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Unilever Indonesia UNVR IJ -Reduce- Market share deterioration a concern

Unilever Indonesia UNVR IJ -Reduce- Market share deterioration a concern

Consumer Durables SH JW SC 735 13th Sep, 2024

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Market share deterioration a concern

Maintain Reduce, TP cut to IDR2,000; roll forward base year to FY25F with lower P/E of 17.2x

Market share deterioration persists

As mentioned in our previous reports, Indonesia local FMCG companies have outperformed foreign companies on several fronts, such as: 1) distribution, 2) advertising, 3) product variety, and 4) pricing strategy. Hence, we believe foreign FMCG companies, including UNVR, may continue to suffer market share erosion. Specifically for UNVR, we opine that previous management’s (which was at the helm of the company from 2014 to 2022) modifications to the sales team structure may have caused loss of talent. Moreover, the same management materially increased the number of third-party distributors, likely leading to higher levels of inventory. More importantly, we believe that UNVR HQ’s focus on margins likely came at the expense of market share; and, coupled with the royalty structure and relatively slow decision-making process also likely led to some inefficiencies. Going forward, with a new management team now in place, we believe it will take time to turn around the business, and we note that strategies such as price cuts and promotions may not yield results quickly, as local competitors may respond to counter these accordingly (read our previous report).

Cost-cutting programs may cause higher staff turnover

With Unilever PLC (ULVR LN, Not rated) having announced that it would cut jobs globally (link), we believe its Indonesia operations under UNVR might also face similar restructuring. We believe this situation, if materializes, may cause higher staff turnover in 2H24F, which could negatively affect sales performance. That said, if this strategy is executed carefully, we expect UNVR to gain from long-term benefits, such as creating a leaner organizational structure and at the same time retaining its best talents, which could then spur productivity.

Maintain Reduce; TP lowered to IDR2,000, implying 8% downside

We cut FY24F/FY25F/FY26F EPS by 10%/16%/17% due to market share erosion as well as relatively ineffective price cuts and A&P strategy. We maintain our Reduce call with a lower TP of IDR2,000 (from IDR2,670); we roll forward our base year to FY25F with a lower target P/E of 17.2x (-2.5SD to its three-year mean). Currently, the stock is trading at 18.9x FY25F P/E (EPS: IDR115.8).

Year-end 31 DecFY23FY24FFY25FFY26F
Currency (IDR)ActualOldNewOldNewOldNew
Revenue (bn)38,61139,89837,48840,64036,85841,60137,735
Reported net profit (bn)4,8015,0804,5935,2844,4185,3804,448
Normalised net profit (bn)4,8015,0804,5935,2844,4185,3804,448
FD normalised EPS125.84133.15120.40138.50115.80141.03116.59
FD norm. EPS growth (%)-10.45.8-4.34.0-3.81.80.7
FD normalised P/E (x)17.4–18.2–18.9–18.8
EV/EBITDA (x)12.3–12.7–13.0–13.0
Price/book (x)24.7–24.4–24.4–24.4
Dividend yield (%)5.7–5.4–5.3–5.3
ROE (%)130.1149.1134.9153.9128.9156.8129.8
Net debt/equity (%)net cashnet cashnet cashnet cashnet cashnet cashnet cash
Source: Company data, Verdhana estimates


