We believe consumer sector is the least regulated industry in Indonesia, making it relatively more predictable than other sectors currently. A pick-up in government spending in the coming years on priority programs such as free school meals, agriculture, and village cooperatives will keep flowing mostly to lower-tier cities and rural areas, in our view. That said, we project stronger consumption by the low-income segment to drive Indonesia consumer companies’ EBIT growth from +4.7% y-y in FY25F to +14% y-y FY26F. The overall valuation of companies under our coverage currently hovers around 13x FY26F P/E (-1 SD to five-year-mean), which suggests relatively low downside risk, although Indonesian consumer companies still lag their regional peers in terms of valuation (see Fig. 2). We cherry-pick the stocks based on our total shareholder return (TSR) framework (read: Evaluating stocks through a TSR framework), focusing on metrics such as superior EPS growth, higher dividend-paying potential, and valuation. In our view, superior EPS growth and higher dividend-paying potential can be attributed to a company’s ability to stay relevant with evolving consumption trends, enabling them to gain market share and to grow faster than the industry. Our top picks in the Indonesia consumer sector are (in order of preference): Mayora Indah (MYOR IJ, Buy) > Kalbe Farma (KLBF IJ, Buy) > Cisarua Mountain Dairy (CMRY IJ, Buy) > Ultrajaya (ULTJ IJ, Buy) > Mulia Boga Raya (KEJU IJ, Buy) > Sumber Alfaria Trijaya (AMRT IJ, Buy) > Midi Utama Indonesia (MIDI IJ, Buy) > Indofood CBP (ICBP IJ, Buy) > Wismilak Inti Makmur (WIIM IJ, Buy) > Daya Intiguna Yasa (MDIY IJ, Buy) > Erajaya Swasembada (ERAA IJ, Buy) > MAP Aktif (MAPA IJ, Buy) > Mitra Adiperkasa (MAPI IJ, Buy) > H.M. Sampoerna (HMSP IJ, Buy) > Sariguna Primatirta (CLEO IJ, Buy) > Sidomuncul (SIDO IJ, Buy) > Multi Bintang (MLBI IJ, Buy) > Indofood (INDF IJ, Buy) > Aspirasi Hidup Indonesia (ACES IJ, Buy) > Nippon Indosari Corpindo (ROTI IJ, Neutral) > Matahari Department Store (LPPF IJ, Reduce) > Ramayana Lestari Sentosa (RALS IJ, Reduce) > Gudang Garam (GGRM IJ, Reduce) > Unilever Indonesia (UNVR IJ, Reduce).

Product relevance

We highlight two key consumer trends in Indonesia currently: 1) government stimulus driving growing consumption in lower-tier and rural areas; and 2) middle-income segment’s downtrading consumption pattern in big cities. We expect companies that can adapt to and capture these trends to outperform peers. For instance, higher disposable income in the low-income segment may boost consumption on affordable luxury discretionary products such as higher quality of snacks, confectioneries, and cosmetics – MYOR’s export-quality products and competitive pricing advantage make it stand out in the low-end consumption segment, in our view, as illustrated by its historically strong domestic sales growth. In the middle-income segment, we believe consumers now increasingly prefer to cook more at home and have cut back on dining out to save money – CMRY with its Kanzler brand (perceived as a practical high-quality frozen food brand) appears to be well positioned to capture demand from the middle-income segment of consumers that want to have better quality of food ingredients – this is evident from Kanzler’s superior sales growth relative to peers. We believe KEJU is riding on the growing baking-at-home trend, given its larger product portfolio vs competitors. Through creative marketing and trendy product packaging, KLBF’s energy drink attracts younger consumers who seek cheaper replacement for energy booster beverage and ready-to-drink coffee.

Pricing relevance

There is limited room to raise selling prices in Indonesia, in our view. We estimate that over FY22-25F, overall Indonesia FMCG product prices witnessed a significant rise, by +30% – much higher than the cumulative nominal minimum wage increase of +16% during the same period. On top of that, low-income to affluent consumers have now increasingly become more selective in their choices, while looking for good quality with cheaper prices. Against this backdrop, we believe MYOR can expand its market share further, due to its high quality (evidenced by its significant export volumes) and relatively cheap prices vs multinational brands. KEJU has also continuously expanded its market share, given its comparable quality and substantially cheaper price points vs multinational brands such as Kraft (KHC US, Not rated). In the cigarettes space, WIIM can capture demand from consumers who seek good quality of cigarettes with cheaper prices than tier-1 players.

Channel relevance

We expect FMCG sales growth in general trade (GT) to continue to outperform modern trade (MT) as: 1) much of the government stimulus will likely flow to lower-tier cities and rural areas, which we believe can be captured by the GT channel due to its proximity to customers; and 2) consumers in big cities continue to downtrade from bulk to sachet products, which is more available in GT. Therefore, FMCG firms with wide distribution networks in GT such as MYOR and ICBP could see higher demand. And this also offers opportunity for several FMCG firms such as CMRY, KEJU, and KLBF to aggressively expand their reach in GT. In the retailer space, we also believe MDIY is in a good position to capture potential rising demand in lower-tier cities.

Any authors named are research analysts unless otherwise indicated. For complete details of the research together with the associated important disclosures, analyst certification, valuation methodology and discussion of risks, please see the full publication attached.