Indonesia Equity Strategy - Pulse Check: KTA from Nourishing Futures
One of the key projects from Indonesia’s new government is the Nutritious Meal Program (NMP)
Understanding the ripple effects of incentives on consumption dynamics
Wallet size: More money allocated for mid-to-low-income class
The government has been setting new incentives to support mid-to-low-income class consumption, such as the nutritious meal program and the electricity discount. It has also resumed its social assistance programs, such as cash transfer (PKH), non-cash subsidy (BPNT), and free 10kg rice program. Assuming a household with two children receives all those incentives simultaneously, a poor family may receive an economic benefit of ~IDR11mn/year (note: the average mid-to-low-income class annual salary is IDR18mn), which is a significant amount to push consumption (see Fig. 19). The government’s decision to lift the purchase price of paddy and corn from farmers by ~10% and the alleviation of key soft commodity prices could strengthen the buying power of informal workers (mainly outside Java) as well. Based on our research, most of the extra money would likely flow to low-ticket items, especially in food and beverages. The government has also provided incentives for the middle-income class, through a minimum wage increase of 6.5% effective 2025 and a tax exemption for labor-intensive sectors, which should be sufficient to cover a higher cost of living in 2025F, in our view.
Wallet share: What consumers buy
Consumer buying behavior keeps evolving, and hence it is important to track the changes and trends to determine the beneficiaries. Currently, we observe four major consumption trends: 1) students using their pocket money fully to buy affordable snacks (food + beverages) after having the free nutritious meal offered by the government, this should benefit Mayora Indah (MYOR IJ, Buy) and Indofood CBP (ICBP IJ, Buy) due to their large penetration in the F&B segment; 2) the market size of UHT milk is likely to rise, thanks to the free nutritious meal program that continuously promotes UHT milk as a highly nutrient product to the mass market; the likely beneficiaries would be Ultrajaya (ULTJ IJ, Buy), ICBP, and Cimory (CMRY IJ, Buy) which have strong positioning in the mass market; 3) continued urbanization, increased local tourism, and hangout activities make consumers shift to more practical (ready to eat/cook meal) and instant out-of-home products (beverages, especially packaged water); we expect rising demand for CMRY and Sariguna Primatirta (CLEO IJ, Buy) products; and 4) strong demand for beauty-related products, driven by social media; we expect Map Aktif (MAPA IJ, Buy) to be a beneficiary given its fashion portfolio. We also think that consumers may consume more with less saving habits due to social media influence.
Stock picks
We are bullish on the Indonesia Consumer sector, which we believe is the only heavyweight sector in the JCI that can provide double-digit earnings growth in 2025F and yet it is trading at an undemanding valuation. We cover 20 consumer stocks in the JCI. We select our top picks based on: 1) growth trajectory; 2) stability; 3) valuation; and 4) liquidity.
In the mid-to-big caps space, we like MYOR for its potential earnings recovery (robust sales + margin improvement), undemanding valuation, and natural hedge of USD. We like ICBP for its inexpensive valuation, and we project a consistent low-to-mid-teens percentage core earnings growth in 2025F; meanwhile, potential impairment of Nigeria assets is a non-cash issue. CMRY should consistently record strong 15-20% earnings growth in 2025F, and hence justifying its premium valuation. Alfamart (AMRT IJ, Buy) has a distinct business model with a solid duopoly structure, which should ensure its growth stability. Indofood (INDF IJ, Buy) is also likely to book stable earnings growth, given its integrated business model. As well, its valuation is undemanding with decent dividend yield and considerable liquidity, in our view. We believe MAPA will still enjoy strong demand for fashion products. For Kalbe Farma (KLBF IJ, Buy), we believe the new management team can turn around the company’s consumer health and nutritional business. Lastly, we expect Aspirasi Hidup (ACES IJ, Buy) to be more aggressive in stores expansion.
