The Old Star Has Returned
Soft Commodity Prices Remain at a High Level
• World wheat prices have soared this year +40% YTD, pushing up the raw material cost, especially bread and noodles. According to the USDA, global wheat production in FY23F is forecasted to lower by -4.46 mn Mt (-0.57% YoY) to 774.83 mn Mt (vs 779.29 mn Mt in FY22E). Despite high wheat prices, high consumption demand leads to higher trade year (July/June) imports in FY22E/23F at a record 201.2 mn Mt.
• Meanwhile, the sugar prices are predicted to fall due to improving global production, which is projected to increase +0.94% YoY to 182.89 mn Mt in FY23F. Furthermore, skim milk prices still have the potential to strengthen, triggered by high prices for fertilizers, animal feed, and fuel.
• We believe that higher input costs will partly be offset by higher retail selling prices for some companies that have stronger pricing power.
Refocusing on State Budget to Maintaining Purchasing Power
• The government refocused the budget to increase energy subsidies and compensation of IDR350 tn in response to the increase in world oil prices. Furthermore, the social assistance (Bansos) budget was also added by IDR 18.6 tn. The addition comes from the outlook for state revenues of IDR420 tn which is supported by rising commodity prices.
• We believe the government's efforts can maintain people's purchasing power through controlled inflation and prevent the negative impact of the commodity boom in FY10-FY14. Whereas in FY11, the increase in world oil prices to a level of >100USD/Bbl caused a significant increase in domestic inflation up to 8% YoY (exhibit 04).
• The maintained public purchasing power is expected to be a positive catalyst for the consumer sector amidst the high world commodity prices.
• However, we need to keep an eye on the slowdown in the core inflation component in May-22 which was recorded at +2.58% YoY (vs +2.60% YoY in Apr-22), amid the rising inflation in the energy and foodstuff components which continued to strengthen. The increase in these two components since the beginning of the year has moved in contrast to the growth in retail sales of food, beverage and tobacco categories as well as motor vehicle fuels, which tended to decline. (exhibit 05).
ICBP Resilient Amid Wheat Prices Soared
• We believe that the “Indomie” brand has strong pricing power, thus supporting the increase in ASP to offset the increase in raw materials.
• The management has adjusted the ASP at the beginning of this year. Based on our survey, the price of “Indomie goreng” and “soto mie” at retail increased by IDR500 (+16.7% YTD) respectively before Apr-22.
• Despite the increase in ASP, we believe sales volume will remain solid and support revenue this year along with: 1) strong pricing power, 2) solid business footprint, 3) high market share of ~73%.
• In 1Q22, ICBP managed to record double digit growth on the top-bottom line (+13.89% YoY/+11.75% YoY). With this fairly solid performance, we assess that ICBP's bottom-line has the potential to increase by +11.55% YoY, to IDR7.13 tn in FY22E, supported by: 1) integrated holding ecosystem under INDF's group; 2) solid revenue growth; 3) decrease in financial expenses.
Recommendation : Overweight for The Consumer Non-Cyclicals
We transfer our coverage on consumer non-cyclicals sector from Rifqi Ramadhan to Raka Junico and upgrade our recommendation from Neutral to Overweight for consumer non-cyclicals sector for 2H22E. Our top picks are INDF IJ (BUY; TP: IDR7,850) and ICBP IJ (BUY; TP: IDR9,800) as a proxy of consumer food spend, SIDO IJ (BUY; TP: IDR1,100) with a lower commodity prices exposure, while UNVR IJ (HOLD; TP: IDR4,600) due to high volatility on oil and skim milk prices.
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