Nippon Indosari Corpindo: No Room For Error

Tuesday, 26 February 2013
CONSUMER SECTOR /COMPANY UPDATE
HOLD
Target Price, Rp 6,200
Nippon Indosari Corpindo
Upside 2.5%
No room for error
ROTI IJ/ROTI.JK
Last Price, Rp 6,050
Although the company still has good prospects, we feel that ROTI is almost fully-
No. of shares (bn) 1,012
valued, especially after outperforming the market by 83% over the past 12 months.
Market Cap, Rp bn 6,123
At this price level, the stock is trading at 2013 P/E of 33.2x, a 55% premium to the
(US$ mn) sector, providing no room for error in our view. Another potential threat is the
631
3M T/O, US$mn entrance of Yamazaki, regarding which the management says it is prepared for a
0.6
Last Recommendation more competitive landscape. Although we feel that the threat is real, it should be
noted that it will not be easy for Yamazaki to penetrate Indonesias market due to
07-Nov-12 BUY Rp 6,900 consumer tastes and brand awareness. All things considered, we make a valuation-
20-Sep-12 HOLD Rp 5,225 based call and downgrade our recommendation to HOLD. Our lower TP of Rp6,200
01-Aug-12 HOLD Rp5,225 still implies a 2013P/E multiple of 34.5x, a significant premium to its peers average
of 21.4x.
ROTI relative to JCI Index
ROTI (LHS) Relative to JCI Index (RHS)
Downgrade to HOLD with new TP of Rp6,200. The 2012 earnings came in above our expectation
Rp %
8,000 90 with revenues surged by 46% yoy and profit margins reached better than expected. However, we
7,000 65
anticipate margin to contract this year as we expect higher labor cost as well as higher raw material
6,000 cost. Another potential threat comes from the entrance of Yamazaki which may challenge ROTIs
40
5,000 grip in Indonesias mass-bread market. As such, we have downgraded our TP to Rp6,200 per share
4,000 15
from previously Rp6,900 per share.
3,000 -10
5/7/2012
2/23/2012
3/30/2012
6/12/2012
7/18/2012
8/23/2012
9/28/2012
11/5/2012
1/16/2013
2/21/2013
12/11/2012
Valuation is too expensive.

2012 was a great year for ROTI and the stock outperformed the market by around 83% over the
Market Recommendation year. Whilst we agree that the stocks premium valuation is warranted, the stock looks fully-valued,
in our view, with the shares now trading at 2013 P/E of nearly 33.2x. Trading at 55% premium to
BUY 5 the sector, which is fairly the highest premium within our coverage in the sector as well as in the
market.
SELL 3
HOLD 4 Challenging competition from Yamazaki
0 1 2 3 4 5 When we met with the companys management, they told us they had identified several ways to
counter the competitive threat posed by the entrance of Yamazaki Baking (Yamazaki officially
Consensus entered the Indonesia market at the end of last year, holding a 51% stake in Yamazaki Indonesia).
So whilst still pursuing a strategy of aggressive capacity expansion, ROTI will, at the same time,
Our Cons % Diff
also seek to improve its distribution and make efficiency gains in production. Furthermore, the
Target price, Rp 6,200 6,241 -0.6
company is also planning to ramp up sales in the general trade (GT) market to an estimated 40%
EPS 2013F, Rp 179 203 -1.5
of total sales this year from 30% in 2012, which will also help to push down its overall return rate.
PE 2013F, x 33.2 29.0 14.4
2011 2012 2013F 2014F 2015F

Sales (Rp bn) 813 1,191 1,588 2,180 2,595
EBITDA (Rp bn) 178 224 294 408 486
EBITDA growth (%) 23 26 40 39 19
Mardesiana Net profit (Rp bn) 116 149 182 247 314
(62-21) 350 9888. ext. 3508 Core profit (Rp bn) 119 149 182 247 314
mardesiana@danareksa.com Core EPS (Rp) 118 147 179 244 311
Core EPS growth (%) 24 25 45 36 21
Danareksa research reports are also Core PER (x) 52.0 40.4 33.2 24.4 19.2
available at Reuters Multex and First Call PBV (x) 8.3 5.2 3.5 2.4 2.2
Direct and Bloomberg. EV/EBITDA (X) 33.8 28.1 21.8 15.7 13.1
www.danareksa.com See important disclosure on the back of this report

