Initiation Report

www.arthasekuritas.com 18 April 2019

SIDO: Organic Growth Through Tapping International Markets

We initiate buy recommendation for Sido Muncul (SIDO) with target price of Rp1,160/shares. We believe SIDO will gain momentum and has the potential to BUY increase its market share due to the following factors: 1) By expanding its market base internationally through Philippines and . These exports of products

1 Yr Target Price : Rp 1,160 will mostly be realized at the end of this year in 2019; 2) GPM FY18 widening to 51.55% (+552 bps) due to better manufacturing technological capabilities by Last Price : Rp 1,005 having higher extraction yield; 3) Utilizing COD 2 new manufacturing machinery Upside/Downside : +15.42% to increase capacity production from 80 million to 180 million sachets per month. Company Profile (www.sidomuncul.com) Higher GPM due to an increase in yield from raw materials extraction. SIDO have been able to achieve YoY% reduction in COGS/Revenue over the past few years. In 2014,

PT Industri dan Farmasi Sido Muncul Tbk COGS/Revenue % was around 62% and by end of 2018, it came all the way down to 48% (SIDO) is an Indonesian-based company positively affecting bottom line. This is due to better extraction yield of production engaged in operations specializing in herbal processes and achieving economies of scale. We expect this trend to continue modestly medicines, pharmacies, land transportation with the new production facility of Cairan Obat Dalam (COD) 2 progressing towards and agriculture. SIDO sells herbal medicine 100% utilization rate of producing 100 million sachets per month. such as Tolak Angin and energy drink such as Kuku Bima. Other products include herbal Potential 3-5% sales growth from exports to Nigeria and Philippines in 2019. We candy, raw herbal products like turmeric, expect SIDO to have an increase in revenue due to exporting of products. In Nigeria, SIDO , guava leaf and other food supplements. have exported Kuku Bima drinks as shipments have started in April 2019 and will be on SIDO owns 1 company in , produce retailers by June 2019. In Philippines, SIDO have already exported Tolak Angin products 300 different types of products, have 109 sub- and in the hands of retailers in late of 2018. The products have been sold out and distributors and more than 160,000 positively accepted by the market. Management is trying to boost production with new wholesalers in . Capacity production reaches 3.8 billion units per year and products production facility COD 2 and prematurely send future expected packages 3 months in are exported to 17 different nations. advance due to high demand.

Consistent dividend payout ratio of above 80% for the past 5 years. SIDO’s revenue Market Cap Rp 15.1 tn for 2018 have grown to Rp 2,76 tn (+7.36% YoY) and net income to Rp 664 bn (+24.36% Enterprise Value Rp 14.3 tn YoY). Dividend per share for 2018 increased to 29 (+11.54% YoY). Additionally, the Current Shares Outstanding 15.0 bn Price to Sales (TTM) 5.46 company is capable of growing organically every year consistently while maintaining its

Price to Book Value 5.19 profits without having any long-term debts in the company. Current PE (Annualised) 22.71 Current PE (TTM) 22.71 Undervalued, forward PER 19F lower than peers. We value SIDO using mixed DCF, DDM and PER Comps with a target price of Rp 1,160/share. This price target reflects Free Cash Flow (TTM) Rp 599 bn EV to EBIT (TTM) 17.67 forward PER 19F at 24x. Compared to its peers KLBF and KAEF, their current PER (TTM) is at 28.5x and 43.4x respectively. Major Shareholders

Figure 1. Financial Highlights (In Millions Rp)

PT. Hotel Candi Baru 81.00% Year 2017 2018 2019F 2020F 2021F Public 19.00% Revenue 2,573,840 2,763,292 3,070,345 3,379,249 3,686,864 GP 1,184,701 1,424,391 1,627,297 1,830,724 2,031,166 Price Performance OP 640,236 824,331 924,960 1,063,303 1,205,960 EBT 681,889 867,837 967,125 1,103,255 1,249,537 1 Month Price Returns (%) : -1.5% Net Income 533,799 663,849 735,015 838,473 949,648 1 Year Price Returns (%) : 33.1% Key Ratios YTD Performance (%) : 19.6% EPS 35.9 44.6 49.4 56.3 63.8 52 Weeks Highest Price : Rp 1070 GP Margin 46.03% 51.55% 53.00% 54.18% 55.09% OPM 24.87% 29.83% 30.13% 31.47% 32.71% 52 Weeks Lowest Price : Rp 675 NPM 20.74% 24.02% 23.94% 24.81% 25.76% RoA 16.90% 19.89% 21.11% 22.40% 24.08% RoE 18.43% 22.87% 24.10% 26.06% 27.87% Research Analyst Source: Company, ASI Forecast

