Equity Research

PT NIPPON INDOSARI CORPINDOTBK 

Better Than Expected 1Q Result

Solid Sales Growth Coupled with Drop in Return Rate

During 1Q19, ROTI booked a total net sales of Rp791.7 billion, solidly grew by 20.1% YoY, which fully driven by volume growth, both in MT and GT in Indonesia and Philippines. This is better than our expectation, made up 25.5% of our FY19F of Rp3.22 trillion (based on 3yr-average, 1Q sales usually covers c.24% to annual sales). In line with the solid sales growth, the sales return rate also continued to improve to 13.5% (vs 25.8% in 1Q18 to 13.6% in 4Q18), mainly derived from management’s strategy on calibrating big data as its forecasting tool that resulted in more efficient and effective sales in MT (better accuracy in product dropping, better shelving, as well as delivery schedule to each outlets). On thebottomline, however, company’s net profit of Rp64.9 bn exceeded our expectation, formed 32.4% of our FY19F Rp200.4 bn, mainly due to better than expected finance income (+140.97% YoY to Rp84.6 bn), as a result from better GPM and further efficiencies in opex.As of 1Q19, Sari Roti has maintained 95% penetration of MT channels in Indonesia or translated to 32,700 outlets and covered 55,000 Point of Sales GT channel (from 44,000 PoS as of 2018).

GPM Broke New Record In Spite of RM Price Hike

Profitability-wise, the GPM hiked by 60 YoY to 54.6% (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. Furthermore, despite the 1) higher transportation cost by 42.1% YoY from Rp49 billion to Rp70 billion, due to company’s effort  heavier marketing cost by 56.9% YoY to Rp62 bn (ratio to sales from 6.0% in 1Q18 to 7.8%) relating to customer acquisition particularly in Philippines through TVC and other promotional campaign and 2) higher salary cost by 28.1% YoY to Rp115 bn which in line with company’s expansion both in Indonesia and Philippines, the EBIT margin jumped by 490bps YoY to 9.8%, thanks to 1) lower expired/ defective inventory cost by 46.4% YoY (ratio to sales from 13.9% in 1Q18 to only 6.2% in 1Q19), which in line with much lower sales return rate during the period; 2) efficiencies in GA expense (ratio to sales declined by 80bps YoY from 7.2% to 6.4%).

Sales in PH Almost Tripled

During the period, the sales in Philippines of Rp32.31 billion jumped by 193.9% YoY from Rp11.0 billion in 1Q18 with attributable loss of Rp9.6 billion (-35% QoQ from Rp14.9 bn loss in 4Q18), along with relatively low return rate of below 20%, in line with deeper penetration in the country(currently 62% in Greater Manila area) as Sari Roti is currently available in 1,700 supermarket stores (vs 1,280 as of 2018). In 1Q19, Sari Roti has also initiated sales in general trade market through hawkers andlater in 2Q19 the company will launch new loaf brads and sandwiches to cater convenient stores. By the end of FY19, the company estimated the attributable loss from Philippines will be around Rp30 bn (drop from Rp54.5 bn loss as of FY18).

Upgrade TP to Rp1,400/ share – Maintain NEUTRAL recommendation

To reflect better than expected 1Q19 performance, we made uptick adjustments in in our projection, particularly in topline assumptions (company’s 2019 sales growth guidance 15-18%) and profitability margins. We expect FY19/20F sales will grow by 16.2%/10.2% YoY. Therefore, we come up with new TP of Rp1,400/ share (from previous Rp1,300/ share). However, as our TP offers 7.7% upside, our recommendation on the stock remains NEUTRAL. Our TP implies 39.6x PER and 18.6x EV/EBITDA 2019F,while currently the stock is traded at 37.4x PER and 17.3x EV/EBITDA 2019F.