20 September 2016 EQUITIES Unilever Indonesia (UNVR IJ) PERSONAL PRODUCTS Initiate at Hold: Premiumisation and quality priced in Indonesia A quality company with a valuation multiple to match INITIATE AT HOLD Volumes, cost efficiency and premiumisation to drive growth TARGET PRICE (IDR) PREVIOUS TARGET (IDR) Initiate coverage with a Hold rating and TP of IDR40,400 40,400 A major player. Unilever Indonesia (UNVR) is one of the country’s largest producers SHARE PRICE (IDR) UPSIDE/DOWNSIDE of fast-moving consumer goods. Its strong cash generation, high ROE (124% in 44,300 -8.8% 2015) and consistent dividend payments have resulted in its stock being a core (as of 16 Sep 2016) holding for investors seeking exposure to Indonesia. This report takes a deep dive MARKET DATA into its product portfolio and business strategy to identify what will drive growth over Market cap (IDRb) 338,009 Free float 15% the next three years. Market cap (USDm) 25,670 BBG UNVR IJ 3m ADTV (USDm) 7 RIC UNVR.JK Bright outlook: The economy is enjoying a broad-based recovery, which is FINANCIALS AND RATIOS (IDR) increasing the purchasing power of consumers, and the country’s favourable Year to 12/2015a 12/2016e 12/2017e 12/2018e demographics provide an ideal environment for consumption growth. This in turn HSBC EPS 766.95 878.32 1024.27 1198.69 HSBC EPS (prev) - - - - creates opportunities for product premiumisation. Our research provides a Change (%) - - - - differentiated way of looking at each of UNVR’s six leading categories which Consensus EPS 769.49 847.46 958.94 1093.13 PE (x) 57.8 50.4 43.3 37.0 generate 73% of its revenue. We assess the performance of each category in terms Dividend yield (%) 1.7 1.9 2.2 2.6 of winners and losers. See page 10 for details. EV/EBITDA (x) 40.2 35.2 30.2 25.7 ROE (%) 124.2 142.8 175.0 214.7 Earnings forecasts. In 2015 EPS growth slowed to 2% but we expect this to 52-WEEK PRICE (IDR) increase to 14.5% in 2016e and 16.6% in 2017e. We forecast earnings to increase at a CAGR of 16% over 2015-18e, driven by higher margins from premiumisation, 50000.00 volume growth, and improved cost efficiency. The capping of the royalty fee UNVR 41000.00 pays to its Dutch parent at a maximum of 8% of domestic revenue from 2015 after 32000.00 Sep 15 Mar 16 Sep 16 three years of increases is another positive. Target price: 40400.00 High: 47800.00 Low: 34600.00 Current: 44300.00 Valuation and risks. We initiate coverage with a Hold and a target price of Source: Thomson Reuters IBES, HSBC estimates IDR40,400. The stock is trading at 50.4x 2016e PE and 35.2x 2016e EV/EBITDA, which is above its historical trading range. At these multiples, we think the positives, Selviana Aripin*, CFA Analyst including EPS growth at a 16% CAGR over 2015-18e, are already in the price. Our The Hongkong and Shanghai Banking Corporation DCF-derived target price implies 9% downside. Our 2016-18e revenue and net Limited, Singapore Branch [email protected] income forecasts are 3-10% ahead of consensus because we have a more positive +65 6658 0610 view of the home and personal care segment. Our bull and bear case scenario Karen Choi* analysis (see page 8) shows that even under a bullish scenario, there is little further Head of Consumer & Retail Research, Asia Pacific The Hongkong and Shanghai Banking Corporation upside. Upside risks include stronger-than-expected GDP growth, industry Limited, Seoul Securities Branch [email protected] consolidation, and acquisitions that are earnings accretive. Downside risks include +822 3706 8781 the implementation of a plastic tax, increasing competition in the food segment, weaker-than-expected GDP growth, and health/food safety issues. *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations. Disclosures & Disclaimer Issuer of report: The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. View HSBC Global Research at: MCI (P) 094/06/2016 MCI (P) 085/06/2016 MICA (P) 021/01/2016 https://www.research.hsbc.com EQUITIES PERSONAL PRODUCTS 20 September 2016 Financials & valuation: Unilever Indonesia Hold Financial statements Key forecast drivers Year to 