Sido Muncul, Largest Herbal Medicine Producer In Indonesia

We initiate coverage on Indonesia’s largest herbal medicine producer Sido Muncul with a BUY call and DCF-derived TP of IDR625 (22x/21x FY16F/17F P/Es, 20% upside). Its current product mix is geared towards higher-margin products as sales volume of its lower-margin F&B products has been declining. With its raw material production capacity expansion almost completed, we expect its new higher-margin herbal medicine product, Tolak Linu, to help sustain its sales growth.

Sido Muncul (SIDO) – the largest herbal medicine producer
Its leading herbal cold remedy, Tolak Angin, has a market share of 75.1% while its leading energy drink product, Kuku Bima, commands a 37% market share.

Product mix geared towards higher-margin products
Sales volume of its lower-margin products such as Kuku Bima energy drinks has been declining, while sales volume of its higher-margin herbal medicine Tolak Angin has rebounded, resulting in higher consolidated gross margins for the company. SIDO is also doubling its production capacity of Tolak Angin.

Expansion into the pharmaceutical industry
In Sep 2014, SIDO acquired a pharmaceutical company, Berlico Farma (Berlico), in its bid to enter the growing pharmaceutical industry. It will relocate and expand Berlico’s manufacturing plant to Sleman industrial estate (Central Java) by 2017, which would enable Berlico to run three production shifts rather than just one currently.

Experienced management team
SIDO is run by the third generation of the Hidayat family, who is determined to make it a transparent and long-lasting corporation.

We initiate coverage with a BUY and a TP of IDR625 (20% upside)
Our DCF-derived TP is based on a WACC of 12.0% and TG of 5%, implying 22x/21x FY16F/FY17F P/Es.

Key risk
SIDO imports 40% of its COGS; a weak IDR and weak purchasing power can adversely affect its profitability. Reliance on one main product constitutes another risk as SIDO derived c.43% of its FY14 revenue from the Tolak Angin product line.

Investment Thesis

Largest herbal medicine producer in Indonesia
Starting out in the home industry in 1940 with only three employees, SIDO has become the largest herbal medicine producer in Indonesia. Its leading herbal cold remedy, Tolak Angin, has a 75% market share while its leading energy drink product, Kuku Bima, commands a 37% market share.

Product mix geared towards higher-margin products
Sales volume of its lower-margin products such as Kuku Bima energy drinks has been declining, while sales volume of its higher-margin herbal medicine Tolak Angin has rebounded, resulting in higher consolidated gross margins for the company. SIDO is also doubling the production capacity of Tolak Angin.

With its raw material production capacity expansion set to complete year-end and its IPO cash put to use to expand its Tolak Angin production capacity to 150m sachets per month from 80m sachets per month, we believe SIDO’s asset turnover should increase going forward.

SIDO launched its latest herbal medicine for joint stiffness/fatigue – Tolak Linu in Jun 2015 and it already contributed 1.3% of herbal medicine product sales during 3Q15. As the gross margin for this new brand is higher than that of Kuku Bima, we believe SIDO’s consolidated gross margin should increase going forward due to higher sales volume from higher-margin products.

Expansion into pharmaceutical industry
In Sep 2014, SIDO acquired a pharmaceutical company, Berlico Farma (Berlico), in its bid to enter the growing pharmaceutical industry. SIDO will relocate and expand Berlico’s manufacturing plant to Sleman industrial estate (Central Java) by 2017, which would enable Berlico to run three shifts rather than just one production shift currently.

Experienced management team
SIDO is run by the third generation of the Hidayat family who is determined to make it a transparent and long-lasting corporation. Johan Hidayat is SIDO’s commissioner, Irwan Hidayat is the president director, while Sofyan Hidayat and David Hidayat are the company’s directors.

Initiating coverage with BUY and a TP of IDR625 (20% upside)
Our DCF-derived TP is based on a WACC of 12.0% and TG of 5%, implying 22x/21x FY16F/FY17F P/Es. This result is corroborated by the peer comparison analysis.

Largest Herbal Medicine Producer In Indonesia

Starting out in the home industry in 1940 with only three employees, SIDO has become the largest herbal medicine producer in Indonesia. Its leading herbal cold remedy, Tolak Angin, has a 75% market share while its leading energy drink product, Kuku Bima, commands a 37% market share. Its products comprise three main categories: i) herbal medicines, ii) food and beverage (F&B) including energy drink Kuku Bima, and iii) pharmaceuticals.

Leading market shares for Tolak Angin and Kuku Bima
Tolak Angin is the no.1 market player in the herbal medicine sector, followed by its competitor Antangin (produced by Deltomed Laboratories – another large herbal medicine producer in Indonesia). While SIDO is the leading energy drink player supported by its Kuku Bima brand (37% market share), its market share has been declining since FY12 (see next section on “Product Mix Geared Towards Higher-Margin Products”), as there is a demand shift towards the ready-to-drink (RTD) energy drink format from the sachet format.

Production capacity expansion
As shown in Figure 9 below, SIDO’s asset turnover has been declining since FY11. The asset turnover decline in FY13 was mostly due to an increase in cash balance from the IPO proceeds in Dec 2013, coupled with an expansion in SIDO’s raw material production capacity to 11,250 kg of herbal extract/day from 3,750 kg of herbal extract/day, which will be completed by the end of this year.