Research Team Contact: [email protected]

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Well-Established Brand Name In Herbal Medicine Market

Tolak Angin Sido Muncul is the industrial leader in terms of herbal medicine in colds/common cold segment. It owns 53.1% of the whole common cold market in terms of statistics surveyed done by Top Brand Award. With a dominant market share and market leader in the industry, price point is inelastic selling in both GT and MT trades. Other than Tolak Angin, SIDO also have a substantial market share in the F&B products for Kuku Bima brand such as: Kuku Bima Ginseng Coffee, Kuku Bima Ener-G and Kuku Bima TL. With a strong dominant position and strong brand name, SIDO continues to grow and innovate in multiple different ways while maintaining strong margins.

Figure 2. Obat Masuk Angin Figure 3. Obat Kuat Pria

Brand Top Brand Index Brand Top Brand Index Kuku Bima TL 84.2% Tolak Angin Sido Muncul 53.1% Neo Hormovitan Pasak Bumi 7.9% Antangin 38.9% Irex 2.3% Bintang Toedjoe 4.5% King Cobra 1.8%

Source: Top Brand Award Source: Top Brand Award

Figure 4. Kopi Ginseng Figure 5. Minuman Penambah Tenaga (Non-Cair)

Brand Top Brand Index Brand Top Brand Index CNI 30.2% Extra Joss 60.5% Kapal Api Susu Ginseng 29.3% Kuku Bima 15.6% Hemaviton Jreng 17.2% Joa Kopi Ginseng 13.7% Kuku Bima Ener-G 13.8%

Source: Top Brand Award Source: Top Brand Award

Higher Demand Due To An Increase In Aging Population

As the growth of population increases substantially in Indonesia, the current population is also aging over the next 25 years. Data by UNFPA shows that over the next 25 years, Indonesia will be gradually growing at about 1.38% per annum in 2010-2015 period and 0.72% per annum in 2030- 2035 period. As both the educated and aging population in Indonesia increases, we believe the demand for preventive/curative medicine will follow through. This factor will benefit SIDO as one of the largest producer of preventive/curative herbal cold medicine.

Figure 6. Indonesia Age Pyramids, 2010 and 2035

Source: UNFPA

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Strategical Expansion Realized In 2019

In late 2018, SIDO has already started the export of Tolak Angin under the name “Tulak Hangin” into Philippines. It was first marketed and introduced by Kris Aquino, the 11th Philippines president’s daughter and a famous public figure who does talk show host, actress and also a producer. Additionally, it was also advertised heavily by Manny Pacquiao who was a famous world class boxer “PacMan” and also the current senator of Philippines. The demand for Tolak Angin was way above expectations and products were sold out not long after distribution. Thus, SIDO has to rush 3 months earlier in the distribution processes and start to ramp up export 3 months earlier using future expected inventories. With the help of new production facility COD2 maximizing its utility rate to around 60% this year, we expect strong revenue growth.

Figure 7. Kris Aquino Figure 8. 2016 Manny Pacquiao

Source: Detik News Source: Indo Berita

Moreover, SIDO have already exported Kuku Bima drinks to Nigeria this April 2019. It will be in the hands of retailers in Nigeria by June 2019. With product penetration towards a large market potential in Nigeria, SIDO has established Muncul Nigeria Limited as a subsidiary of the company in Nigeria last year on January 2018. We can expect potential growth of revenues from both Philippines and Nigeria in the fiscal year of 2019.