For small-caps, we like CLEO, which we believe remains the fastest-growing FMCG company under our coverage. Alfamidi (MIDI IJ, Buy) is also interesting, given its strong SSSG and reduced losses from Lawson stores (unlisted). ULTJ might experience softer earnings growth in 2H24-1H25F after making a substantial average selling price (ASP) hike in 2Q24, but we expect a gradual recovery as management continues to invest in promotion to protect market share. ULTJ is still an undervalued stock, in our view.
The biggest downside risk to our investment view would be depreciation of IDR. On the other hand, we do not see a sugary drink tax being implemented in the near term (read: Nutri-Grade labelling’s impact on consumers); however, should the government impose the tax, the impact would be minimal as companies under our coverage could easily pass on to consumers, likely hiking ASP by 2-3% on average.
Investment thesis
We are bullish on the Indonesia Consumer sector (FMCG + retailer) on the back of potential better purchasing power underpinned by the government’s increased incentives and continued market share expansion of local firms. Among all sectors in the JCI, we believe Consumer is the only heavyweight sector that could provide double-digit earnings growth in 2025F and yet it is still trading at a relatively undemanding valuation. Our preference order when determining our top picks is: 1) growth trajectory; 2) stability; 3) valuation; and 4) liquidity. We prioritize stocks with a high core earnings growth profile in the medium term (based on 3-year forward core earnings CAGR + ROE level); for instance, stocks that can capture more tailwinds from the nutritious meal program (i.e., MYOR, ICBP, ULTJ, CMRY, AMRT, and MIDI). Some players including CMRY and CLEO could also benefit from the structural rising demand for instant products (ready to cook/eat meal) and out of home products (beverages, mostly packaged water) amid increased consumer mobility. For discretionary names, we believe MAPA is appealing, due to its strong fashion products which attract demand driven by social media influence. Lastly, we like KLBF and ACES as we believe the management teams’ new strategy should turn around the businesses.
On stability, we focus on long-term historical growth trend to gauge sustainability and nature of the business (based on 5-10 years historical core earnings growth + ROE stability). For example, we prefer companies such as AMRT, MYOR, ICBP, CLEO, CMRY, and ULTJ that have consistent strong growth over the past 5-10 years. We also like companies with reasonable valuation, and lastly, we consider the size of daily turnover, as it could be a barrier for investors to invest as well. A weakening IDR would be a downside risk to our view, as it would disrupt FMCG margin and consumer purchasing power. Within our coverage, we find that MYOR is least susceptible to currency volatility, as it has a natural hedge advantage given its strong export sales. On the other hand, we do not see a sugary drink tax being implemented in the near term; however, should the government impose the tax, the impact would be minimal as companies under our coverage are likely to hike ASP by 2-3% on average.
Based on our analysis (see Fig. 2-Fig. 5), our preference for mid-to-big caps (with daily turnover >USD1mn) is MYOR > ICBP > CMRY > AMRT > INDF > MAPA > KLBF >ACES and for small caps (with daily turnover <USD1mn) is CLEO > MIDI > ULTJ.
We like MYOR for its potential earnings recovery as we project sales growth to sustain at low-to-mid-teen percentage levels, while its margins may rebound 50-100bp in 2025F, driven by ASP hikes and higher capacity utilization to defend against elevating coffee and cocoa prices. The company derives a significant amount of USD-denominated revenue from its export markets. Meanwhile, its valuation is undemanding, in our view. We expect ICBP to record consistent low-to-mid-teen core earnings growth in 2025F, underpinned by its continued Pinehill expansion. We note that its valuation hovers at only ~11.5x P/E 2025F. We project CMRY to book strong 15-20% earnings growth, driven by consumer food and dairy products expansion in general trade, and we believe its consistent strong earnings growth justifies its premium valuation. AMRT has a distinctive business model with a duopoly structure competition landscape, in which AMRT can dictate FMCG companies due to its superior bargaining power. Hence, this strong advantage should enable it to sustain low-to-mid teen earnings growth in the long run. INDF may also provide a good shelter, given its stable high-single-digit percentage earnings growth (integrated business), is undervalued, and has decent dividend yield and sizeable liquidity. MAPA is able to enjoy both strong fashion products demand and store expansion (domestic and overseas), in our view. We believe KLBF may record high-single-digit to low-teen sales growth in the consumer health and nutritional division in 2025F, driven by new management strategy; we highlight that both divisions have the highest margins among all its business units. Lastly, we like ACES as we expect management to be more aggressive in new store opening.