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26 February 2013 Nippon Indosari Corpindo
Downgrade to HOLD with new TP of Rp6,200

The 2012 earnings came in above our expectation with revenues surged by 46% yoy and
profit margins reached better than expected. However, we anticipate margin to contract this
year as we expect higher labor cost as well as higher raw material cost. Although we agree
that an increase in selling prices as well as declining sales return rate would somewhat
mitigate the margins contraction, we feel that any deviation from expectations would
potentially change our view.
Taking into account the additional production lines as well as the potential output coming
from the new lines added last year, we anticipate strong sales volume growth of 28% this
year. On pricing, despite ROTIs pricing policy to adjust prices every two years only, we expect
the company to increase prices on selected products only - possibly by 10% - to minimize
the impact of rising labor costs and potentially higher raw material costs. As such, we have
raised our 2013 revenues forecast by 16% to Rp1.58tr from Rp1.37tr previously.
We now expect gross margins to contract to 43.7% (compared to our previous forecast of
46.5%), on the back of: 1) a 20% increase in labor costs (compared to previously 12%), 2) higher
raw materials costs in response to the 28% increase in sales volume (compared to 19%
increase previously), and 3) a higher wheat price assumption of US$7.2/bushel (compared
to US$6.5/bushel previously). To pass on some of the higher costs, ROTI plans to increase
prices on selected products by Rp500/px this year.
A&P spending will continue to be aggressive this year at around 7% of the companys total
revenues. Nonetheless, the targeted lower sales return rate of between 10% - 11% (vis--
vis 12.6% last year) will protect operating margin from declining further. Here, we expect the
operating margin to contract at around 15.5%.
Exhibit 1. Margins outlook in 2013
Gross margins Operating margins Net margins
45.7% 47.2% 46.6% 46.7%

43.7%
42.0%
20.5%
16.1% 18.2% 18.0% 16.7%
16.3% 15.5%
11.8% 14.3% 12.5%
11.1% 11.4%
2008 2009 2010 2011 2012F 2013F
Source: Danareksa Sekuritas
2
Exhibit 2. New valuation figures
2013F 2014F 2015F

Previous New chg Previous New chg Previous New chg
% % %
Sales, Rp bn 1,369 1,588 16.0 1,889 2,180 15.4 2,271 2,595 14.2
Gross profit, Rp bn 636 695 9.2 922 993 7.7 1,113 1,185 6.5
Operating profit, Rp bn 213 245 15.5 314 351 11.9 380 420 10.3
Net profit, Rp bn 185 182 -2.0 264 247 -6.4 321 314 -2.0
Growth (%)
Sales 22 33 55.0 38 37 -1.7 20 19 -6.2
Gross profit 25 25 -0.2 45 43 -4.5 21 19 -6.0
Operating profit 26 43 63.8 48 43 -9.7 21 20 -7.8
Net profit 25 45 82.4 42 36 -14.9 21 21 -0.2
Gross margin (%) 46.5 43.7 -2.7 48.8 45.5 -3.3 49.0 45.7 -3.3
Operating margin (%) 15.5 15.5 -0.1 16.6 16.1 -0.5 16.7 16.2 -0.6
Net margin (%) 13.5 11.4 -2.1 14.0 11.3 -2.6 14.1 12.1 -2.0
At Rp6,200, valuation is rich

2012 was a great year for ROTI and the stock outperformed the market by around 83% over
the year. Whilst we agree that the stocks premium valuation is warranted, the stock looks
fully-valued, in our view, with the shares now trading at 2013 P/E of nearly 33.2x, 55%
premium to the sector.
Looking at the table below, ROTI is trading at a premium as compared to the average P/E
in the sector of 21.4x in 2013, along with UNVR and KLBF, who both have a much larger market
cap and higher liquidity.
Exhibit 3. Peers comparison
Last Price Mkt Cap P/E EV/EBITDA ROE ROA GM, %