Financial Breakdown

Figure 9. Sales Breakdown Figure 10. Revenue & EPS Trends

100% 4,000,000 63.7 70 90% 56.3 3,500,000 60 80% 31% 30% 29% 28% 27% 49.4 3,000,000 44.6 70% 35.9 50 2,500,000 60% 40 50% 2,000,000 30 40% 1,500,000 66% 67% 68% 69% 70% 30% 20 1,000,000 20% 10 10% 500,000 0% 0 0 2017 2018 2019F 2020F 2021F 2017 2018 2019F 2020F 2021F

Herbal Medicine Food & Beverages Pharmacies Revenue (In Mn Rp) EPS

Source: Company, ASI Forecast Source: Company, ASI Forecast

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Figure 11. Gross Profit Margin by Segment Figure 12. ROA & ROE

70% 63% 64% 65% 65% 30% 27.81% 56% 26.07% 60% 22.87% 24.10% 25% 18.43% 22.73% 24.23% 50% 19.89% 21.09% 20% 16.90% 40% 30% 31% 32% 15% 30% 27% 29% 10% 20% 10% 5% 0% 0% 2017 2018 2019F 2020F 2021F 2017 2018 2019F 2020F 2021F

Herbal Medicine Food & Beverages Pharmacies ROA ROE

Source: Company, ASI Forecast Source: Company, ASI Forecast

SIDO’s majority market penetration is in herbal medicine contributing to around 67% of total revenue while F&B market covers around 30% for 2018. The rest minority goes to SIDO’s pharmacy businesses for around 3-4%. Revenue continues to grow YoY for around 5-6% for the past 5 years following with EPS and bottom-line improvement. Herbal medicine has the highest gross profit margin compared to F&B and pharmacies which are more competitive and price sensitive.

Figure 13. COGS/Revenue Ratio Figure 14. EPS Growth

65% 62% 70.0 63.7 30% 60% 56.3 60% 58% 60.0 24% 25% 49.4 50.0 55% 54% 44.6 20% 35.9 40.0 14% 50% 48% 47% 15% 46% 45% 30.0 13% 10% 10% 45% 20.0 11% 5% 40% 10.0 0.0 0% 35% 2017 2018 2019F 2020F 2021F 30% 2014 2015 2016 2017 2018 2019F 2020F 2021F EPS (LHS) EPS Growth (RHS)

Source: Company, ASI Forecast Source: Company, ASI Forecast

Due to advancement of technology and better use of manufacturing facilities, manufacturing machineries have been able to extract higher yield from its raw materials. Utilization rate for COD 2 machinery in 2019 will be around 60% and grow accordingly in the following year according to required output/demand.

In 2018, the Hidayat family decided to sell off 1.5% in trade secrets royalty fee from the books at a huge discount for only around Rp 35 bn. To put the numbers into perspective, 1.5% royalty fee from 2018 revenue is around Rp 41.5 bn and they could have gotten a growing perpetuity income for years to come. However, they decided to sell it for the benefits of the company and to improve the long-term financial health of the company. This courteous act shows goodwill from the founders and majority shareholders in supporting SIDO as a public company.

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Valuation

In valuing SIDO, we use 3 different valuation methods to derive our price target of Rp 1,160. We use 5-year DCF model, DDM and PE Comps, each with 25%, 50% and 25% weight respectively. We weight DDM model higher due to its dividend payout ratio of around 80% and paying it consistently every year. We assume 8.5% WACC based on 8.5% cost of equity and 0% weight on cost of debt because the company has 0 debt. We also assume a 5.2% terminal growth rate following Indonesia’s GDP growth rate.

Figure 15. DCF Calculation Terminal Growth Rate (%) 5.2% NPV of Cash Flows 17,083,777 WACC (%) 8.50% Final Beta 0.50 Sub Total 17,083,777 Risk-free rate 7.50% Market risk premium 2.00% Debt/(Cash) '2018 0 Cost of equity 8.50% Gross cost of debt 0.00% Implied Equity Value 17,083,777 Tax rate 0% Net cost of debt 0.00% Number of shares (Millions) 15,000 Weighted cost of equity 100% Weighted cost of debt 0% Equity Value Per Shares 1,139 WACC 8.50%

Source: ASI Research

Figure 16. Historical PER Band

24.00

22.00 21.55 20.00 19.55 18.00 17.55 16.00 15.55 14.00 13.54 12.00

10.00 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19

Source: Yahoo Finance, ASI Research

For DDM calculation, we use 7.5% risk free rate following the yield of 10-year government bond in Indonesia, 8.5% cost of equity and 5.2% growth rate. We also assume 80% dividend payout ratio. Upside to current share price are calculated at Rp 1,260/share, thus the current stock price of around Rp 1,000/share are trading at a discount.