Key data on Unilever Indonesia

Income statement (IDRbn)
Year-end 31 Dec
FY22
FY23
FY24F
FY25F
FY26F
Revenue
41,219
38,611
37,488
36,858
37,735
Cost of goods sold
-22,154
-19,417
-18,943
-18,651
-19,024
Gross profit
19,065
19,195
18,546
18,208
18,711
SG&A
-11,995
-12,915
-12,584
-12,474
-12,938
Employee share expense
0
0
0
0
0
Operating profit
7,070
6,279
5,962
5,734
5,772
EBITDA
7,881
6,683
6,526
6,380
6,377
Depreciation
-811
-404
-564
-646
-605
Amortisation
0
0
0
0
0
EBIT
7,070
6,279
5,962
5,734
5,772
Net interest expense
-84
-77
3
4
4
Associates & JCEs
0
0
0
0
0
Other income
-1
0
0
0
0
Earnings before tax
6,985
6,202
5,965
5,737
5,776
Income tax
-1,629
-1,401
-1,372
-1,320
-1,329
Net profit after tax
5,356
4,801
4,593
4,418
4,448
Minority interests
0
0
0
0
0
Other items
0
0
0
0
0
Preferred dividends
0
0
0
0
0
Normalised NPAT
5,356
4,801
4,593
4,418
4,448
Extraordinary items
0
0
0
0
0
Reported NPAT
5,356
4,801
4,593
4,418
4,448
Dividends
-5,341
-4,753
-4,547
-4,418
-4,448
Transfer to reserves
15
48
46
0
0
Valuations and ratios
Reported P/E (x)
15.6
17.4
18.2
18.9
18.8
Normalised P/E (x)
15.6
17.4
18.2
18.9
18.8
FD normalised P/E (x)
15.6
17.4
18.2
18.9
18.8
Dividend yield (%)
6.4
5.7
5.4
5.3
5.3
Price/cashflow (x)
10.9
12.9
19.0
18.5
18.4
Price/book (x)
20.9
24.7
24.4
24.4
24.4
EV/EBITDA (x)
10.6
12.3
12.7
13.0
13.0
EV/EBIT (x)
11.8
13.1
13.9
14.5
14.3
Gross margin (%)
46.3
49.7
49.5
49.4
49.6
EBITDA margin (%)
19.1
17.3
17.4
17.3
16.9
EBIT margin (%)
17.2
16.3
15.9
15.6
15.3
Net margin (%)
13.0
12.4
12.3
12.0
11.8
Effective tax rate (%)
23.3
22.6
23.0
23.0
23.0
Dividend payout (%)
99.7
99.0
99.0
100.0
100.0
ROE (%)
128.8
130.1
134.9
128.9
129.8
ROA (pretax %)
38.7
37.5
38.4
37.7
39.2
Growth (%)
Revenue
4.2
-6.3
-2.9
-1.7
2.4
EBITDA
-6.6
-15.2
-2.4
-2.2
0.0
Normalised EPS
-7.0
-10.4
-4.3
-3.8
0.7
Normalised FDEPS
-7.0
-10.4
-4.3
-3.8
0.7
Source: Company data, Nomura estimates
Cashflow statement (IDRbn)
Year-end 31 Dec
FY22
FY23
FY24F
FY25F
FY26F
EBITDA
7,881
6,683
6,526
6,380
6,377
Change in working capital
1,499
1,275
-751
-550
-502
Other operating cashflow
-1,714
-1,478
-1,369
-1,316
-1,325
Cashflow from operations
7,667
6,480
4,405
4,514
4,551
Capital expenditure
-245
-178
-250
-250
100
Free cashflow
7,421
6,302
4,155
4,264
4,651
Reduction in investments
0
0
0
0
0
Net acquisitions
0
0
0
0
Dec in other LT assets
0
0
0
0
0
Inc in other LT liabilities
0
0
0
0
0
Adjustments
110
53
56
-82
-7
CF after investing acts
7,531
6,354
4,212
4,182
4,644
Cash dividends
-5,341
-4,753
-4,547
-4,418
-4,448
Equity issue
0
0
0
0
0
Debt issue
-1,250
-600
0
0
0
Convertible debt issue
0
0
0
0
0
Others
-763
-484
71
-3
5
CF from financial acts
-7,354
-5,837
-4,477
-4,420
-4,443
Net cashflow
178
518
-265
-239
201
Beginning cash
325
503
1,021
756
517
Ending cash
503
1,021
756
517
718
Ending net debt
97
-1,021
-756
-517
-718
Balance sheet (IDRbn)
As at 31 Dec
FY22
FY23
FY24F
FY25F
FY26F
Cash & equivalents
503
1,021
756
517
718
Marketable securities
0
0
0
0
0
Accounts receivable
4,416
2,719
2,909
2,860
2,928
Inventories
2,625
2,422
2,363
2,326
2,373
Other current assets
24
30
29
29
29
Total current assets
7,568
6,192
6,057
5,732
6,049
LT investments
0
0
0
0
0
Fixed assets
9,536
9,311
8,997
8,601
7,896
Goodwill
62
62
62
62
62
Other intangible assets
447
399
443
535
528
Other LT assets
705
700
600
590
604
Total assets
18,318
16,664
16,159
15,520
15,139
Short-term debt
600
0
0
0
0
Accounts payable
4,700
4,064
4,209
3,730
3,459
Other current liabilities
7,142
7,160
6,393
6,236
6,121
Total current liabilities
12,442
11,224
10,602
9,966
9,580
Long-term debt
0
0
0
0
0
Convertible debt
0
0
0
0
0
Other LT liabilities
1,879
2,059
2,129
2,127
2,131
Total liabilities
14,321
13,283
12,732
12,093
11,711
Minority interest
0
0
0
0
0
Preferred stock
0
0
0
0
0
Common stock
76
76
76
76
76
Retained earnings
3,825
3,209
3,255
3,255
3,255
Proposed dividends
0
0
0
0
0
Other equity and reserves
96
96
96
96
96
Total shareholders' equity
3,997
3,381
3,427
3,427
3,427
Total equity & liabilities
18,318
16,664
16,159
15,520
15,139
Liquidity (x)
Current ratio
0.61
0.55
0.57
0.58
0.63
Interest cover
84.6
81.1
–
–
–
Leverage
Net debt/EBITDA (x)
0.01
net cash
net cash
net cash
net cash
Net debt/equity (%)
2.4
net cash
net cash
net cash
net cash
Per share
Reported EPS (IDR)
140.40
125.84
120.40
115.80
116.59
Norm EPS (IDR)
140.40
125.84
120.40
115.80
116.59
FD norm EPS (IDR)
140.40
125.84
120.40
115.80
116.59
BVPS (IDR)
104.78
88.63
89.83
89.83
89.83
DPS (IDR)
140.00
124.59
119.19
115.80
116.59
Activity (days)
Days receivable
41.0
33.7
27.5
28.6
28.0
Days inventory
41.8
47.4
46.2
45.9
45.1
Days payable
76.4
82.4
79.9
77.7
69.0
Cash cycle
6.5
-1.2
-6.2
-3.2
4.1
Source: Company data, Nomura estimates
Company profileUNVR is a leading FMCG player in Indonesia, focusing on Home & Personal Care (66% of sales) as well as the Food & Refreshment segment (34% of sales). Its Home & Personal Care products include detergent, disinfectant, soap and shampoo, oral care, skincare and makeup. The Food & Refreshment segment is divided into in-home (e.g. food seasonings) and out-of-home products (e.g. ice cream and beverages). The company generates 96% of its revenue in Indonesia.
Valuation MethodologyOur target price of IDR2,000 is based on 2025F target P/E of 17.2x (-2.5SD of its three-year-mean). The benchmark index of the stock is JCI Index.
Risks that may impede the achievement of the target priceUpside risk includes inorganic growth through acquisition.
ESGUNVR is an ESG leader in raw material sourcing, corporate behavior, packaging materials and waste management, while still a laggard in corporate governance and opportunities in nutrition and health. UNVR has been aiming to set the highest standards of corporate behavior towards employees, communities and the environment. UNVR is one of the very few FMCG companies to be committed to reduce plastic usage and uses recycled plastics for most of its packaging. The company is also committed to reduce energy and water usage as well as better waste management, including reducing carbon emissions over the years.

