Unilever Indonesia : Revaluing the Pricey One (FULLY VALUED) ~ DBS

11:45 AM | December 16, 2015 Fundamental Tags: No Comments

FULLY VALUED; Last Traded Price: Rp35,150.00; $UNVR IJ
Price Target : Rp30000.00 (Downside 15%) (Prev Rp35400.00)

Cut TP to Rp30,000 on lower earnings and PE multiple
We maintain our FULLY VALUED call on Unilever Indonesia with a lower TP of Rp30,000, pegged to 39x FY16F earnings (from 43x previously), which is +1SD of its average valuation in the past ten years. The stock has de-rated to c.46x FY16F PE from c.50x after our re-initiation back in June 2015. We believe that further de-rating could be warranted given the company’s slowing earnings growth on the back of lower revenue, tight competition, and weaker rupiah.

Revenue and earnings growth to remain soft in 2016
We expect progressive recovery in consumer sentiment next year, but we believe it will come later in the year rather than sooner. We estimate that sales volume growth next year will remain weak at c.3% y-o-y, similar to what is expected this year. Increase in selling price is expected to be minimal given the fragile purchasing power among consumers. Similarly, a weaker rupiah could put pressure on margins as more than 60% of its raw materials are palm oil and its derivatives; although this could be partially negated by the low CPO price.

Valuation too high given slowing growth
Unilever has posted compounded annual earnings growth rate of c.15% between 2009-13 which led its stock to re-rate from c.20x PE to c.40x PE during that period. However, slowing revenue growth and tightening competition has led earnings growth to weaken and we estimate compounded annual growth of just c.3% between 2014-17F.

Accordingly, we believe that its current valuation is too high (at c.46x FY16F PE, about +2SD of its 10-year mean valuation) and potential de-rating should be expected.

Valuation:
We value Unilever Indonesia at Rp30,000 per share based on 39x FY16F PE, which is +1SD of its 10-year average valuation.