Indofood CBP

Initiating Coverage Finally Stands on Own Feet

Report date 17-Dec-10 The debut of Indofood CBP provides access to investors looking to grow
along with Indonesia’s strong domestic and consumption growth. The
Sector Consumers
company has created an impressive plan to utilize its IPO proceeds for
Rating BUY expansionary purpose. We believe that volume growth will continue to
Last price Rp4,525 next year and attractive margins still remain. Initiate buy, with target price
Price Target Rp5,700
of Rp5,700.
Potential upside (%) 26.0
52 week Hi-Lo price Rp4,400-Rp6,200
Parental support and control still strong
Indofood Consumer Branded Products is the subsidiary of Indofood (INDF, Rp4,475,
Stock Data Buy) with annual sales reaching Rp16.32tn in 2009 . It was listed in November 2010,
Bloomb./Reuters code ICBP IJ / ICBP.JK with1.17 bn shares sold to the public at the price of Rp5,395 per share. The Indofood
Mkt Cap (Rp bn/US$ mn) 26,385/2,920 company still retains control of the group and therefore fully consolidates it in its book
Issued Shares (mn) 5,831 as it holds 4.66bn shares or equal to 80% stake. Apart from its strong brand name,
Avg. daily val. (Rp bn/US$ mn) N. A.
Indofood CBP also has access to raw materials and relies on its parent for distribution.

Major shareholders
Wise investment for future
PT Indofood Sukses Makmur 80.0% The company is anxious to expand and sees that capex spending in 2011F and 2012F
Others 20.0% to be equal or more to the Rp954bn expected in 2010E. It plans to increase
production capacity of its divisions by 13%-100%.

EPS concensus
2010F 2011F External factors conducive
As a total food solutions company, it is dependent on the price of commodities and
Consensus (Rp) 279 293
the purchasing power of its customers. However, ample global commodity stock ratio
Our est. vs consensus (%) 6.0 5.6
and strengthening of Rupiah should curb cost increases. Market size is expected to
continue next year in line with Indonesia’s growth, which is expected to grow
Share price performance between 6.0%-6.5%.
3m 6m YTD
Absolute (%) N. A. N. A. N. A.
Relative (%) N. A. N. A. N. A. Growth inline with domestic consumption, attractive prospect
Indofood CBP is a good choice for investors looking to bet on the domestic economy.
Relative performance chart We see that net income can grow to reach 1.72tn this year and will grow at a steady
growth between 6% to 8%. We expect earnings per share to reach Rp309 and Rp352
(Rp)
6,000
(%)
0
in 2011F and 2012F. The company also plans to pay dividend starting from next year
5,000 -5
with dividend payout ratio up to 40%. Therefore we initiate our coverage with a
4,000
-10 target price of Rp5,700. As it offers a 26% upward potential from its last closing
3,000
2,000
-15 price, we recommend Buy. Currently the share is trading at 2011F PER of 14.6x and
1,000 -20 EV/EBITDA of 7.2x.
0 -25
Oct-10 Dec-10
Hist. price (LHS) Rel. to JCI (RHS)
Key financial and valuation metrics

Year-end 31-Dec 2008 2009 2010F 2011F 2012F

Lyana Margareth Revenue (Rp bn) 12,043 16,333 17,870 18,989 20,428
lyana.margareth@nispsekuritas.com
EBITDA (Rp bn) 973 2,267 3,014 3,082 3,498
62-21-8379 5238 ext.7327
Net profit (Rp bn) 339 1,078 1,723 1,803 2,054
EPS (Rp) 58 185 296 309 352
EPS growth (%) 508.9 218.0 59.9 4.6 13.9
DPS (Rp) 0 0 0 118 124
Dividend yield (%) 0.0 0.0 0.0 2.6 2.7
P/E Ratio (x) 77.8 24.5 15.3 14.6 12.8
EV/EBITDA (x) 27.0 12.0 7.7 7.2 6.0
Return on Equity (%) 15.1 84.3 18.5 17.3 17.5
Net Gearing (x) net cash 57.0 net cash net cash net cash

Source: Company data and NISP Sekuritas

Indofood CBP
Separate entity carrying strong Group name
Indofood Consumer Branded Products is the subsidiary of Indofood (INDF, Rp4,475,
Buy), with annual sales reaching Rp16.32tn in 2009 . It was listed in November 2010,
with1.17 bn shares sold to the public at the price of Rp5,395 per share. The Indofood
company still retains control of the group and therefore fully consolidates it in its book
as it holds 4.66bn shares or equal to 80% stake.

