Continuous strong sales performance

Based on our survey of FMCG wholesalers and distributors, we reckon that ULTJ booked very strong sales growth of +22% y-y in July-24 (vs -0.4% y-y in 3Q23 and +13% in 2Q24); we estimate most of the growth was driven by volume (+15% y-y), while ASP was also up by +7% y-y. This brings total ULTJ 7M24 sales growth to +9.4% y-y (vs +7.4% y-y in 6M24). In our view, the strong sales recovery was attributable to the improvement of money circulation in the grassroots economy (see Fig. 2), given higher government expenditure and stronger loan growth. Interestingly, despite a low A&P-to-sales ratio level of only 6% (vs 8% averatge for the FMCG sector), ULTJ’s UHT milk division sales still grew by double-digits and gained market share (36.8% share in Jun-24 vs 35.9% in Dec-23) amid a tougher competitive landscape, in our view demonstrating its excellent brand equity and superior product quality. ULTJ also has the strongest pricing power among all dairy players; the company just commanded an ASP hike of 6-7% in Jun-24, and it was the only FMCG company able to do that. Note that even with a significant price hike, ULTJ sales volume still managed to grow by +15% y-y in July-24, which we think is a remarkable achievement. All in all, we predict 3Q24F sales growth performance will be much stronger on a y-y as well as q-q basis; we expect a similar trend for other FMCG companies, as well.

Margin will expand backed by pricing power

We estimate 3Q24F GPM will expand on a y-y and q-q basis on the back of higher ASP and low powder milk prices. Moreover, the A&P-to-sales ratio remains low, which also will translate to a higher EBIT margin, in our view. Hence, with a stronger sales performance and higher margin level, we believe ULTJ will likely book strong double-digit earnings growth this year. We also expect margins will continue to expand in the following years on the back of ULTJ's superior pricing power; in our view, the company has the capability to raise prices by ~4% every year, similar to its historical trend. Bear in mind that in a favorable year ULTJ GPM could reach 37.6% (vs 33.7% in 1H24), leaving plenty of upsides.

Largest and fast-growing UHT milk player with undemanding valuation

Currently, ULTJ remains the largest UHT milk player (36.8% market share) with superior 2013-2023 sales and EBIT CAGRs of +9% and +12%, respectively, (vs +7% and +8% average for the FMCG sector, respectively). We project the company to continue its double-digit earnings growth going forward, given new production capacity and higher product penetration. We have a Buy rating on ULTJ , with a TP of IDR2,700, using a target P/E of 18.8x FY25F. Based on our current forecasts, ULTJ now is only trading at 12.6x FY25F P/E. Downside risks would be tougher-than-expected competition landscape and weaker-than-expected buying power conditions. 

Fig. 1: ULTJ quarterly sales growth trend

 

Fig. 2: Indonesia M2 data recovery

 

Fig. 3: ULTJ vs FMCG average sales growth trend

Fig. 4: ULTJ vsFMCG average A&P-to-sales ratio level

 

Fig. 5: ULTJ GPM trend

Fig. 6: ULTJ P/E band

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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