based on yesterday’s closing price. Our TP implies 21.1x PER and 12.2x EV/EBITDA 2020F, while currently the stock is traded at 29.0x PER and 14.4x EV/EBITDA. Key Risks: 1.) higher competition in the domestic bread market, 2.) lower than expected overseas business operations, 3.) Unfavourable wheat price

PT BANK NEGARA INDONESIA (PERSERO) TBK 

Expected Result – Healthy Asset Quality

BBNI managed to maintain its NPL at healthy level of 1.8% in 3Q19 (vs 1.8% in 2Q19 and 2.0% in 3Q18) thanks to 1) Rp 845 billion corporate debtor payment from coal mining sector; 2) upgraded bad debt of Rp 895 billion into current category (mainly come from marble mining sea transportation and mining contracting as well as corporate segment); and 3) a write-off of Rp 4.2 trillion. In all, the company’s 9M19 net interest income (NII) and net profit came in line with expectation which covered by 72% and 70% to our 2019F, respectively. Currently, BBNI share price plummeted by 21% from its highest closing price this year implied to its average 5 years forward PBV – 1 stdev of 1.09x and reflected an attractive valuation. Kept BUY rating on the counter.

NPL maintained at healthy level of 1.8% in 3Q19

BBNI managed to maintain its asset quality at a healthy level in 3Q19, in which the NPL stood at the level of 1.8% (vs 1.8% in 2Q19 and 2.0% in 3Q18) while its provision coverage ratio strengthened to 159.2% (vs 156.5% in 2Q19 and 152.0% in 3Q18) driven by 1) Rp 845 billion corporate debtor payment from coal mining sector in East Kalimantan; 2) upgraded bad debt of Rp 275 billion medium segment to current category (mainly come from marble mining sea transportation and mining contracting); 3) upgraded corporate bad debt of Rp 620 billion to special mention loan (category 2); and 4) a write-off of Rp 4.2 trillion. We forecast that the company’s NPL will reach to the level of 2.1% in 2019F (vs 1.96% in 2018) as consequence of PSAK 71 implementation and loan restructure program from KRAS and Duniatex. Note that, bad debt from Duniatex will not threat significantly to the company’s NPL since the total exposure is only Rp 450 billion, in our view.

Strong 3Q19 net profit

On quarterly basis, the company’s 3Q19 net profit increased by 22.0% QoQ reach to Rp 4.3 trillion (vs Rp 3.6 trillion in 2Q19) due to a significant decline in provision cost of 34.7% QoQ (Rp 1.5 trillion in 3Q19 vs Rp 2.2 trillion in 2Q19) thanks to Rp 845 billion debtor payment from coal mining sector and an upgraded bad debt of Rp 895 billion into special mention loan (category 2) and current (category 1). Meanwhile, the company net interest income (NII) only grew by 5.8% QoQ during the same period from Rp 8.8 trillion became to Rp 9.3 trillion as a result of sluggish loan growth environment.

The 9M19 result came in line with our expectation

All in all, the company’s 9M19 financial results came in line with our expectation, in which NII and net profit covered by 72% and 70% to our 2019F of Rp 37.1 trillion in NII and Rp 17.1 trillion in net profit, respectively. Note that the NII only inched up 3.3% YoY became to Rp 26.9 trillion in 9M19 (vs Rp 26.0 trillion in 9M18) as consequence of its lending rate reduction by 50 bps. As a result, the company’s net profit only advanced by 4.7% YoY from Rp 11.4 trillion to Rp 11.9 trillion.

Kept BUY rating – fair value Rp 11,500 per share

Currently, BBNI share price plummeted by 21% from its highest closing price this year (at Rp 9,850/shr as of 18 April 2019) which was implied to its average 5 years forward PBV – 1 stdev of 1.09x and reflected an attractive valuation. Hence, we kept BUY rating on the counter with a 47% upside potential.