There are 4 (four) divisions, noodles, snack foods and nutritions and special food
(NSF). Two divisions are the key drivers to ICBP where 70% sales come from
noodles, while almost 20% come from dairy sales or Indomilk. The remaining
divisions make for the remaining 10%.

Exh. 1: ICBP Net Revenue 2007-2009 (in Rpbn)

2007 2008 2009

Total 9,801.3 12,367.8 16,703.4
Noodles 8,440.6 10,897.8 11,688.3
Dairy - 3,245.9
Food Seasonings 471.4 480.3 574.2
Snack Food 464.7 609.2 764.5
NSF 424.5 380.6 430.6

Source: Company

Sales have grown at an average of 19.1% for the past years (excluding Dairy sales)
The acquisition of Indolakto in December 2008 added Rp3.26tn to revenue, or 19.4%,
making it now one of the main drivers to the company’s performance.

Exh. 2: EBIT Margin

ICBP EBIT Margin

14.0%

12.0%

10.0%

8.0%
Year

6.0%

4.0%

2.0%

0.0%
2007 2008 2009

ICBP Noodles Food Seasonings Snack Food NSF Dairy

Note: Dairy division starts in 2009

Source: Company

ICBP has 35 production facilities that include 16 instant noodle facilities, 3 food
seasoning facilities, 3 dairy plants, 1 NSF facilities, 3 flexible packaging facilities, and
3 cardboard packaging facility. These are located in the bigger islands in Indonesia,
and also 1 noodle facility in Malaysia.
Indofood is the market leader for instant noodles in Indonesia, owning 73.2% market
share in 2008 with various brands such as Indomie, Supermie, and Sarimi. It controls
37.8% market share in the condensed milk category and 22.4% market share in the
flavoured milk drinks and long life/UHT milk.
As Indofood subsidiary, it depends much on its parent for raw materials including
flour and cooking oil. ICBP products are also distributed by Indofood. Compared to its
parent though, it stands on a more stronger financial position, with a net cash
position.

2
Indofood CBP
IPO proceeds to generate growth
The company has raised Rp6.29tn from the IPO, where Rp 4.10tn is used to repay
loans its parent, Indofood and Rp1.10tn will be used to repay outstanding bank loans.
This still leaves a sizable amount of approx. Rp1.09tn for the company for capacity
expansion.
The company sees that capex spending in the upcoming years to reach Rp1.90tn.
Upcoming projects that are planned include:
1. 3 (three) instant noodle production facilities, completed by 2012-2014. This is
expected to increase production capacity by 13%. Current capacity is 15.6 bn packs.
2. 1 (one) new dairy facility and add new lines to the division., starting 2011-2012.
This is expected to double production capacity. Current capacity is 203.5 th tons (solid
products) and 122.3mn L (liquid products)
3. Relocation of potato chip production in Tangerang to new facility and increase
potato chip production capacity in Semarang, completed by 2012. This is expected to
double production capacity. Current capacity is 33.7 tons.
4. 1 (one) new spicy sauce production facility in Semarang, completed by 2011.
Capex financing will be sourced from the IPO proceeds and internal cash. The
company is also open to external funding, namely new bank loans.

Diverse divisions
Instant noodle division
ICBP is one of the world's largest instant noodle producers with annual capacity in
excess of 15 billion packs a year. Its diverse brand portfolio, which includes Indomie,
Supermi, Sarimi, Sakura, Pop Mie, Pop Bihun and Mi Telur Cap 3 Ayam, It caters to all
market segments, offering a variety of products such as bag noodles, cup noodles,
instant noodles, and instant rice vermicelli.
Instant noodles are immensely popular to all levels of household income in Indonesia.
It is considered the cheapest alternative to rice and a substitute of staple for most,
while an enjoyable snack for others. For the last market, Indofood is targeting to
place itself as a nutritious and easy alternative, with several more premium tastes and
varieties.
Dairy division
The dairy division is controlled under Indolakto, the company’s indirect subsidiary,
which was acquired in December 2009. The company has effective control over
68.6% in Indolakto. Indolakto is the second largest producer of dairy products in
Indonesia, providing a wide range of products such as sweetened condensed milk
(SCM), ultra high temperature (UHT) milk, sterilized bottled milk, pasteurized liquid
milk (PLM) and powdered milk, ice cream, yoghurt drink and butter. Brands under the
division include Indomilk, Cap Enaak, Tiga Sapi , Orchid butter, Indoeskrim and Nice
yoghurt drinks.
In 2009, it sold 89.57 million liters for the liquid base, which includes UHT, sterilized
bottled milk, pasteurized liquid milk, yoghurt drink and ice cream. Total sales volume
for the solid base, which includes SCM, powdered milk and butter was 167.95
thousand tons.
In terms of market volume, the dairy market in Indonesia is mostly made up by SCM
(sweet condensed milk) which comprises more than 50% of total market size,
followed by UHT and sterilized bottled milk as the second largest market. Indomilk
controls 37.8% market share in the condensed milk category and 22.4% market
share in the flavoured milk drinks and long life/UHT milk.
Food Seasonings division
The Food Seasonings Division produces a wide range of products for both the
Indofood Group and associated company, PT Nestlé Indofood Citarasa Indonesia
(NICI), which is responsible for marketing of culinary products of the company. It also
manufactures syrups branded with the Indofood name. Total sales volume in 2009
reached 63.67 thousand tons. Ingredients and materials affecting the division include