12/2015a 12/2016e 12/2017e 12/2018e Year to 12/2015a 12/2016e 12/2017e 12/2018e Profit & loss summary (IDRbn) Home and Personal Care revenue 25,419 28,994 33,220 38,229 Revenue 36,484 41,791 48,122 55,694 Food and Refreshment revenue ( 11,065 12,797 14,902 17,465 EBITDA 8,444 9,633 11,209 13,094 Total revenue (IDRbn) 36,484 41,791 48,122 55,694 Depreciation & amortisation -505 -603 -720 -842 Gross profit (IDRbn) 18,649 21,153 24,357 28,190 Operating profit/EBIT 7,939 9,030 10,490 12,252 EBIT (IDRbn) 7,939 9,030 10,490 12,252 Net interest -110 -94 -70 -57 PBT 7,829 8,935 10,420 12,195 HSBC PBT 7,829 8,935 10,420 12,195 Taxation -1,978 -2,234 -2,605 -3,049 Valuation data Net profit 5,852 6,702 7,815 9,146 Year to 12/2015a 12/2016e 12/2017e 12/2018e HSBC net profit 5,852 6,702 7,815 9,146 EV/sales 9.3 8.1 7.0 6.0 Cash flow summary (IDRbn) EV/EBITDA 40.2 35.2 30.2 25.7 Cash flow from operations 6,695 8,885 10,440 12,422 EV/IC 53.2 55.9 70.0 106.5 Capex -1,472 -1,881 -1,396 -1,615 PE* 57.8 50.4 43.3 37.0 Cash flow from investment -1,429 -1,881 -1,396 -1,615 PB 70.0 74.2 77.3 81.5 Dividends -5,592 -6,366 -7,424 -8,689 FCF yield (%) 1.5 2.1 2.7 3.2 Change in net debt 537 -223 -1,085 -1,481 Dividend yield (%) 1.7 1.9 2.2 2.6 FCF equity 5,155 7,005 9,045 10,807 * Based on HSBC EPS (diluted) Balance sheet summary (IDRbn) Intangible fixed assets 493 474 456 438 Tangible fixed assets 8,321 9,620 10,317 11,111 Issuer information Current assets 6,623 6,416 8,077 10,181 Share price (IDR) 44300.00 Free float 15% Cash & others 628 50 1,272 2,914 Target price (IDR) 40400.00 Sector Personal Products Total assets 15,730 16,664 19,027 21,935 Reuters (Equity) UNVR.JK Country Indonesia Operating liabilities 8,428 10,389 12,744 15,653 Bloomberg (Equity) UNVR IJ Analyst Selviana Aripin Gross debt 2,166 1,365 1,503 1,663 Market cap (USDm) 25,670 Contact +65 6658 0610 Net debt 1,538 1,315 230 -1,251 Shareholders’ funds 4,827 4,557 4,374 4,148 Invested capital 6,381 6,072 4,834 3,163 Price relative Ratio, growth and per share analysis 47000.00 47000.00 Year to 12/2015a 12/2016e 12/2017e 12/2018e Y-o-y % change 42000.00 42000.00 Revenue 5.7 14.5 15.1 15.7 37000.00 37000.00 EBITDA 3.8 14.1 16.4 16.8 32000.00 32000.00 Operating profit 2.3 13.7 16.2 16.8 PBT 2.0 14.1 16.6 17.0 27000.00 27000.00 HSBC EPS 2.0 14.5 16.6 17.0 22000.00 22000.00 Ratios (%) Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Revenue/IC (x) 6.0 6.7 8.8 13.9 Unilever Indonesia Rel to JAKARTA S E COMPOSITE ROIC 98.3 109.0 144.6 230.2 ROE 124.2 142.8 175.0 214.7 Source: HSBC ROA 39.6 41.9 44.1 44.9 Note: Priced at close of 16 Sep 2016 EBITDA margin 23.1 23.0 23.3 23.5 Operating profit margin 21.8 21.6 21.8 22.0 EBITDA/net interest (x) 76.8 102.0 161.3 229.9 Net debt/equity 31.9 28.9 5.3 -30.2 Net debt/EBITDA (x) 0.2 0.1 0.0 -0.1 CF from operations/net debt 435.3 675.6 4532.1 Per share data (IDR) EPS Rep (diluted) 766.95 878.32 1024.27 1198.69 HSBC EPS (diluted) 766.95 878.32 1024.27 1198.69 DPS 732.94 834.40 973.05 1138.76 Book value 632.68 597.24 573.22 543.63 2 EQUITIES PERSONAL PRODUCTS 20 September 2016 Contents Investment Summary 4 Earnings are set to rise rapidly 4 Key forecasts 6 Valuation and risks 6 How we are different from consensus 8 Bull and bear care scenarios 8 Industry analysis 11 A young population and strong GDP growth 11 Home and personal care 14 Food and refreshments 18 Bottom line 19 Unilever Indonesia 20 Company profile 20 Investment thesis 20 SWOT analysis 21 Corporate governance and management 21 Management strategy 23 Forecasts, valuation, and risks 26 Financial analysis 26 Consensus vs. HSBC forecasts 35 Valuation 35 Risks 38 Disclosure appendix 40 Disclaimer 43 3 EQUITIES PERSONAL PRODUCTS 20 September 2016 Investment Summary Unilever Indonesia is benefiting from the country’s premiumisation trend as the broader economy recovers But we think that these positive factors are already in the price Initiate coverage with a Hold rating and a target price of IDR40,400 Earnings are set to rise rapidly Unilever Indonesia (UNVR) is one of the country’s largest producers of consumer goods.