For small-caps, we forecast CLEO to post +20% earnings growth, despite a high base last year, underpinned by strong industry growth, pricing power, and market share gains. We like MIDI for its strong exposure outside Java, which we believe will continue to be its main growth driver, given its high SSSG. On top of that, the downsizing of its Lawson operations may help to reduce operational loss. ULTJ is our long-term stock pick as it is undervalued, in our view, with relatively healthy earnings growth; however, sales could turn softer in the near term after its substantial ASP hike in 2Q24, but we think this should be a temporary issue.
Wallet size: More money allocated to mid-to-low-income class
We project overall consumer purchasing power to improve in 2025F versus in 2024, as the government rolls out additional incentives, such as: 1) nutritious meal program; 2) decent minimum wage increase; 3) electricity discount; and 4) tax break for employees in the labour-intensive sector. On top of that, existing social assistance programs such as cash transfer (PKH), non-cash subsidy (BPNT), and free 10kgs rice would also help to enhance purchasing power. Most of the money disbursement from these programs will largely flow to mid-to-low-income class. Moreover, the government’s decision to raise the purchase price of paddy and corn from farmers by ~10% this year and higher soft commodity prices would also support informal workers' consumption, especially those that reside outside Java. Moreover, the government’s decision to raise value added tax (VAT) only for luxury items is a strong sign that it prioritizes the mid-to-low-income class economy.
The Nutritious meal program is President Prabowo’s flagship program, targeting a massive number of 82.9mn students by 2029. This program provides a substantial trickle-down effect on students, job seekers, and local food suppliers. The government has started the first phase of the program in Jan 2025, targeting to operate 923 central kitchens with 3mn recipients’ coverage per day in 1Q25. For the second phase, it plans to run approximately 2,000 central kitchens in 2Q25 to cover 6mn recipients per day. The government also plans to manage 15mn recipients’ coverage per day by 3Q25. Currently, the allocated budget is about IDR71tn for 2025, which we believe is enough to cover the program this year. The government allocates IDR10k per meal per student on average, depending on location. We assume 85% of budget would be used for food ingredients and packaging, 10.5% for staff expenses, and the remaining for utilities costs. If we annualize this, a student may receive an economic benefit of IDR2.4mn from the nutritious meals per year. Assuming two children per household, this program could contribute IDR4.8mn economic benefit to the household per annum, which is equivalent to 27% of the average yearly income of the middle-to-low-income class. This additional economic benefit from the nutritious meal program is also equivalent to the combined fund disbursement of PKH and BPNT.
We assume the government would operate ~2,000 central kitchens in 2025F, which may require at least 70,000 staff members (assuming 35-50 staff per kitchen). Assuming 10.5% of the allocated budget is for salary payment, we estimate each staff may earn IDR1.8mn/month or IDR90k/day (working from 3AM-3PM), which would help to improve employment. We estimate this program may disburse salary of around IDR1.5tn this year. Lastly, for the nutritious meal program, the biggest spending would be food ingredients procurement, in our view. We estimate the spending spillover to local food suppliers may reach IDR12.3tn this year. Overall, each central kitchen will manage around IDR7.2bn/year, on our estimates.
In our view, the nutritious meal program can substantially strengthen the purchasing power of the middle-to-low income class. The number of students under the nutritious meal program will expand gradually along with execution progress and financial readiness. As a new project, we understand that execution would be the main risk for the nutritious meal program; however, even if the government only manages to execute 20% of total projects, it would still be incrementally positive for middle-to-low-income household consumption.