Along with the upcoming additional raw material production capacity and a rebound in sales volume for the higher-margin herbal medicine Tolak Angin product line (as seen in its 9M15 results), we expect SIDO to move back closer to Zone D, the high-margin, high-volume strategy quadrant .

Product Mix Geared Towards Higher-Margin Products

Due to the intense competition in the energy drinks and F&B markets, sales volume of SIDO’s lower-margin products such as Kuku Bima and its beverage and confectionary products has been declining, while sales volume of its market-leading higher-margin herbal medicine products (ie Tolak Angin) has rebounded, resulting in higher consolidated gross margins for SIDO.

Demand shift towards RTD products
In addition to the intense competition in the energy drinks market, there has been a demand shift towards the RTD product format from the sachet format. In order to stem the declining Kuku Bima market share, SIDO launched its RTD Kuku Bima Ener-G products (with orange, berry and grape flavours) in Jun 2015. As a result, we expect a slower sales decline for Kuku Bima energy drink going forward

Tolak Linu – SIDO’s new herbal medicine was launched in Jun 2015
SIDO launched its latest herbal medicine for joint stiffness/fatigue – Tolak Linu in Jun 2015. During 3Q15, it already contributed 1.3% of its herbal medicine product sales (see Figure 13). As the gross margin for this new brand is higher than that of Kuku Bima, SIDO’s consolidated gross margins should increase going forward due to higher sales volume from higher-margin products.

Herbal medicine product division outlook
Given our Tolak Linu sales forecasts above, we expect the brand to contribute c.10.8% of herbal medicine sales by FY21.

Expansion Into The Pharmaceutical Industry
In its bid to enter the growing pharmaceutical industry, SIDO acquired Berlico, a pharmaceutical company, for IDR121bn in Sep 2014. SIDO will relocate and expand Berlico’s manufacturing plant to Sleman industrial estate (Central Java) by 2017, which would enable Berlico to run three shifts rather than just one production shift currently.

Product example
Berlico’s well-known over-the-counter (OTC) pharmaceutical products are Anacetine (fever drug), Berlosig (ulcer medicine), Tiga Anak telon oil (a type of traditional Indonesian baby oil), Anabion (multivitamin for children), and Suprabion (multivitamin for adults).

Berlico’s sales growth forecast
With the relocation and resultant higher production capacity for Berlico’s new location in the Sleman industrial estate, we forecast Berlico’s sales growth forecast as in Figure 17 below. The current production facility for Berlico can only run one production shift. With the planned relocation to the Sleman industrial estate by end of 2017, Berlico would be able to run three shifts per day starting early FY18F. Hence, we expect the sales growth to pick up in FY18F and level off in FY20F onwards.

Working Capital & Free Cash Flow

To be conservative, we assume SIDO’s payable days would revert back at closer to 36 days (in FY11) from FY15F going forward. Based on 9M15 results, we are comfortable using 68 days for inventory days and 81 days for receivable days from FY15F onwards.

Positive FCF and Net Cash
SIDO has turned positive FCF in FY14 and we expect it to remain positive going forwards as we don’t foresee any other acquisition like Berlico. We are also comfortable in SIDO’s net cash position since FY10.

Valuation
We believe the DCF is an appropriate valuation methodology for SIDO since the company will have a different revenue pattern going forward due to the recently launched Tolak Linu product and as a result of the acquisition of a pharmaceutical company. We corroborate our findings through a peer-comparison.

We assume a risk free rate of 8.25%, market risk premium of 5.0%, equity beta of 0.75, terminal growth rate of 5.0%, which results in a WACC of 12.0%.

To derive the line-items in our DCF we used the assumptions for revenues and margins, product split, estimates in relation to the recently launched Tolak Linu product, working capital as well as assumptions on the future growth from the acquisition of Berlico.

Scenario Analysis
We are particularly interested in developing a scenario analysis for its recently launched Tolak Linu product as SIDO is the leading herbal medicine player in Indonesia. We believe, if the Tolak Linu product is successful, SIDO’s earnings growth will be solid in the coming years as it is a higher margin product compared to its Kuku Bima energy drinks. Our DCF Valuation on Figure 22 is the base case scenario analysis as shown in Figure 25 below.

Key Risks
Volatility in USD/IDR exchange rate. As SIDO imports 40% of its COGS, weak IDR and weak purchasing power can adversely affect its profitability.

Competition in the herbal medicine sector
In Jul 2014, a significant competitor in the herbal medicine sector, Nyonya Meneer, signed an agreement with Kimia Farma (KAEF IJ, Not Rated) for KAEF to distribute Nyonya Meneer’s herbal medicine products. Being a state-owned largest pharmaceutical company, KAEF has vast distribution network to distribute Nyonya Meneer’s competing products.

Intense competition in the energy drink market
Kalbe Farma (KLBF IJ, BUY, TP: IDR1,600) with its larger cash and capital can erode SIDO’s Kuku Bima market share even faster if SIDO is complacent.

Dependence on Tolak Angin product
Tolak Angin constituted c.43% of SIDO’s FY14 total sales. Should Tolak Angin loses its market share, it will significantly reduce SIDO’s sales and profitability.