Sido Muncul, Tolak Linu Gaining Broader Acceptance

While its low-margin energy drink sales could still decline this year, sales volume of Sido’s high-margin flagship herbal medicine product, Tolak Angin, has rebounded strongly and its new herbal medicine product, Tolak Linu, has been gaining solid traction since its launch in Jun 2015. Sido would continue its share buyback as it had used only c.41% of its IDR198bn fund for share buyback as at Nov 2015. Keep BUY with a higher IDR640 TP (25% upside) as we see strong acceptance of its high-margin Tolak Linu and rebounding sales of Tolak Angin.

Strong start for Tolak Linu
Since its launch in Jun 2015, the new herbal medicine for joint stiffness/fatigue, Tolak Linu, has been gaining solid traction as evidenced by Sido Muncul’s (Sido) increasing monthly sales volume (Oct 2015: 2m sachets, Nov 2015: 4m sachets, Dec 2015: 10m sachets).

Continued rebound in Tolak Angin sales
Sido increased the selling price of its flagship high-margin herbal medicine, Tolak Angin, by 6% in Sep 2015, which affected its monthly sales in Oct and Nov 2015. Yet, Tolak Angin monthly sales volume rebounded to c.30m sachets in Dec 2015 and it recorded the same sales volume in Jan 2016. Thus, management expects Tolak Angin sales to grow 15% YoY in 2016 (ie 9% from a volume increase in FY16F and 6% from the price increase in Sep 2015).

More sales via modern store outlets
As there is still ample room for modern store growth in Indonesia, Sido aims to increase sales of Tolak Angin and Tolak Linu via modern outlet channels, such as Alfamart (AMRT IJ, NEUTRAL, TP: IDR570) and Indomaret. Currently, only c.8% of Tolak Angin sales are transacted via modern outlets.

We upgrade our TP to IDR640 (from IDR625) to account for the strong acceptance of its new herbal medicine Tolak Linu and rebounding sales of Tolak Angin. Our new TP of IDR640 offers a 25% potential upside and implies 21.8x/20.5x 2016F/2017F P/E. Downside risks include: i) a slower take-up rate of its new herbal medicine, Tolak Linu, in the coming years, and ii) a faster-than-expected sales decline of its Kuku Bima energy drink.

Strong start for Tolak Linu
Since its launch in Jun 2015, the new herbal medicine for joint stiffness/fatigue, Tolak Linu, has been gaining solid traction as evidenced by its increasing monthly sales volume (Oct 2015: 2m sachets, Nov 2015: 4m sachets, Dec 2015: 10m sachets).

Continued rebound in Tolak Angin sales
Sido increased the selling price of its flagship high-margin herbal medicine, Tolak Angin, by 6% in Sep 2015, which affected its monthly sales in Oct and Nov 2015. Yet, Tolak Angin monthly sales volume rebounded to c.30m sachets in Dec 2015 and it recorded the same sales volume in Jan 2016. Thus, management expects Tolak Angin sales to grow 15% YoY in 2016 (ie 9% from a volume increase in FY16F and 6% from the price increase in Sep 2015).

More sales via modern store outlets
As there is still ample room for modern store growth in Indonesia, Sido aims to increase sales of Tolak Angin and Tolak Linu via modern outlet channels, such as Alfamart and Indomaret. Currently, only c.8% of Tolak Angin sales are transacted via modern outlets. As such, the company aims to increase Tolak Angin sales contribution via modern store channels to 10%. We support the goal as we noted a rebound in Alfamart’s same-store sales growth (SSSG) in 4Q15 (Oct 2015: 6.27%, Nov 2015: 8.29%, Dec 2015: 11.39%).

Upgrading FY16F and FY17F earnings
We have revised our forecasts as follows, considering the strong start for Tolak Linu sales, rebounding sales of Tolak Angin, and higher margins due to a product mix change towards higher-margin herbal medicine products (ie Tolak Angin and Tolak Linu).

Valuations
We assume a risk-free rate of 8.25%, a market risk premium of 5.0%, equity beta of 0.75 and TG rate of 3.0%, which result in an implied WACC of 12.0%.