Expansion outside Java could sustain strong sales trajectory

Our survey with distributors and wholesalers indicated that CLEO’s sales growth may reach +33% y-y in 8M24, which could be above our forecast, and remains the fastest growing amongst FMCG companies under our coverage. In our view, strong sales growth has been attributable to market shares gain (+17%), industry growth (+11%), and price hike (+5%). CLEO continues to gain market share from Danone Indonesia (market leader, unlisted) and small local players, while at the same time, CLEO has also enjoyed higher industry growth; we note that packaged water is currently the top three fastest-growing FMCG in the past three year, based on Nielsen survey. On top of that, the company still has room to raise prices, in our view, catching up to Danone price points. Strong sales are supported by the company’s distribution expansion, adding storehouses from 342 unit in 2023 to 400 unit in 2024F. Management expects to reach >500 storehouses by 2026F (see Fig. 1). Outside Java expansion will be the key focus, in our view. CLEO’s strategy will prioritize potential second- and third-tier cities with less competition. Moreover, the outside Java market is now showing a stronger consumption growth trend. Currently, the outside Java market only contributes 18% of total CLEO sales; normally for national FMCGs, ex-Java can deliver 40% of total sales, which indicates plenty room to grow for CLEO, in our view.

The biggest beneficiary from lower oil prices

Packaging currently is the biggest raw material cost for CLEO, reaching 40% of total COGS. In Fig. 2, we show that CLEO’s raw material costs have a positive correlation with oil prices. Our estimate suggests that every 1% change in oil prices may affect NPAT by 0.8%. Should the current declining oil price trend persist, we see more room to upgrade our NPAT projection. We believe the impact could be partly felt in 4Q24F, but the full effect would be more meaningful in 2025F. On top of that, CLEO’s margin could also structurally expand on the back of the company’s annual price hike policy, higher utilization rate, and higher recycle packaging mix. Our current forecasts suggest that CLEO’s net profit margin (NPM) may expand from 15.5% in 2023 to 17.2% in 2024F, while in 2025F, it may reach 19%.

Maintain Buy on CLEO

We expect CLEO will record a strong +42% NPAT CAGR over 2023-2025F, the fastest among its peers under our coverage. Market share gains, strong industry growth, and price hikes will be the key drivers of sales growth (read our previous reports: Initiation, Upgrade, Water Industry), in our view. The company also has a competitive advantage from its strong distribution proximity. We believe the company still has more opportunity to expand business beyond water products in the future. We rate the shares Buy with a TP of IDR1,560, using a target FY25F P/E of 28.7x. Currently, the stock is trading at FY25F P/E of 21.6x. Downside risks would be weakening buying power situation and higher oil prices.

Fig. 1: CLEO internal distribution expansion

Fig. 2: CLEO raw material costs vs. oil prices trend

Fig. 3: FMCG EBIT CAGR 2023-2025 + valuation comparison

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)