Sido Muncul, Herbal Medicine Rebounding Strongly

We continue to see a sustained, strong rebound of Sido’s leading herbal medicine product Tolak Angin in early 2016, while the new herbal medicine Tolak Linu has been gaining good sales traction since its launch in Jun 2015. Sido’s cash conversion cycle also improved significantly in FY15. Maintain BUY with a higher IDR650 TP (27% upside), as we raise FY16F-17F net income by 8%/11% respectively, from better sales and margins of its herbal medicines Tolak Angin and Tolak Linu.

Tolak Angin herbal medicine
Sido Muncul (Sido) increased the selling price of its flagship high-margin herbal medicine, Tolak Angin, by 6% in Sep 2015, which affected its monthly sales volume in 4Q15. However, Tolak Angin’s sales volume has rebounded strongly with an average of 58m sachets/month in Jan-Feb 2016.

Tolak Linu herbal medicine
Since its launch in Jun 2015, the new herbal medicine for joint stiffness/fatigue, Tolak Linu, has been gaining solid traction. Its sales volume averaged 6m sachets/month in Jan-Feb 2016. At end-FY15, Tolak Linu’s sales already made up 9.4% of Sido’s total herbal medicine sales.

Remain BUY with a higher TP
We remain BUY on Sido with a higher IDR650 TP (from IDR640, 27% upside), as we increase FY16F-17F net income by 8%/11% respectively to reflect higher sales and gross margins from its herbal medicine products. Our TP is based on DCF valuation with WACC of 12.3% and 3% TG. Key risks to our call would be Tolak Linu failing to sustain its sales growth traction and a faster-than-expected decline in food and beverage (F&B) product sales volume.

Higher-margin product mix
Sido’s receivable days improved by 10 days and its inventory days improved by 2 days in FY15. Its high-margin herbal medicine product sales volume grew 5% YoY in FY15, while the low-margin F&B product sales volume declined 17% YoY. We have observed a continued strong rebound in Tolak Angin’s sales volume and good traction for Tolak Linu.

Tolak Linu herbal medicine
Since its launch in Jun 2015, the new herbal medicine for joint stiffness/fatigue, Tolak Linu, has been gaining solid traction. Its sales volume averaged 6m sachets per month in Jan-Feb 2016. At end-FY15, Tolak Linu’s sales already accounted for 9.4% of Sido’s total herbal medicine sales.

Revising our FY16F-17F earnings
We increase FY16F-17F net income by 8%/11% respectively to primarily reflect higher sales and gross margins of its herbal medicine products. Our new DCF-based TP of IDR650 implies 21x/19x 2016F/2017F P/Es, with 12.3% WACC and 3% TG.

Valuation
We assume a risk-free rate of 8.25%, a market risk premium of 5%, an equity beta of 0.8 and a TG rate of 3%, which result in an implied WACC of 12.3%.