3
Indofood CBP
chili and sugar. More than 30% of the products are sold internally to the instant
noodle division.
Snack Food division
The Snack Food Division produces a range of modern snack food products controlled
by subsidiary Indofood Frito Lay, where it has 51% stake. Brands include Chitato,
Qtela, Lays, Cheetos, Chiki and Jetz. In 2009, sales volume reached 13.69 thousand
tons.
Nutrition & Special Foods Division
The Nutrition & Special Foods Division produces foods for babies and children, as well
as milk for expectant and lactating. Its brands are Promina, targeted for higher-
income groups and SUN, which targets the lower-middle market. The brand Promina
is the leader in the instant follow-on cereal category. Total sales volume for the
Division grew by 7.6% in 2009 to 12.50 thousand tons.

Exh. 3: ICBP Products

Source: Media, Company

Susceptible to many factors

During 2008, sales volume declined as it is faced with several constraining factors.
1. High raw material prices.. Instant noodles production is dependent on the price of
wheat as its main ingredient, cooking oil, and the price of energy as the drying
process consumes a certain sizable amount of energy. The commodity boom of 2008
saw wheat prices, CPO, and coal prices shoot up to record highs. Although ICBP
secures its materials such as flour from the Indofood group, it is still forced to
increase prices as wheat is imported from Australia and other parts of the northern
hemisphere. This forced the company to raise prices 5 times in 2007- 2008 to
compensate for the increased cost, with total price increase ranging between 40%-
70%. Other divisions are also dependent on commodity prices, such as skim milk
price, potatoes, chili and sugar.

4
Indofood CBP

Exh. 4: Wheat Price (US$ per MT)

450
400
350
300
250

200
150
100
50

0
06

07

07

07

07

08

08

08

08

09

09

09

09

10

10

10
4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q
Source: USDA

2. Declining consumer purchasing power. Price increases in 2008 made the more
sensitive consumer reduce consumption of noodle. In addition, inflation in 2008 shot
up to 11.8% YoY , compared to 2007 inflation of 6.6%. This caused real purchasing
power to decline and subsequently took a toll towards sales volume. Noodles volumes
declined by 10.1% while other divisions such as food seasonings and NSF declined by
3.9% and 26.4%.
3. Increasing competition. As a consumer branded product, the company faces
increased competition from other companies. Therefore in addition to tactical pricing
to balance price increase with volume contraction or growth, it needs to keep
investing in brand equity awareness to ensure consumer loyalty.
Going back several years, the company faced serious competition in 2003 due to
competition from Mie Sedap from the Wings group, which not only sold its product
below the company’s price but also conducted heavy market campaigning. This
caused Indofood to lose some of its market share where it now controls only 73.2%
from 88% in 2002.
Marketing efforts do not show a correlation to total sales as it only grew by 25.%4
YoY each year compared to 36.1% YoY growth in revenue. The company still
maintains a prudent budget for selling expenses as revenue is more volatile to the
swings of raw materials. Selling expenses, which includes advertising expenses, in
2009 equaled Rp1.56tn compared to net revenue which reached Rp16.33tn in 2009

Exh. 5. Revenue and Selling Expenses 2007-2009

18000
16000
14000
12000
(Rp bn)

10000
8000
6000
4000
2000
0
2007 2008 2009

Revenue Selling expenses

Source: Company

5
Indofood CBP

Appetite for noodles satisfying but not enough

The food market in Indonesia has a strong growth backed by increasing population
and economic growth. At least half of disposable income is spent for food
expenditures, which will benefit Indofood. Indonesia’s economy has been fairly
insulated from the global crisis due to its strong domestic growth fuelled by high
consumption expenditure. As such according to Euromonitor International, the
packaged food industry in 2009 grew at 11.2% YoY supported by volume growth.
Even after the Asian crisis in 1998, packaged food continue to grow by an impressive
double digit rate

Exh. 6: Indonesian Packaged Food Industry CAGR (1999-2009)