For PE Comps, we use 2019F EPS of 49 and PE of 20 which is a conservative estimate for a stable leading herbal medicine industry player with low beta/low volatility in terms of seasonal change in demand, and receive our calculation at Rp 980/share.

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Figure 17. Calculation Summary Method Weight Price Valuation Total DCF 25% 1139 285 DDM 50% 1260 630 PE Comps 25% 980 245 RP 1,160

Source: ASI Research

Figure 18. Competitor Comparison Market Ticker DPS DPR Div Yield PBV PER (TTM) ROA ROE Cap SIDO 15.1T 29 80.8% 2.9% 5.19 22.71 19.9% 22.9% KLBF 70.1T 25 48.8% 1.7% 4.79 28.52 13.5% 16.8% KAEF 18.1T 18 30.0% 0.5% 5.64 43.40 4.4% 13.0% TSPC 8.0T 40 33.1% 2.3% 1.55 15.60 6.5% 10.0%

Source: IDX, ASI Research

Company Structure & Management

Figure 19. Company Structure

Source: Company

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Board of Directors

David Hidayat – President Director

Appointed as president director of the company since May 2018. He was born in Semarang in 1955. Currently, he held several positions such as Director of PT Hotel Candi Baru, Commissioner of PT Muncul Mekar and many more.

Source: Company

Irwan Hidayat – Director

Appointed as director of the company since May 2016. He was born in in 1947. Currently, he held several positions such as President Director of PT Hotel Candi Baru, Commissioner of PT Muncul Mekar and many more.

Source: Company

Gerry Mustika – Independent Director

Appointed as independent director of the company since July 2018. He was born in 1968. Before coming to SIDO, he was a general manager in PT Aventis Pharma (Sanosi Indonesia) from 2017-2018.

Source: Company

Leonard – Independent Director

Appointed as independent director of the company since July 2018. He was born in 1978. Before coming to SIDO, he was the group CFO in PT Great Giant Pineapple from 2011-2018.

Source: Company

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Board of Commissioners

Jonatha Sofjan Hidayat – President Commissioner

Appointed as president commissioner of the company since May 2018. He was born in Yogyakarta in 1948. Currently, he held several positions such as President Commissioner of PT Hotel Candi Baru, Commissioner of PT Muncul Putra Offset and many more.

Source: Company

Sigit Hartojo Hadi Santoso – Commissioner

Appointed as commissioner of the company since May 2018. He was born in Rembang in 1949. Currently, he held several positions such as President Commissioner of PT Muncul Armada Raya, Commissioner of PT Koeno Koeni, Commissioner of PT Chanti Hotel Aura Nusantara and Director of PT Muncul Mekar.

Source: Company

Johan Hidayat – Commissioner

Appointed as commissioner of the company since 1972 and reappointed back as a commissioner of the company in May 2016. He was born in Yogyakarta in 1950. Currently, he held several positions such as President Commissioner of PT Muncuk Mekar, President Commissioner of PT Muncul Putra Offset, President Commissioner of PT Mentara Anugerah Sakti and many more.

Source: Company

Ronnie Behar – Independent Commissioner

Appointed as independent commissioner of the company since 2018. He is of nationality. As of now, he is a Partner in Affinity Equity Partners. Before Affinity, he was a managing director and co-head M&A of Asia Pacific in Credit Suisse. He received his MBA from University of Chicago.

Source: Company

Eric Marnandus – Independent Commissioner

Appointed as independent commissioner of the company since 2018. He is of Indonesian nationality. As of now, he is an Executive Director in PT Affinity Equity Partners Indonesia. Before Affinity, he was an Engagement Manager in McKinsey & Company and Associate in J.P Morgan. He received his MBA from UC Berkeley.