Rp/share Rp bn 2013F 2014F 2013F 2014F 2013F 2014F 2013F 2014F 2013F
TCID 11,700 2,262.00 12.4 10.9 8 6.9 15.5 16.3 13.5 14.1 37
KLBF 1,130 56,874 27.4 22.3 20.6 16.7 23.8 25 18.4 19.4 50.1
INDF 6,700 51,363 14.5 12.8 5.4 4.9 15.4 15.9 5.5 6 25.4
ICBP 8,050 46,648 18.3 16.6 12.3 11.2 19.1 18.8 13.7 13.5 27.3
MYOR 22,600 16,137 17.9 13.5 9.4 7.5 9.7 9.7 12 12 27.6
AISA 1,260 3,423 12.6 10.5 5.8 5 16.6 16.7 6.7 7.1 20.4
ROTI 5,950 6,023.50 33.2 24.4 21.8 15.7 26.2 28.7 11.6 11.3 43.7
UNVR 22,950 170,149 34.6 31.2 25.5 23 15.8 15.1 97.8 103 51.4
Ave. 21.4 17.8 13.6 11.3 17.8 18.3 22.4 23.3 35.4
Source: Bloomberg
3
Exhibit 4. PE Band
40
+2SD = 35.34x ~ 6,342
35
+1SD = 30.08x ~ 5,399
30
ave = 24.82x
25
20 -1SD = 19.57x ~ 3,512
15
10
Jun-10
Jun-11
Jun-12
Oct-10
Oct-11
Oct-12
Aug-10
Aug-11
Aug-12
Apr-11
Apr-12
Feb-11
Feb-12
Dec-10
Dec-11
Dec-12
Challenging competition from Yamazaki

Furthermore, the entrance of Yamazaki may challenge ROTIs grip in Indonesias mass-bread
market. We feel that the threat is real, considering Yamazakis position as the #2 bread
producer in the global market. However, we also believe it will not be easy for Yamazaki to
penetrate Indonesias mass market as Indonesians are very brand aware. The key point is
that while ROTI may lose some market share to Yamazaki, the impact will depend upon
Yamazakis ability to build its brand image during the first five years.
At the end of last year, Yamazaki Group officially entered Indonesia through its subsidiary,
Yamazaki Indonesia. Yamazaki is the largest bread producer in Japan with over 100,000
stores across Asia, Europe and the US. Yamazaki invested US$102mn to acquire a 51% stake
in Yamazaki Indonesia and will team up with Atri Pasifik (49%). Atri Pasifik is linked to
Alfamart. Therefore, we believe Atri Groups distribution unit, Alfa Distribusindo will handle
Yamazakis products distribution through Alfamart. Yamazaki plans to build a plant in
Indonesia with commercial production starting in 2014.
Yamazaki is a Japanese company, established since 1948 as Yamazaki Baking, headquartered

in Chiyoda, Tokyo. The company produces bread, snack food, and other baked foods. The
products can be found in various Asian countries such as Malaysia, Taiwan, Singapore,
Thailand, and China including Hong Kong. The products are also known in other countries
such as the US and France.
Today, Yamzakis products varied from bread, sweet buns, Japanese-style confectionery,
Western-style confectionery, processed bread and prepared rice & side dishes, as well as jam
and desserts. Some of its brands are kirian (sweet bean paste), castella (sponge cake) and
yokan (sweet bean jelly) as well as confectioneries such as dango (skewered rice dumplings),
daifuku (sweet bean filled rice cakes), as well as yaki-gashi (pancake style sweets), mushipan
(steamed cakes), castella, and yokan.
4
Exhibit 5. Yamazakis products
Source: Yamazaki Baking
Looking at historical patterns of competition amongst bread producers in Indonesia, we