The government has raised the minimum wage by 6.5% y-y effective 2025 (vs. 3.4% y-y in 2024), which is barely enough to cover the increasing cost of living, which we estimate at 5.9% (see Fig. 9). We believe the government would maintain a high minimum wage increase in the following years to push for higher consumption. Historically, a higher minimum wage has benefited FMCG and retailers as higher sales help to offset an increase in salary costs.
The government has also rolled out a 50% electricity discount for 81.4mn customers with a total monthly subsidy of ~IDR5tn. We note that electricity bills can reach 10-12% of mid-to-low-income class’ total expenses and, hence the electricity discount may substantially improve their disposable income. So far, the government only allocates the electricity subsidy for two months, but we believe it might extend the program for a couple of months if the buying power condition remains weak.
Employees with monthly salary of up to IDR10mn in labour-intensive industries have been exempted from income tax. We estimate the number of beneficiaries may reach 10-20mn employees in manufacturing and food & beverage sectors. Employees’ take home pay may increase 5%, including the 6.5% minimum wage increase. In terms of absolute amount, we estimate the beneficiaries may earn an additional income of IDR7mn on average for full-year 2025F, which is sufficient for them to expand their expenditure on FMCG and discretionary items (i.e., fashion and other entertainment).
Higher soft commodity prices have a significant contribution to Indonesia informal workers’ income, in our view, especially for those in the agriculture sector. Note that the proportion of informal workers has reached 59% of total workforce, according to Indonesia BPS (Badan Pusat Statstik), with most of them in the agriculture sector. There is a significant number of direct and indirect labours in the agriculture sector, especially in key soft commodities like paddy, corn, palm oil, and coffee. Hence, the government's decision to lift purchase prices by ~10% from farmers for paddy and corn this year (translates into a ~IDR20tn surplus for farmers) can significantly improve overall consumption, in our view. At the same time, we observe fertilizer prices also declined substantially by ~40% YTD Nov 2024 from 2022-2023 levels, on our estimate; hence, farmers are likely to enjoy higher margins. We believe this has helped to boost consumption outside Java (i.e., Sulawesi, Kalimantan, and South Sumatra), based on our observation, benefiting companies who have actively expanded outside Java such as CLEO, AMRT, MIDI, and ACES. On the consumer side, despite higher commodity prices, the government is controlling price volatility of some key staples like rice and chicken through market operation to keep the prices affordable for mid-to-low-income class. As illustrated in Fig. 18, soft commodity prices have a positive correlation with FMCG sales.
With all these government incentives, we project consumer buying power to improve substantially. The new incentives (nutritious meal + electricity discount) may contribute roughly of IDR5.7mn/year or ~30% of total mid-to-low income. Under a perfect scenario, if beneficiaries receive the nutritious meal, PKH, BPNT, free 10kg rice, and 50% electricity discount simultaneously, then they can earn around IDR11.8mn/year in total or 65% of total mid-to-low-income consumer income (note: average mid-to-low-income class income is around IDR18mn/year), which could significantly boost consumption. Moreover, the multiplier impact from the free meal program towards job creation and local food suppliers will also increase the money supply for grassroots. More incentives for farmers and the high level of soft commodity prices also help mass informal workers' consumption. For the middle income class, the 6.5% minimum wage increase and tax exemption may buffer the increased living costs, in our view.
Wallet share: What people buy
Understanding the flow of consumer money is very important in order to identify the beneficiaries as consumer spending habits continue to evolve. We observe four likely consumption trends: 1) students may consume more snacks, 2) UHT milk gets larger penetration, 3) practical products benefit from urbanization and hangout activities, and 4) beauty-related products demand remains strong on the back of social media influence. We also believe young consumers will spend more with lesser saving habits.