Segment CAGR (1999-2009)

Noodles 10.0%
Dairy products and ice cream 15.3%
Sauces, dressings and condiments 10.3%
Sweet and savoury snacks 13.2%
Baby food 15.8%

Source: Euromonitor International

In fact in the last 5 years, noodles and dairy products have enjoyed even higher
growth, with a CAGR of 11.1% and 15.5%.
2010 continued to be a better year for Indofood after sales volume had picked up in
2009. ICBP had satisfying success as the company saw greater volume growth and
improving EBIT margin to most of its lines. Notably the Noodles line, as the division’s
highest contributor, saw EBIT margin grow from 12.8% in 9M09 to 16.8% in 9M10.
This improvement is due to the weakening of flour price and other raw materials that
made for lower cost of goods sold. In addition, low inflation and improving domestic
purchasing power increased demand by 4.2% YoY to 8.76bn packs sold in 9M10.

Exh. 7: ICBP Results 9M10

Sales EBIT Volume
Sales (in Rpbn) EBIT (in Rpbn)
ICBP Growth growth Growth
9M09 9M10 9M09 9M10 (in %)
Noodles 8,831.4 9,533.9 1,132.4 1,598.2 8.0 41.1 4.2
6.0% (liquid),
Dairy 2,394.1 2,609.1 182.1 324.7 9.0 78.3
5.5% (solid)
Food Seasonings 465.0 630.5 24.1 20.6 35.6 -14.7 14.6
Snack Food 556.7 742.2 29.4 51.8 33.3 76.5 28.8
NSF 320.0 375.5 29.1 37.8 17.4 29.8 15.5

Source: Company

As instant noodles remain the cheapest alternative to rice, it is immensely popular to

the low-income segment and demand should grow in line with the size of the
population and domestic growth. Bank Indonesia forecast sees that Indonesia will
grow by 6% in 2010E and between 6%-6.5% next year. Considering that half of
disposable income is still used for food consumption, we see that demand for ICBP
products can continue to accelerate in the short term.
A risk to the noodle division sales lies in the price of flour, which is affected by
international prices of wheat. Wheat price have increased to touch a high of US$259
per MT this year, which will affect the price of flour. However we believe that the
price of wheat will not be as high as in 2008 when it hovered around US$450 mid-
2008, as world wheat stock is much higher than the level in 2008 when wheat stock
was only 19% compared to 2010 ending stock ratio at 27% and 2011F ending stock
ratio of 25%. In addition, the stronger Rupiah will help wheat importers, or
specifically Bogasari as ICBP’s supplier, to curb the rising costs.

6
Indofood CBP
Although we see increased volume in the short term however such growth is unlikely
to be a major catalyst for the company. With improving income, there should be also
a shift in demand by consumers to seemingly more nutritious alternatives therefore
we do not see a sizable jump in volume in the middle to long-term timeline.
We see better prospects for the dairy segment, where we believe sales could continue
to grow higher backed by volume size. Indonesia still has the lowest level of milk
consumption in SE Asia with 11.7 L per capita. For comparison Vietnam’s milk
consumption has reached 15 L. This shows there is still a huge market potential that
will continue to increase in size over the years. With the company’s plan to add new
lines and open a new production facility, we see that dairy will increase contribution
to total revenue.

Initiate with Buy coverage

ICBP growth is strongly correlated to strong domestic growth. Indonesia is expected
to continue with a 6%-6.5% growth next year, which would increase demand for the
company’s products. It chooses to invest its IPO proceeds wisely in anticipation for
long-term growth while remaining to have a net cash position. This is a good choice
for investors looking to bet on the domestic economy and its up to 40% dividend
payout ratio will also provide incentive. Therefore we initiate our coverage with a
target price of Rp5,700, where with a 26% upward potential, and a recommendation
of Buy. Currently the share is trading at 2011F PER of 14.6x and EV/EBITDA of 7.2x.

