Shares of Indonesian consumer staple companies are poised to narrow the gap with PT Unilever Indonesia’s (UNVR) record gains as their valuations don’t yet reflect the spending potential of Indonesia’s poor, according to Standard Chartered Plc and PT Bahana Securities.
PT Indofood Sukses Makmur (INDF), whose Indomie noodle brand is ubiquitous in supermarkets, convenience stores and roadside stalls throughout Indonesia, traded at 11.1 times estimated profit on June 4, the cheapest level in three years. Shares of Unilever, a unit of the world’s second-biggest consumer goods company, were three times more expensive, and climbed to an all- time high of 23,750 rupiah on June 12. PT Charoen Pokphand Indonesia (CPIN), which produces poultry and animal feed, was at 13 times earnings on June 4, the lowest level since Jan. 4.
“Investors are looking for a safe haven and the low-income class provides a cushion against market weakness,” Harry Su, head of research at Bahana Securities in Jakarta, said in an interview on June 8. “We all have buys on those stocks at the moment, with substantial upside,” said Su, the most accurate forecaster for Indofood’s instant-noodle unit PT Indofood CBP Sukses Makmur, according to Bloomberg data.
Spending by lower-income households on products from mobile phones and cigarettes to noodles and chicken will contribute to a “major portion” of growth over the next decade in Southeast Asia’s biggest economy, according to a May 3 report by Standard Chartered. Even with estimated gross domestic product growth of 7 percent a year, poorer households will account for 51 percent of spending by 2020, the report said.
That will boost shares of companies including Indofood, which may jump 50 percent from yesterday’s closing price to 7,132 rupiah in the next 12 months, Nirgunan Tiruchelvam, a Singapore-based analyst with Standard Chartered, forecast in the report. Charoen Pokphand may rise 12 percent to 2,999 rupiah, according to analyst forecasts compiled by Bloomberg, while feedmaker PT Japfa Comfeed (JPFA) may climb 43 percent to 6,000 rupiah.
“Despite the rhetoric about middle classes contributing to growth in Indonesia, 82 percent of the population is living on less than $4 a day and they account for 58 percent of household consumption,” Tiruchelvam, rated the most accurate analyst by Bloomberg for Charoen Pokphand Indonesia, wrote in the report. “The market has unjustly ignored the potential consumption growth of the poor over the next decade.”
Indofood Director Werianty Setiawan declined to comment on the company’s share price and valuation when contacted by e-mail on June 13, citing company policy. Hadijanto Kartika, Charoen Pokphand’s corporate secretary, declined to comment by phone.
Indofood gained as much as 1.6 percent to 4,825 rupiah before closing at 4,775 rupiah. Charoen Pokphand rose 4.7 percent to 2,800 rupiah, the highest close since April 3. Unilever dropped 1.1 percent and the benchmark Jakarta Composite Index (JCI) climbed 0.7 percent to 3,818.11.
Still, a recent drop in commodity prices, while cutting input costs for food producers like Indofood, may curb the spending power of rural customers, Bahana Securities’s Su said. The S&P GSCI Agriculture Index of farm commodities has lost 11 percent this year to the lowest level since September 2010. The agriculture, farming, forestry and fishery industries were the second-biggest contributor to GDP in the first quarter, according to government data.
“The only negative factor which is happening at the moment is that farmers’ incomes should come down on the back of lower commodity prices,” Su said.
Even so, a 17 percent increase in the country’s average minimum wage this year, slowing inflation and lawmakers’ rejection late March of a government plan to raise the price of subsidized fuel will support lower-income consumption, Su said.
Indonesia will implement stimulus measures to boost consumption as the global economy slows, Bambang Brodjonegoro, head of fiscal policy at the Ministry of Finance, said on June 13. The government will tap last year’s 24 trillion rupiah ($2.5 billion) budget surplus to lift the tax-free annual income level to 24 million rupiah, from 15.8 million, he said.
The Consumer Price Index rose 4.45 percent in May, slowing for the first time in three months, while the central bank kept its benchmark interest rate at a record low of 5.75 percent on June 12 to help spur investment. GDP in Indonesia, the world’s fourth most-populous country, grew 6.5 percent last year, the fastest pace since before the 1998 Asian financial crisis.
Shares of Unilever Indonesia have jumped 19 percent this year and last traded at 36.9 times estimated earnings. The Jakarta Composite lost 0.1 percent and trades at 13.2 times net income. Indofood Sukses has climbed 3.8 percent and Charoen Popkhand has advanced 30 percent.
Revenue at Unilever, which sells soaps, detergents, cosmetics and food, accounted for 3 percent of Indonesian GDP in 2011, according to Standard Chartered. The country’s annual GDP is $706 billion, according to data compiled by Bloomberg. About 15 percent of the company’s products sell for less than 0.1 euros ($0.13) and 60 percent for less than 0.6 euros, Maurits Lalisang, the company’s president director, told reporters on May 29.
“Smart companies know there are better margins to be made among the low-income consumers because they don’t have a choice,” Winston Sual, who helps manage about $1 billion at PT Panin Asset Management, which runs Indonesia’s best-performing fund over the past three years, said by phone from Jakarta on June 8. “Many companies that sell things like shampoo sell them in sachets to the low-income class and they are selling these at a higher price than bottled shampoo. So the margin is good.”
Indofood Sukses, which gets about 70 percent of its revenue from instant noodles, may also benefit from a drop in wheat prices that has made the product more affordable than rice, the country’s traditional staple, Tiruchelvam wrote.
The price of wheat, one of Indofood’s main costs, dropped 9.8 percent in Chicago in the past year, compared with a 1.2 percent drop in rice futures. The price of medium-grade rice, the most-consumed staple in Indonesia, was at 7,100 rupiah a kilogram as of June 8, compared with 5,850 rupiah on June 28, 2011, according to data compiled by Bloomberg.
Indofood director Setiawan declined to comment on the impact of lower wheat prices on the company’s earnings.
“We expect wheat consumption to rise due to its cost advantage over rice,” Tiruchelvam wrote in a research note in March. “One of the reasons for Indofood’s dominance in Indonesia is that it has effectively introduced Indonesian dishes into an instant-noodle format.”
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