Over the past few weeks, INDF’s share price has remained firm, in spite of a
soft 1Q11A result (9.5% below our quarterly forecast), and the share prices of
its two key investments ICBP (Rp5,200, Neutral, Rp5,700 PT) and IFAR
(S$2.05, Not Rated) continuing to decline (collectively 75% of INDF’s NAV).
We highlight that this divergence has increased the implied value of Bogasari
to Rp14.5tr, and quite likely reflects anticipatory buying in the lead-up to the
SIMP IPO. However, we believe the view that the IPO will act as a positive
catalyst for INDF’s share price to be misplaced, and we expect the reverse to
occur, and the stock to sell off after the IPO. We recommend investors utilise
the current strength as a short term trading opportunity to lighten.
Impact
We do not believe SIMP’s IPO will act as positive catalyst for INDF: While
INDF’s share price has been strong in recent weeks, IFAR’s share price (the
vehicle actually conducting the IPO) has continued to weaken, indicating that
investors are concerned about the dilutionary consequences of the offer,
and/or the transaction converting IFAR into a holding company. Certainly
there are no indications from IFAR’s share price that the IPO is about to
imminently crystallise value or trigger a positive re-rating. In addition, we
would also flag that after a strong run in the lead-up to ICBP’s IPO, INDF’s
share price collapsed by c10–15% in the days following the IPO. Successfully
trading around the ICBP IPO required selling out before the IPO, not after.
Valuation difficult to justify: INDF's share price relative to ICBP and IFAR’s
is now implying a Rp14.5tr valuation for Bogasari – representing a 13.5x
FY11E PER based on normalised (10-year average) margins of 9.5% (which
is high by global flour-milling standard). We note that 1Q11A margins were
wheat prices remaining elevated. We believe Bogasari warrants a large PER
discount to the JCI (c14x FY11E PER) given its relatively poor economics.
Earnings and target price revision
No change. We expect to update our earnings forecasts following INDF’s
recent 1Q11A result in coming weeks.
Price catalyst
12-month price target: Rp5,300 based on a RNAV methodology.
Catalyst: SIMP IPO (expected in early June).
Action and recommendation
We maintain our neutral call on valuation grounds but flag a negative
short term trading view: We believe INDF’s share price has remained
buoyant in recent weeks as investors have been hesitant to take underweight
positions pre SIMP’s IPO. However, as soon as the IPO occurs and removes
this “event uncertainty”, we believe this artificial support will disappear and
valuation considerations will resurface and become INDF’s primary share
price driver. We believe this holds out scope for INDF’s share price to rapidly
retrace to Rp5,000–5,500 (more in line with our Rp5,300 valuation).
analysis by: Macquarie Research