note that it is not easy to penetrate the Indonesian market, especially the mass market. We
believe that brand image does matter in Indonesia as Indonesians are very brand conscious.
A number of global bread players have take on such a challenge and failed. US bread maker
Sara Lee (1998) and Simplot from Australia (2002) took about 5 years to penetrate the market,
and faced failure thereafter.
Considering Yamazakis standing as the worlds #2 bread producer, we believe that they will
adopt an aggressive strategy in trying to penetrate the Indonesia market. However, we
believe they will still need time to actually seize market share. Yamazaki will need at least
one star brand to get a foothold in Indonesias mass-bread market. Normally, it takes about
3-4 years to build one strong brand in Indonesia and it takes about 5-6 years for a bread
producer to break even.
In addition, bear in mind that although Yamazaki will use Alfamarts distribution network,
we believe that Alfamart will not immediately stop distributing ROTIs products when
Yamazaki commercially enters the market in 2014 considering ROTIs contribution to the
store. Currently around 20% of ROTIs products are sold through Alfamart. At the moment,
ROTI holds a strong foothold of around 90% market share in the mass-bread market.
FY12 earnings review

ROTI reported FY12 revenues of nearly Rp1.2tr, up more than 46% yoy, exceeding our full
year target of Rp1.1tr (+39%). We believe the good results owe largely to aggressive capacity
expansion throughout the year (production capacity increased by 41% in 2012). Whilst the
gross margin rose to 46.7% from 46.6% in 2011, the operating margin contracted by 127bps
to 16.7%, however, amidst aggressive A&P spending, in our view. Both the gross and
operating margins surpassed our estimates of 45.2% and 14.9%, respectively.
5
Exhibit 6. FY12 earnings highlights
2011 2012 % chg 3Q12 4Q12 % chg FY % FY

Rp bn Rp bn y-y Rp bn Rp bn q-q Rp bn
Revenue 813 1,191 46.4 286 335 17.3 1,127 105.7

COGS 434 634 46.2 152 176 15.4 617 102.8
Gross profit 379 556 46.7 133 159 19.4 510 109.2
Opex 233 357 53.3 101 89 (11.3) 317 112.7
Operating profit 146 199 36.1 33 70 113.9 193 103.3
Pretax profit 155 200 28.9 33 70 113.5 214 93.2
Net profit 116 149 28.7 24 52 115.2 159 93.9
EPS 115 147 28.7 24 52 115.2 157 93.9
Margin (%)
Gross margin 46.6 46.7 0.08 46.7 47.6 0.9 45.2
Operating margin 18.0 16.7 (1.27) 11.5 20.9 9.4 17.1
Net margin 14.3 12.5 (1.73) 8.5 15.7 7.1 14.1
Source: Company
Looking at the results on a quarterly basis, revenues grew a brisk 17% qoq to Rp334bn in
4Q from Rp286bn in 3Q. Over the longer term, the growth is equally impressive: since 2007,
ROTI has recorded revenues CAGR of 36.6%. The indicated revenues in 2012 of Rp1.2tr beat
our forecast of Rp1.1tr.
Exhibit 7. Quarterly sales (Rpbn) Exhibit 8. Consistently strong growth in revenues
2010 2011 2012 Rpbn

1,190
350 17% 1,200
8% -4% CAGR = 36.6%
300 1,000
813
250 800
612
200 600 486
384
150 400
251
100 200
0
50
FY2007 FY2008 FY2009 FY2010 FY2011 2012
1Q 2Q 3Q 4Q
Source: Company Source: Company
The management confirmed that the return rate dropped below 13% (or the targeted
return rate in 2012). Return rate dropped to 12.6% in 2012 from previously 16% in 2011.
We believe the significant decline in the return rate was helped by improves sales
management in forecasting demand in each stores. As a consequence, the operating
margin improved to 15.7% from 15.1% in 9M12 when the return rate was still around
13% -14%.
Going forward, ROTI aims to continue reducing the return rate to below 10% over the
next two years, whilst still pursuing aggressive expansion in areas out of Java. If a single-
digit return rate can be achieved, the operating margin should pick up as well. To reach
the targeted single-digit return rate, ROTI aims to boost sales in the general trade (GT)
market where profitability is greater and the return rate lower. This year, the company
hopes the contribution coming from the GT market can be raised to 40% and then to
50% next year.
6
Exhibit 9. Sales return rate Exhibit 10. Margins
% Gross margins Operating margins Net margins

50%
20
40%
16
30%
12
20%
8
10%
4 0%
1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 2007 2008 2009 2010 2011 2012F
Source: Company Source: Company
Managements strategy in 2013

