Indofood, Strength in Diversity

BUY with target price Rp6,300
Our BUY call hinges on INDF’s i) diversified earnings, ii) ability to maintain robust margins, and iii) aggressive expansion for future growth. Our target price is Rp6,300, based on 18.8x-16.6x FY11-12f PE earnings multiple.

Diversified earnings
INDF’s diversified earnings base ranging from flour, noodle and dairy to plantations provides the company with a natural hedge against spiraling commodity prices. Hence the lower profit from noodles and flour due to higher wheat cost are being partially offset by higher earnings from plantation, which is benefiting from higher CPO price.

Ability to pass on higher costs
INDF is able to partially pass on its costs increase to customers by raising the average sales price of noodles to Rp1,115/pack (+5.8% q-o-q) and that for dairy products to Rp12,756/kg (+8.0% q-o-q). Owing to this ability and its diversified earnings, INDF’s earnings may remain strong even amid an environment of rising raw material cost.

Aggressive expansion
INDF may spend Rp4.2tn in capital expenditure, of which Rp2.5tn will be for its agribusiness mills and plantation expansion, Rp1.1tn to expand its capacity for consumer branded products, and Rp576bn to expand its flour business. The company also plans to build a new dairy factory, which is expected to commence production in 2012. These measures to expand capacity will lay the foundation for growth of future earnings.