We project students will spend more of their pocket money to buy snacks (food and beverages) after having the free nutritious meal. We have observed this behaviour during the pilot nutritious meal projects, especially in the elementary school level. Despite having a free meal, their parents continue to give pocket money. A free nutritious meal set contains carbohydrate (i.e. rice), protein (i.e. chicken), and vegetables, while a pack of UHT milk will also be given if there is sufficient budget, which is to be decided by each respective area. Mass-market snack products with competitive prices will see high demand, in our view. Therefore, companies with a strong portfolio of affordable snacks and deep product penetration including MYOR and ICBP could get more incremental sales from the nutritious meal program, in our view.
The free nutritious meal program has also become a national campaign for UHT milk as the introduction of UHT milk as a high nutrient product for kids may influence more parents to buy UHT milk for their children. This campaign can influence more parents to shift from condensed milk and powder milk to UHT milk, in our view. Hence, the campaign will help to enlarge the market penetration of UHT milk (currently hovers at 48.9% vs. condensed milk at ~70%), especially in mid-to-low-income class. Companies with a strong product portfolio in UHT milk including ULTJ, CMRY, and ICBP could witness solid industry growth ahead. In our view, companies with more competitive pricing have an edge over peers to capture more incremental sales from the mid-to-low-class segment.
The third consumer trend that we observe is the improvement of mobility, driven by urbanization trend, hang-out and traveling activities. Higher mobility and busier lifestyle in urban areas could drive consumption of practical and instant products, for instance ready-to-eat, ready-to-cook, and frozen products. Urbanization could also boost sales of packaged water as there are very limited clean water sources in big cities. We also detect there has been an increase in dine-out and local tourism activities, which should expand consumption toward out-of-home products, especially beverage-related products. In our view, companies like CLEO (packaged water player) and CMRY (processed meat products player) could continue to enjoy stronger demand going forward, in our view.
Lastly, we project demand for beauty related products will continue to grow strongly, driven by social media influence. The cosmetics market size will continue to expand, driven by young consumers including those in elementary and junior high schools due to peer pressure and strong influence of social media, based on our observations. However, competition will intensify as the segment’s barriers to entry are relatively low. We also see fashion as parts of the beauty trend ecosystem; hence, we believe fashion products will enjoy strong demand. This trend will benefit branded fashion retailer such as MAPA, in our view.
In conclusion, most of the flow generated from the government’s incentives should go to the mid-to-low-income class. Low ticket items, for instance, will primarily benefit FMCG, in our view, especially those involved in affordable food and beverages. Hence, we believe FMCG firms with strong brand equity and competitive pricing such as MYOR, ICBP, CMRY, CLEO, and ULTJ will outperform. FMCG retailers with a wide area coverage such as AMRT and MIDI are likely to earn incremental sales. For discretionary items, fashion products will continue to grow strongly, potentially benefiting MAPA. ACES’ active expansion outside Java should benefit the company given the high prices of soft commodities. The main risk to our view would be IDR weakening, which might disrupt FMCG margins and buying power. Specifically on this, we think MYOR has the ability to balance the impact of USD/IDR movement given its strong export sales. However, even under a worst-case scenario of very weak buying power, we still believe the food and beverage (F&B) segment would be more resilient than the non-F&B segment, given F&B’s relatively inelastic demand. On the potential of a sugary drink tax, we do not think this would be implemented in the near term as it needs approval from three ministries. Currently, we believe the Ministry of Industry and the Ministry of Health are likely to reject the proposal, as there is a lack of proof from other countries to suggest the obesity rate will reduce when a sugary tax is implemented. Further, this would reduce the purchasing power of mid-to-low income class, and such a tax only has minimal impact to state revenue (we estimate at IDR6tn). The tax could also bring forth illegal business players (read: Nutri-Grade labelling's impact on consumers). However, should the government impose the tax, the impact would be minimal as companies under our coverage mostly need to pass on with an ASP hike of 2-3% on average, based on our estimates.