7
Indofood CBP
Indofood CBP – Financials
Income statement Cashflow analysis
Year-end 31 Dec (Rp bn) 2008 2009 2010F 2011F 2012F Year-end 31 Dec (Rp bn) 2008 2009 2010F 2011F 2012F
Revenue 12,043 16,333 17,870 18,989 20,428 CFs from operation
COGS 9,929 12,420 12,836 13,677 14,772 Net Profit 339 1,078 1,723 1,803 2,054
Gross profit 2,113 3,913 5,078 5,372 5,791 Depreciation/amortz. 457 467 309 422 525
Gross margin (%) 17.5 24.0 28.4 28.3 28.3 Change in working capitals -365 -83 -259 -33 -55
EBITDA 973 2,267 3,014 3,082 3,498 Others 770 -44 4 44 -36
EBITDA margin (%) 8.1 13.9 16.9 16.2 17.1 CFs from operation 1,201 1,418 1,777 2,237 2,487
Operating expense 1,598 2,113 2,373 2,712 2,818
Operating profit 515 1,800 2,705 2,660 2,974 CFs from investments
Operating margin (%) 4.3 11.0 15.1 14.0 14.6 Net capex -1,093 -249 -267 -565 -695
Net interest inc (exp) -11 -57 -92 89 134 Others -4,205 1 -7 -6 -7
Others 25 -141 -146 -168 -169 CFs from investments -5,297 -247 -275 -571 -702
Pre-tax profit 529 1,603 2,466 2,580 2,939
Pre-tax profit margin (%) 4.4 9.8 13.8 13.6 14.4 CFs from financing activ.
Income tax - net -174 -430 -617 -645 -735 Decrease (inc.) in share cap. 0 466 6,292 0 0
Minority interest -16 -94 -126 -132 -151 Decrease (inc.) in debt 244 1,067 -49 -1,369 -7
Net profit 339 1,078 1,723 1,803 2,054 Dividend payments 0 0 0 -689 -721
Net profit margin (%) 2.8 6.6 9.6 9.5 10.1 Others 3,984 -2,511 -4,012 88 100
CFs from financing activ. 4,228 -978 2,230 -1,970 -628
EPS (Rp) 58.1 184.9 295.6 309.3 352.2 Net inc/(dec) in cash 132 193 3,733 -304 1,157

DPS (Rp) 0.0 0.0 0.0 118.2 123.7

Balance sheet Key ratio analysis

As at 31 Dec (Rp bn) 2008 2009 2010F 2011F 2012F Year-end 31 Dec 2008 2009 2010F 2011F 2012F
Assets Revenue gr. (%) 27.0 35.6 9.4 6.3 7.6
Cash and equiv 503 696 4,429 4,125 5,282 EBITDA gr. (%) 295.9 133.0 33.0 2.3 13.5
Receivables 1,608 1,476 2,055 2,145 2,168 Opr. Profit gr. (%) 405.3 249.2 50.3 -1.7 11.8
Inventories 1,392 1,311 1,424 1,626 1,651 Net profit gr. (%) 508.9 218.0 59.9 4.6 13.9
Others 144 318 179 189 197
Total current assets 3,647 3,801 8,086 8,086 9,299 ROE (%) 15.1 84.3 18.5 17.3 17.5
Net fixed assets 2,177 2,180 2,361 2,726 3,119 ROA (%) 3.3 10.5 11.8 12.2 12.6
Other assets 4,382 4,243 4,116 3,973 3,851
Total assets 10,206 10,224 14,564 14,785 16,269 Current ratio (x) 0.6 0.5 2.3 3.3 3.8
Quick ratio (x) 0.3 0.3 1.8 2.6 3.1
Liabilities and equities Debt to equity (x) 15.9 111.3 14.8 0.1 0.0
Payables 1,504 1,101 1,446 1,608 1,570 Net debt to equity (x) net cash 57.0 net cash net cash net cash
ST. debt and curr. maturity 4,459 5,480 1,369 0 0 EBITDA/Interest cov. (x) 12.8 40.5 29.3 26.3 55.7
Other current liabilities 513 798 741 845 879
LT. debt 63 42 7 7 0
Other long term liabilities 1,142 1,179 1,277 1,398 1,460 Valuation
Total Liabilities 7,681 8,599 4,839 3,858 3,910 Year-end 31 Dec 2008 2009 2010F 2011F 2012F
Minority Interest 280 346 430 518 618 PER (x) 77.8 24.5 15.3 14.6 12.8
Shareholders' equity 2,245 1,279 9,295 10,409 11,741 EV/EBITDA (x) 27.0 12.0 7.7 7.2 6.0
PBV (x) 11.8 20.6 2.8 2.5 2.2
BVPS (Rp) 385 219 1,594 1,785 2,014 Dividend yield (%) 0.0 0.0 0.0 2.6 2.7

8
Indofood CBP

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Research Team
+62 21 83795238
Bagus Hananto Head of Research bagus@nispsekuritas.com Ext 7311
Lyana Margareth Equity Analyst lyana.margareth@nispsekuritas.com Ext 7327
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Rating Definitions
BUY : We expect this stock to give total return of above 15% over the next 12 months.
HOLD : We expect this stock to give total return of between -15% and 15% over the next 12 months.
SELL : We expect this stock to give total return of -15% or lower over the next 12 months.

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