Equity Research

PT NIPPON INDOSARI CORPINDOTBK 

2019: A Tastier year

Return Rate Continue to Improve

During 2018, ROTI posted a total sales growth of 11.1% YoY to Rp2.77 trillion, in line with our FY18F of Rp2.72 trillion, which fully driven by sales volume growth. We highlighted company’s sales return rate that has graduallydeclined from the all-time high 18.2% in 2017 to 17.6%, thanks to management’s strategy on calibrating big data that resulted in more efficient and effective sales (better accuracy in product dropping, better shelving, as well as delivery schedule to each outlets). On thebottomline, however, company’s net profit of Rp172.7 bn exceeded our expectation, formed 133.2% of our FY18F Rp129.7 bn, mainly due to better than expected finance income (+140.97% YoY to Rp84.6 bn), as a result from better overall interest rate during the year.

GPM Jumped to All-Time High Level

Profitability-wise, the GPM jumped by 140bps YoY to 53.9% (all-time high) as a result of some production efficiency done by the company that resulted in better waste management from 4-5% to c.1%, in spite of ~5% price increase in wheat flour, ROTI’s major raw material. Still, the operating margin remained under pressure, down by 330bps to7.0% from 10.3% in FY17, i.e: 1)heavier marketing cost by 36.6% YoY to Rp207 bn(ratio to sales from 6.1% in FY17 to 7.5% in FY18) relating to customer acquisition particularly in Philippines through TVC and other promotional campaign and 2) higher salary cost by 18.8% YoY to Rp408 bn which in line with company’s expansion both in Indonesia and Philippines (no. of employee grew by 17.2% YoY. This cost is expected to normalize in upcoming periods, as the company has normalized hiring since 2Q18 (ratio to sales 15.8% in 2Q18 vs 14.8% in 4Q18).

Philippines Market: Survival of the Fittest

In Philippines, company managed to book sales of Rp100.32 billion, jumped by 124.7% YoY from Rp44.64 billion in FY17, along with relatively low return rate of below 20%. This was in line with deeper penetration in the country, as Sari Roti is currently available in 1,280 supermarket stores (vs 420 as of Jun18), including 1.800 7-eleven stores (as of Nov18). In order to penetrate the Philippines market, the company is dealing with a tough competition, so that we believe that it is reasonable for the marketing cost is peaked at the moment. Sari Roti will initiate sales in general trade market in this quarter(1Q19) where ROTI’s JV partner, Monde Nissin, has largest distribution network of about 300,000 Sari Sari stores. In addition, in 2Q19 the company will launch new loaf brads and sandwiches to cater convenient stores.

2019 Optimistic Outlook

This year, the company guided a 15-18% sales growth on the back of higher volume (no ASP increase plan) both from general trade (GT) and modern trade (MT) channels, driven by forecasting tools that has proven to boost sales and decrease return rate since last year. The company plans no new SKU rollouts this year, they will focus on best-selling products instead, as well as gradually expand BOTI’s distribution to Java and Sumatera (from only Banten area since Oct18). Regarding the expansion, the company expected 3 new factories to commercially operate this year (Gresik, Lampung, and Balikpapan) as well as 1 new factory in Kendal that will begin its construction later in 4Q19 or 1Q20. In line with it, the company allocated Rp600 bn capex.

Unchanged TP of Rp1,300/ sales; Fully Valued – NEUTRAL recommendation

We made no adjustment in our projection and hence our TP of Rp1,300/ share is unchanged. However, we had to downgrade our recommendation from BUY to NEUTRAL since the current share price has fully reflected our TP, but still offers an 8.3% upside. Our TP implies 40.2x PER and 18.1x EV/EBITDA 2019F,while currently the stock is traded at 37.0x PER and 16.6x EV/EBITDA 2019F.