Source: Company

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Figure 21. Key Financials

Balance Sheet 2017 2018 2019F 2020F 2021F Income Statement 2017 2018 2019F 2020F 2021F

Cash 903 806 764 833 862 Net Revenues 2,574 2,763 3,070 3,379 3,687

Receivables 427 409 468 525 560 Cost of Goods Sold -1,389 -1,339 -1,443 -1,549 -1,656

Inventories 268 311 302 328 350 Gross Profit 1,185 1,424 1,627 1,831 2,031

Other Current Assets 31 22 21 22 22 Selling Expense -364 -414 -472 -519 -563

Total Current Assets 1,629 1,548 1,555 1,708 1,794 General and Admin -195 -203 -231 -249 -263

Fixed Assets - Net 1,215 1,553 1,719 1,796 1,870 Operating Profit 640 824 925 1,063 1,206

Deferred Tax Assets 46 59 77 100 130 Finance gain (loss) 42 44 42 40 44

Goodwill 91 91 91 91 91 Pre-tax Income 682 868 967 1,103 1,250

Other non-current 177 87 40 48 58 Tax Expense -148 -204 -232 -265 -300 assets Total Non-Current 1,529 1,790 1,927 2,035 2,149 Net Income 534 664 735 838 950 Assets

Total Assets 3,158 3,338 3,482 3,743 3,943 NI for Parent 534 664 735 838 950

Key Ratios 2017 2018 2019F 2020F 2021F

Trade Payables 125 182 155 214 189 Gross Profit Margin 46% 52% 53% 54% 55%

Taxes Payable 34 80 91 104 118 Operating Margin 25% 30% 30% 31% 33%

Other Payables 11 8 8 9 8 Net Profit Margin 21% 24% 24% 25% 26%

Accrued Expenses 37 86 98 105 111 ROA 17% 20% 21% 22% 24%

Other Current 2 13 13 13 13 ROE 18% 23% 24% 26% 28% Liabilities Total Current 209 368 365 445 439 Current Ratio 7.8 4.2 4.0 3.6 3.7 Liabilities Employee benefits 45 56 67 81 97 Quick Ratio 6.7 3.6 3.3 3.0 3.0 liabilities Deferred tax 9 11 0 0 0 Debt to Equity 0.1 0.2 0.2 0.2 0.2 liabilities Total Non-Current Long-Term Debt to 54 67 67 81 97 0.0 0.0 0.0 0.0 0.0 Liabilities Equity

Total Liabilities 262 435 433 526 536 CCC (days) 76.85 78.94 82.88 82.88 82.88

Inventory Turnover Total Equity 2,896 2,903 3,049 3,217 3,407 4.8 4.6 4.6 4.5 4.5 (X)

AR Turnover (X) 6.5 6.6 6.5 6.4 6.2

Total Liabilities and 3,158 3,338 3,482 3,743 3,943 AP Turnover (X) 9.2 8.7 8.6 8.4 8.2 Equity

Source: Company

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Disclaimer

INVESTMENT RATINGS: Indicators of expected total return (price appreciation plus dividen yield) within the 12-month period from the date of the last published report, are: Buy (10% or higher), Neutral (-10% to 10%) and Sell (-10% or lower).

DISCLAIMER: This report is issued by PT Artha Sekuritas Indonesia, a member of the Indonesia Stock Exchanges (IDX) and supervised by the Financial Services Authority (OJK). We have based this document on information obtained from sources we believe to be reliable, but we do not make any re presentation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Expressions of opinion contained herein are those of Artha Sekuritas Indonesia only and are subject to change without notice. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of the addressee only and is not to be taken as substitution for the exercise of judgment by the addressee. This document is not and should not be construed as an offer or a solicitation of an offer to purchase or subscribe or sell any securities.

PT Artha Sekuritas Indonesia A Member of the Indonesia Stock Exchange

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Telephone +(62) (21) 515 2338 Fax +(62) (21) 515 2339 Email [email protected]

Website www.arthasekuritas.com

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