Potential for further share price upside

ICBP’s share price has performed well in the past three months (3M: +23% vs JCI 12.5%), driven by a set of strong 2Q24 core earnings results, not to mention the positive catalysts of strengthening IDR and lower oil prices. However, we think its current valuation (at 11.8x FY5F P/E) still looks undemanding; we value ICBP at 20x FY24F P/E – given its track record of delivering double-digit core earnings growth, superior cash flow generation, and sizeable liquidity – which we think is justified when compared to the valuations of other large-caps peers such as UNVR (Reduce, 19.4x P/E FY25F) and KLBF (Buy, 22.2x P/E FY25F) which are growing at a relatively slow pace. In terms of governance, as we have noted in our previous reports, ICBP could use its significant cash position cautiously as bond rating agreement does not allow affiliated-party transactions anymore, which should protect minority shareholder interests to a certain extent, in our view. We maintain our Buy rating and TP of IDR18,000, based on 20x FY24F target P/E.

ICBP’s instant noodles business a solid growth engine

ICBP’s Indonesia and Pinehill (unlisted, subsidiary of ICBP) instant noodle operations have different sales growth drivers. In Indonesia, instant noodle consumption has already saturated (50 packs p.a.), with industry volumes posting 2-3% growth in 2023. However, given its dominant market position (>70% market share), ICBP could take a ~4% price hike every year, in our view. Hence, 6-7% sales growth is a reasonable steady state growth for ICBP’s Indonesia operations. But after the Pinehill acquisition, ICBP is likely to enjoy higher incremental growth, given its low instant noodle consumption per capita (12 packs p.a.) in Pinehill. We estimate Pinehill can record steady state sales growth of 10-15%, largely driven by volumes. Despite a very high market share in Pinehill (~85%), ICBP through Pinehill is reluctant to raise prices there in order to focus on market penetration. All in all, with pricing power in Indonesia and volume penetration in Pinehill, we project ICBP can record steady state sales growth of 8-11% y-y.

In terms of margins, we forecast ICBP’s EBIT margins can expand structurally, driven by higher contribution from Pinehill. We estimate ICBP’s instant noodles EBIT margin will hover at 20-25% over 2024-26F, which we consider as one of global companies to have the highest margin (see Fig. 3); meanwhile, Pinehill’s EBIT margin can be even higher, in the 30-35% range, in our view. Having said that, with increasing sales contribution from Pinehill, ICBP should record improved EBIT margins. In addition, if its Indonesia operation manages to take price hikes, like what it has done in the past, it might boost margins. We think the company can start increasing ASP gradually early next year (hiked prices back in 2022). Importantly, since the instant noodle category does not need heavy promotions (a well penetrated product in Indonesia), ICBP enjoys operating leverage, which is reflected in its high EBIT margins. These drivers explain ICBP’s strong OCF generation, in our view (see Fig. 2).

Fig. 1: Valuations of global FMCG peers

Fig. 2: Indonesia’s most liquid consumer companies’ EBIT and OCF CAGR, 2018-2023

Fig. 3: Global instant noodles EBIT margin comparison, 2023

Fig. 4: ICBP – P/E band

INVESTMENT RATINGS

A rating of ‘Buy’, indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of ‘Neutral’, indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of ‘Reduce’, indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of ‘Suspended’, indicates that the rating, target price, and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as ‘Not Rated’ or ‘No Rating’ are not in regular research coverage. Benchmark is Indonesia Composite Index (‘IDX Composite’). A ‘Target Price’, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part of the analyst’s estimates for the company’s earnings, and may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market in general. 

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Sandy Ham (sandy.ham@verdhana.id)

Jody Wijaya (jody.wijaya@verdhana.id)

Samuel Christian (samuel.christian@verdhana.id)