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).