Growth beyond the Java region

Our analysis of FMCG and retail sales data of companies we track across Indonesia suggests that Sulawesi, Kalimantan, South Sumatra and Bali Nusa Tenggara have been the main growth drivers of retail sales for the past two years (see Fig. 1-9). Currently, these four regions together contribute 25% of Indonesia’s total FMCG sales value, based on a Nielsen survey. We expect higher contribution from these regions going forward on the back of accelerated economic activity. Over the past two years, Sulawesi Island has recorded consistently strong FMCG sales growth above the national average, driven by South Sulawesi’s performance. As the main hub of Eastern Indonesia, South Sulawesi enjoys a relatively high degree of trading and logistics activities. Moreover, farmers in South Sulawesi are better off than their peers in other provinces as they own larger farm land (paddy + corn), in our view. The development of mining sites also partly supports consumption in Sulawesi, which is evident from the accelerated growth of GDP/capita in Central Sulawesi. We also view Kalimantan as a strong growth driver, thanks to favorable CPO (crude palm oil) prices and rapid infrastructure development. South Sumatra’s economy also benefits from toll road development, which could gradually accelerate the trading traffic from Java to Sumatra. Meanwhile, better CPO prices also help sustain consumption. Lastly, Bali Nusa Tenggara also shows a strong consumption trend, mainly backed by the recovery of tourism activities in the region.

Rural better than urban

We note FMCG consumption in rural areas has grown faster than that in urban centers in the past three years (see Fig. 10-12), supported by the disbursement of government’s village fund (USD5bn budget p.a. during the Jokowi regime) as well as the low base factor, in our view. This also explains the improved performance of the general trade (GT) channel. Data from the Central Bureau of Statistic (BPS) also shows that rural consumption of prepared foods has improved at a faster pace than urban. Given its low base factor, lower-tier cities and rural areas should sustain the strong consumption trend along with the incentives from government, which we think should continue under the Prabowo regime.

Indonesia’s fastest-growing regions may hold strong growth potential for CLEO, AMRT, MAPI, MAPA, ACES, CMRY, and KEJU

We assess that Indonesia’s FMCG sector offers more pockets of growth in lower-tiers cities and rural areas than urban, especially in the ex-Java region. We believe companies with relatively low presence in the ex-Java market may have an opportunity to accelerate their product penetration in the four aforementioned areas. In this context, we highlight CLEO IJ (Buy), AMRT IJ (Buy), MAPI IJ (Buy), MAPA IJ (Buy), and ACES IJ (Neutral), which have been aggressively tapping into the ex-Java market, while enjoying higher incremental sales growth than their peers (see Fig. 13-16). We also believe that CMRY IJ (Buy) and KEJU IJ (Buy) could benefit from such opportunity as well.

CLEO may have the biggest advantage as ex-Java currently only contributes 18% to its overall sales; it is equipped with a strong distribution and sales network, as well as solid financials to gain market share from small local players in the ex-Java region. AMRT has enjoyed improved sales growth and margins following Sulawesi expansion, given its strong consumption trend and relatively low salary cost vs its Java operations. From the perspective of discretionary items, retailers such as MAPI, MAPA, and ACES also enjoy stronger consumption activities in the ex-Java market due to changes in consumer lifestyle owing to the influence of social media on consumption, in our view. We also see opportunity for CMRY to provide more frozen and chilled Kanzler products in the ex-Java region, and think KEJU could also introduce cheap processed cheese products to lower-tier cities, even rural areas.

Fig. 1: FMCG average sales value growth y-y by area during 1Q17-2Q24

Fig. 2: Sulawesi, Kalimantan, South Sumatra, and Bali Nusa Tenggara's contribution to total FMCG sales value

Fig. 3: GDP/capita CAGR 2014-2023

Fig. 4: Indonesia top five paddy producers + land ownership/farmer

Fig. 5: Cement consumption average growth y-y 2017-8M24

Fig. 7: Favourable CPO price trend (USD/ton) for farmers in Kalimantan and South Sumatra

Fig. 8: Number of tourists arrivals (mn person)

Fig. 9: MLBI (alcoholic beverage) sales in Bali recover strongly

Fig. 10: Indonesia FMCG sales value monthly index

Fig. 11: FMCG sales value monthly index

Fig. 12: FCMG to total food expenditure

Fig. 13: Retailers’ ex-Java vs. Java 1H24 y-y sales growth

Fig. 14: AMRT ex-Java sales contribution

Fig. 15: ACES ex-Java sales contribution

Fig. 16: Ex-Java region’s expected contribution to FCMG firms’ sales

 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. 

GENERAL DISCLOSURE/DISCLAIMER 
This report is prepared by PT Verdhana Sekuritas Indonesia (“PTVSI”) a securities company registered in Indonesia, supervised by Indonesia Financial Services Authority (OJK) and a member of the Indonesia Stock Exchange (IDX).

This report is intended for client of PTVSI only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of PTVSI.

The research set out in this report is based on information obtained from sources believed to be reliable, but PTVSI do not make any representation or warranty as to its accuracy, completeness or correctness. The information in this report is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. Any information, valuations, opinions, estimates, forecasts, ratings or targets herein constitutes a judgment as of the date of this report is published, and there is no assurance that future results or events will be consistent.

This report is not to be construed as an offer or a solicitation of an offer to buy or sell any securities or financial products. PTVSI and its associates, its directors, and/or its employees may from time to time have interests in the securities mentioned in this report or it may or will engage in any securities transaction or other capital market services for the company (companies) mentioned herein.

ANALYST CERTIFICATION
The research analyst primarily responsible for the content of this report and certifies that the views about the companies including their securities expressed in this report accurately reflect his/her personal views.  The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report.

RESTRICTIONS ON DISTRIBUTION

By accepting this report, the recipient hereof represents and warrants that you are entitled to receive such report in accordance with the restrictions and agrees to be bound by the limitations contained herein. Neither this report nor any copy hereof may be distributed except in compliance with applicable Indonesian capital market laws and regulations. 

Sandy Ham (sandy.ham@verdhana.id)

Jody Wijaya (jody.wijaya@verdhana.id)

Samuel Christian (samuel.christian@verdhana.id)