Fig. 1: FMCG Sales Index (2014 = 100)
UNVR remains the most underperforming FMCG company under our coverage
Source: Company data, Verdhana estimates

 

Fig. 2: FMCG EBIT index (2014 = 100)
Not only sales, UNVR’s EBIT has also been continuously declining vs the FMCG companies under our coverage
Source: Company data, Verdhana estimates

 

Fig. 3: UNVR — P/E band

Source: Bloomberg Finance L.P., Verdhana estimates



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.


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Rating Table


Rating
Remains
Reduce
Target price
Reduced from IDR 2,670
IDR 2,000
Closing price
11 September 2024
IDR 2,190
Implied upside-8.7%
Market Cap (USD mn)5,427.0
ADT (USD mn)2.9

Relative performance chart



Source: LSEG, Verdhana
M cap (USDmn)
5,427.0
Free float (%)
15.0
3-mth ADT (USDmn)
2.9
(%)
1M
3M
12M
Absolute (IDR)
-11.0
-28.4
-40.0
Absolute (USD)
-7.9
-24.3
-40.3
Rel to Jakarta Stock Exchange Composite Index
-17.9
-41.6
-51.5

Research Analysts

Sandy Ham (sandy.ham@verdhana.id), 

Jody Wijaya (jody.wijaya@verdhana.id)

Samuel Christian (samuel.christian@verdhana.id)

Tags: Consumer, UNVR JK, UNVR IJ, Sandy Ham, Jody Wijaya, Samuel Christian
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