Company Update

27 Mei 2020

ICBP - MNC Sekuritas Equity Report 27 May 2020

PT Indofood CBP Tbk (ICBP IJ)

Consumer Sector


Déjà Vu: Rare Opportunity!


Pinehill Acquisition worth to USD2.99 bn (IDR44.25 tn) at a Premium Price with 23x PE

Indofood CBP Sukses Makmur (ICBP IJ) share price plunged by 6.98% in the first trading session bringing –25.34% YTD downturn (27/05). We believe that this fall was due to ICBP’s announcement on its acquisition of its British Virgin Island affiliates, Pinehill Corpora Limited and Steele Lake Limited (Pinehill group). ICBP has finally signed the agreement on May 22, 2020, with an exceptional transaction value of USD2.99 bn (IDR44.25 tn; IDR14,800/USD) or 43% of ICBP’s market cap and funding mostly came from bank loans (90%) and 10% of internal cash worth to USD300 mn (IDR4.44 tn). However, the acquisition value may create a short-term negative sentiment given its premium valuation of 23.25x PE (vs 18.36x ICBP PE FY20E at current share price). Furthermore, Pinehill Corpora Limited is an affiliate of Mr Anthoni Salim (CEO Indofood Group) which owns approximately 49% of the shares; it may affect the market perception about this related party transaction.


Pinehill Group at a glance

Pinehill owns four subsidiary companies and is primarily engaged in the manufacturing of instant noodles using the "Indomie" trademark (which is licensed by INDF) in 8 countries with the total population of approximately 550 mn. Pinehill has 12 instant noodle production facilities with a production capacity of 10 bn packs and also has distribution networks in 33 countries that have a total population of 885 mn people.


Learning from the past: How serious is the current slump?

We note that ICBP’s share price downturn has happened several times along with the corporate actions: 1) Back in March-2019 (-8.74%) when INDF announced its land acquisition in Bintan and Pasuruan; 2) PepsiCo decision to discontinue their distribution contract with Indofood (AIBM) in October-2019 (-7.66%); 3) ICBP announced its plan to explore the offer made in purchasing the entire issued shares owned by affiliated parties Pinehill Corporate Limited in February-2020 (-6.31%). Historically speaking, this downswing might only be temporary, note that the stock will always rebound eventually supported by the solid earnings result.


Long-term Synergy to Become a Global Food Player

Based on the agreement, Pinehill guaranteed a net profit of USD128.5 mn (IDR1.90 tn) p.a. in FY20E and FY21F with 5% of deviation. To secure the payment of the adjustment value, ICBP shall retain USD650 mn on Apr 30, 2022. We believe that this agreement will benefit ICBP in the long run, along with the huge potential market (550mn population) and underpenetrated noodle consumption. This would make ICBP the largest player of instant noodles globally. On the flip side, this acquisition could potentially affect to its DER level to above 1.30x in FY20E from 0.09x in FY19. Assuming that USD interest rate stood at 4%, the additional debt will surge up around IDR1.60 tn to ICBP’s financing cost, translated to ~6% higher in FY20E post-deal net profit.


Maintain BUY with a lower TP of IDR10,300

We maintain our BUY recommendation on ICBP with a slightly lower TP of IDR10,300 (previously IDR11,500) based on FY20E PE of 18x (close to -2.5STD of its 5-years mean). Downside risk to our call: 1) higher interest costs due to the acquisition; 2) higher COGS pressure; 3) depreciation of IDR.


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