For 2013, the management targets revenues growth of 40% to Rp1.6tr as the additional
capacity starts to kick in. At the end of last year, the company added two facilities in
Palembang and Makassar, each with two production lines: one sweet bread and the other
white bread. On top of this, the company also added sweet bread lines to their facilities in
Pasuruan, Semarang and Medan. The additional production lines boosted capacity by
around 41% last year.
Exhibit 11. Production lines profile
Dec-11 Palembang Makassar Pasuruan Semarang Medan Total

Dec-12 Dec-12 Sep-12 Nov-12 Dec-12
WB 8 1 1 10
SB 9 1 1 1 1 1 14
Total 17 2 2 1 1 1 24
Source: Company
This year, ROTI will add three new facilities this year located in Purwakarta, Ciledug, and
Samarinda, each with two production lines with total investment of US$36mn. The
additional capacity will increase its production capacity by around 30% this year.
7
Exhibit 12. Profit and Loss (Rp bn)

Y/e Dec 2011 2012 2013F 2014F 2015F
Revenues 813 1,191 1,588 2,180 2,595

Gross profit 379 556 695 993 1,185
Operating Profit 146 186 245 351 420
EBITDA 178 224 294 408 486
Net interest 2 0 -63 -104 -99
Interest income 2 0 1 3 8
Interest expense 0 0 -64 -108 -108
Forex gain (loss) -3 0 0 0 0
Net other 7 13 56 87 78
Pretax income 152 200 245 334 424
Income tax -39 -51 -64 -86 -110
Net profit 116 149 182 247 314
Source: Company, Danareksa Sekuritas
Exhibit 13. Balance Sheet (Rp bn)

Y/e Dec 2011 2012F 2013F 2014F 2015F
Total assets 759 1,205 1,795 2,577 2,886

Current assets 190 220 544 1,110 1,212
Cash & ST investment 48 38 337 835 884
Account Receivable 104 137 157 208 249
Inventories 16 23 34 45 53
Others 22 23 16 22 26
Guaranteed deposits 9 11 12 14 15
Fixed Asset 546 894 1,200 1,412 1,616
Others 14 80 113 122 132
Total liabilities 213 538 1,043 1,633 1,702
Current liabilities 148 195 265 352 419
Accounts payable 131 165 201 267 317
ST borrowings 0 0 0 0 0
Others 17 30 64 85 102
Long-term liabilities 64 343 778 1,281 1,283
Long-term debts 33 297 730 1,230 1,230
Others 31 46 48 51 53
Shareholders equity 546 667 766 959 1,199
8
Exhibit 14. Cash flow (Rp bn)

Y/e Dec 2011 2012F 2013F 2014F 2015F
Net Profit 116 149 182 247 314

Depr & Amort 31 37 48 57 67
Chg in working capital 6 1 52 19 13
Other op. cash flow -5 -100 0 0 0
Operating Cash Flow 148 87 262 324 394
Capital expenditure -218 -300 -360 -270 -270
FCF -70 -213 -98 54 124
Other inv. cash flow -10 -68 -34 -10 -11
Cash Flow From Investing -228 -369 -394 -280 -281
Net change in debts 33 270 427 500 0
Equity funds raised 0 0 0 0 0
Other financing cash flow -25 -14 -42 -53 -72
Cash Flow From Financing 8 256 384 447 -72
Net change in cash -72 -26 69 498 48
Cash at beginning 121 48 23 337 835
Cash at End 48 23 337 835 884
Exhibit 15. Ratios
Y/e Dec 2011 2012 2013F 2014F 2015F
Growth (%)
Sales 32.9 46.4 33.4 37.3 19.0
OP 16.5 27.1 42.9 43.0 19.6
EBITDA 23.3 26.0 40.4 38.9 19.2
NP 16.2 28.7 44.8 36.1 21.4
Profitability (%)
Gross margin 46.6 46.7 43.7 45.5 45.7
Operating margin 18.0 15.6 15.5 16.1 16.2
EBITDA margin 21.8 18.8 18.5 18.7 18.7
Net Profit margin 14.3 12.5 11.4 11.3 12.1
ROE 23.1 24.6 26.2 28.7 29.1
ROA 17.5 15.2 11.6 11.3 11.5
Leverage
Net debt/equity (%) (2.8) 39.8 51.3 41.2 28.9
Debt/EBITDA (x) 0.2 1.4 2.5 3.0 2.5
Per share data (Rp)

