Indofood - Misperception and earnings growth – strong stock drivers

Tuesday, September 8, 2009

The misperception of Indofood’s earnings quality and growth suggests significant upside. Importantly, the noodle business, and not CPO, will drive future profits, accounting for two-thirds of NPAT. We raise our earnings estimates by 27% and 32% for FY09 and FY10, respectively, putting us at 36% ahead of the Street.

We believe there is material upside to our estimates as they are based on a modest 2% increase in noodle prices, a wheat price that is 15% higher than spot and an assumption of no debt paid down.

We believe that Indofood’s earnings are relatively insulated from the volatility in commodity prices. Indofood is 3x less volatile than pure CPO plays. A 10% increase in wheat prices can be offset by a < 2% increase in the price of noodles.

As Indofood is trading at 10.6X FY10 (7.1X ex-IFAR), we find it attractive. We raise our target price to Rp3,500, implying FY10 P/E of 14.7X and 11.7X ex-IFAR, a material discount to regional peers’ 15.2X. The implied valuation does not appear to be too demanding given the stability of the company’s earnings, and because it is one of the best proxies to domestic consumption. Risks: rupiah volatility and rising wheat prices.


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