Fast-growing FMCG stocks reach all-time high

We continue to like the six FMCG stocks (out of 12 under our coverage) in the order of Mayora Indah (MYOR IJ, Buy) > Indofood CBP (ICBP IJ, Buy) > Kalbe Farma (KLBF IJ, Buy) for big caps and Sariguna Primatarta (CLEO IJ, Buy) > Cisarua Mountain Dairy (CMRY IJ, Buy) > Ultrajaya (ULTJ IJ, Buy) for small-to-mid caps. The share prices of fast-growing FMCG firms like ICBP, CLEO, and CMRY have reached their all-time highs this year, while MYOR is at its five-year high (see Fig. 1). This recent share price rally (in the past 3 months) is just at the initial phase, as valuations for these companies are yet to capture their upside potential (see Fig. 2-7), in our view. Fundamentally, we see limited downside risks this year; instead, we project further upside surprise from the companies’ upcoming 3Q24F and 4Q24F results on strong volume recovery and likely increased money circulation during the election period of local leaders (stimulus packages). For 2025F, we believe that under the Prabowo regime, investment will focus more on human development (education, healthcare, and food), translating to more money circulating to grassroots, which should benefit FMCG consumption.

Laggard stocks are also noteworthy

In terms of share price, we note that some stocks are still lagging despite recording strong financial performance for 1H24, such as ULTJ and Mulia Boga Raya (KEJU IJ, Buy). ULTJ is only trading at 13.3x FY25F P/E, overly discounted in our view. In our opinion, ULTJ is the strongest UHT milk brand in Indonesia, as evidenced by its ability to lead price hikes and win market share. Note that ULTJ raised its ASP by 6-7% in Jun-24, but it is able to maintain double-digit volume growth, which is a remarkable achievement. Its A&P-to-sales ratio is still steady at a low level of 5-6% (vs. other dairy players at 10-11%). Small-cap stock, KEJU, is also interesting, given its relatively young market. We forecast strong sales and NPAT recovery this year, supported by strong food services demand and product innovation in retail. We also highlight Multi Bintang (MLBI IJ, Buy), although it reported poor performance in 1H24. Yet, its valuation still looks undemanding. MLBI has completed revamping its distribution network; hence, we expect a sales recovery in 2H24F. We continue to like Indofood (INDF IJ, Buy). We observe the share price typically moves up once the valuation gap with ICBP widens. For Nippon Indosari (ROTI IJ, Buy), competition risks from Chinese players remain the biggest challenge for the company. For Sidomuncul (SIDO IJ, Buy), we believe the company still needs to resolve its high AR days level to further sustain its growth trajectory. Lastly, on Unilever Indonesia (UNVR IJ, Reduce), we think the company still faces the heavy burden of market share deterioration.

Local companies continue to outperform foreign companies

In our view, local companies have three sales growth engines: 1) improving buying power; 2) rising consumption, and 3) market share gains. We believe local FMCG firms will continue to gain market share from foreign FMCG firms (see our previous report: Multinationals fighting back?). Local firms continue to have distribution network advantages, and are able to make fast decision-making. Moreover, there is potential for local firms to accelerate their market share expansion as some big foreign multinational companies are considering cost-cutting (i.e. retrenchment risk) in the near term, which would weaken their sales performance further, in our view.

Fig. 1: FMCG under our coverage share price performance year-to-date

Fig. 2: MYOR — P/E x ROE

Fig. 3: ICBP — P/E x ROE

Fig. 4: KLBF — P/E x ROE

Fig. 5: CLEO — P/E x ROE

Fig. 6: CMRY — P/E x ROE

Fig. 7: ULTJ — P/E x ROE

Fig. 8: FMCG peers valuation

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)