EPS 115 147 179 244 311
BVPS 750 1,190 1,774 2,546 2,851
DPS 0.02 0.03 0.04 0.05 0.07
9
DISCLAIMER
The information contained in this report has been taken from sources which we deem reliable. However, none of P.T. Danareksa Sekuritas and/or its affiliated companies and/or
their respective employees and/or agents makes any representation or warranty (express or implied) or accepts any responsibility or liability as to, or in relation to, the accuracy or
completeness of the information and opinions contained in this report or as to any information contained in this report or any other such information or opinions remaining
unchanged after the issue thereof.
We expressly disclaim any responsibility or liability (express or implied) of P.T. Danareksa Sekuritas, its affiliated companies and their respective employees and agents whatsoever
and howsoever arising (including, without limitation for any claims, proceedings, action , suits, losses, expenses, damages or costs) which may be brought against or suffered by
any person as a results of acting in reliance upon the whole or any part of the contents of this report and neither P.T. Danareksa Sekuritas, its affiliated companies or their respective
employees or agents accepts liability for any errors, omissions or mis-statements, negligent or otherwise, in the report and any liability in respect of the report or any inaccuracy
therein or omission therefrom which might otherwise arise is hereby expresses disclaimed.
The information contained in this report is not be taken as any recommendation made by P.T. Danareksa Sekuritas or any other person to enter into any agreement with regard to
any investment mentioned in this document. This report is prepared for general circulation. It does not have regards to the specific person who may receive this report. In
considering any investments you should make your own independent assessment and seek your own professional financial and legal advice.
10

Nippon Indosari Corpindo: No Room For Error

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Tuesday, 26 February 2013

CONSUMER SECTOR /COMPANY UPDATE

Valuation is too expensive.

2011 2012 2013F 2014F 2015F

www.danareksa.com See important disclosure on the back of this report

Downgrade to HOLD with new TP of Rp6,200

Exhibit 1. Margins outlook in 2013

Gross margins Operating margins Net margins

45.7% 47.2% 46.6% 46.7%

2008 2009 2010 2011 2012F 2013F

Source: Danareksa Sekuritas

Exhibit 2. New valuation figures

2013F 2014F 2015F

Source: Danareksa Sekuritas

At Rp6,200, valuation is rich

Exhibit 3. Peers comparison

Last Price Mkt Cap P/E EV/EBITDA ROE ROA GM, %

20 -1SD = 19.57x ~ 3,512

Challenging competition from Yamazaki

Yamazaki is a Japanese company, established since 1948 as Yamazaki Baking, headquartered

Exhibit 5. Yamazakis products

Source: Yamazaki Baking

Looking at historical patterns of competition amongst bread producers in Indonesia, we

FY12 earnings review

Exhibit 6. FY12 earnings highlights

2011 2012 % chg 3Q12 4Q12 % chg FY % FY

Revenue 813 1,191 46.4 286 335 17.3 1,127 105.7

Exhibit 7. Quarterly sales (Rpbn) Exhibit 8. Consistently strong growth in revenues

2010 2011 2012 Rpbn

Source: Company Source: Company

Exhibit 9. Sales return rate Exhibit 10. Margins

% Gross margins Operating margins Net margins

Source: Company Source: Company

Managements strategy in 2013

Exhibit 11. Production lines profile

Dec-11 Palembang Makassar Pasuruan Semarang Medan Total

Exhibit 12. Profit and Loss (Rp bn)

Revenues 813 1,191 1,588 2,180 2,595

Exhibit 13. Balance Sheet (Rp bn)

Total assets 759 1,205 1,795 2,577 2,886

Source: Company, Danareksa Sekuritas

Exhibit 14. Cash flow (Rp bn)

Net Profit 116 149 182 247 314

Exhibit 15. Ratios

Y/e Dec 2011 2012 2013F 2014F 2015F

Per share data (Rp)

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