UNVR 3Q19 Results_a Quest of Growths

UNILEVER INDONESIA: 9M19 Results

Unilever Indonesia (UNVR) published its 9M19 financials with net profit of IDR5.5tr (+1.9% YoY) on the back of net revenue of IDR32.4tr (+2.6%, YoY). 9M19 results are on track with our estimates (see Report dated February 1_The smell of musk),  with 9M19 revenue representing 75.2% of our full FY19F estimates,  and operating income of 78.1%, and net profit of 77.2% of our FY19F estimates. Meanwhile, during the period to end September this year, UNVR reported its trait of stable profitability with gross margin of 50.8% (9M18: 50.2%), operating margin of 23.3% (our FY19F of 22.4%). Please note that last year UNVR incurred a one-off gain of the sale of its brand right worth of IDR2.6tr that included in the operating income and thus increased operating margin to 31.4%, above its normal operational level. Furthermore, net operating margin during 9M19 was registered at 17.0% as compared to our full year estimates of 16.6%.

𝐄𝐚𝐫𝐧𝐢𝐧𝐠𝐬 𝐄𝐬𝐭𝐢𝐦𝐚𝐭𝐞𝐬

We tweaked total revenue growth slightly higher for next year to 4% YoY from the previous 3% YoY taking into account zero growth of Foods & Refreshment (FR) segment (9M19: -1.2% YoY), while assume current level of growth of Home and Personal Care (HPC) segment which recorded sales growth of 4.5% YoY during 9M19. All in all, at present we are comfortable to plug-in sales growth of within 5% YoY for the year 2021 onwards, while assume profitability remains stable.

𝐕𝐚𝐥𝐮𝐚𝐭𝐢𝐨𝐧𝐬

We retain our BUY recommendation and down-grade our 12M-TP to IDR52,900/share (previously IDR61,000/share) as being the equity value /share of the company by DCF method whereby current WACC attached is 8% (previously:9%) as we lowered our terminal growth rate prospect for the company.

At our 12M-TP, UNVR is trading at 52.6 x our FY20 estimated earnings which is in-line, or representing a slight 3% premium to its 5-years average historical multiple of 51.1x. Being a counter with significant capitalizations , premium to the sector rating is fair, we argue.

𝐀 𝐛𝐞𝐭 𝐨𝐟 𝐠𝐫𝐨𝐰𝐭𝐡

The company’s current position in the HPC consumer market in Indonesia offer prospect of growth for the segment ((9M19:4.5% YoY), given UNVR track record of innovations as well as the country untapped vast layers of niche market, we view. Growth is expected to source from the launch of new products as well as relaunched of the existing ones to serve consumer better.

Rinso, Sunlight, Sunsilk, Rexona, Pepsodent, are the earlier brands among the 27 brands that are in the HPC segment that the company put effort to revitalize to serve dynamic consumers for sustainable growths. Recent newly launches include the brands of Nameera and Cif.

In the FR segment, the company most recent ones are Hellman’s and Seru ice cream, both are serving into different target of consumers.

𝐑𝐞𝐜𝐨𝐦𝐦𝐞𝐧𝐝𝐚𝐭𝐢𝐨𝐧

We argue a BUY rating as investors should not miss growth momentum for the company that has served consumers in Indonesia for decades. Furthermore, the company has shown solid control on profitability thanks to its world-wide supply chains. Combined with current strong balance sheet at 31% debt-to-equity ratio as well as consistent capital spending (see Charts1-9 in the next pages), UNVR should be able to face stiff competition in the country’s consumer market.