ICBP - Pinning hopes on flattening commodity prices

• ICBP’s 1H22 net profit plunged 40.1% YoY to Rp1.93tn (loss Rp10.7bn in 2Q22) 

• We expect revenue growth of 16% YoY with net profit Rp4.9tn in 2022 

• We reiterate our “BUY” call with 17% upside potential on a 12-month view on improved margins in 2H22, and overseas expansion 

Soft performance largely due to forex loss ICBP's net profit came in at Rp1.93tn in 1H22, plunging 40.1% YoY (loss of Rp10.7bn in 2Q22), accounting for 33.2% of our FY forecast. The lower profit YoY was mainly caused by balooning finance expense due to higher forex loss from financing and interest expenses. Taking forex loss out, ICBP’s 1H22 net profit was Rp3.0tn or down 25.0% YoY. Meanwhile, ICBP's revenue grew 15.6% YoY to Rp32.6bn in 1H22 (-10.4% QoQ in 2Q22 to Rp15.4tn). Nevertheless, GPM contracted from 37.0% in 1H21 to 31.9% in 1H22 (34.2% in 1Q22 to 29.4% in 2Q22) due to higher COGS +25.0% YoY (-3.8% QoQ in 2Q22) amid surging commodities prices. Furthermore, opex also rose 14.7% YoY to Rp4.90tn in 1H22, mainly from selling and distribution expense due to ads & promotion and freight, leading to lower OPM from 21.9% in 1H21 to 16.9% in 1H22. Other income in 1H22 largely derived from net gains on forex from Pinehill. Balance-sheet wise, net gearing remained controllable in 1H22 at 0.9x. Margin contractions in most segments ICBP's 1H22 net revenue was mostly supported by noodles that grew 15.4% YoY (-9.4% QoQ in 2Q22). However, margin of noodles tumbled from 25.3% in 1H21 to 19.9% in 1H22. Despite lower margin, noodles contribution to revenue was stable at 69.8% in 1H22. This was followed by dairy products that grew 14.6% YoY in 1H22 (-9.4% QoQ) with margin of 7.4%, lowered from 12.4% in 1H21 due to higher price of skim milk. The contribution of dairy to its revenue was stabilized at 15.7% in 1H22. Furthermore, snacks, which contributed 5.8% of its revenue in 1H22, increased 18.4% YoY. Although, its margin also plunged from 13.6% in 1H21 to 6.5% in 1H22. Meanwhile, beverage products reported higher margin of 5.7% in 1H22 compared to in 1H21 of 3.4%. Top line growth to remain solid We expect ICBP's revenue to grow 15% YoY in 2022 as the company has carried out price hikes twice in 1H22, mostly on noodles. Amid high commodity prices, we estimate gross margin to lower to 32.4% in 2022, yet will improve on QoQ basis, in addition to higher contribution of Middle Eastern and African markets. Nevertheless, we expect commodity prices hikes will slow down in 2H22, impacted by higher interest rates and, indicated by lower wheat price by c.25% in September, compared to June. Furthermore, skimmed milk powder price has also came down this month, therefore we expect ICBP's dairy product margins to at least stay at current level. Nevertheless, we revise down our ICBP's net profit forecast to Rp4.88tn in 2022 on the back of higher-than-expected finance costs. Reiterate BUY on the back of strong leadership in instant noodle We maintain our BUY recommendation with a DCF-based price target of Rp10,150/ share. The stock is currently traded at a 2022F PER of 24.2x. We note several paramount catalysts to the company's performance, namely 1) leadership in instant noodle market; 2) better selling prices; 3) expansion in Middle East and African market through Pinehill that will bring margin improvement; 4) lower commodity prices in 2H22; and 5) relatively controllable leverage ratio. Nevertheless, we highlight several factors that may hamper to its performance, including 1) strong energy and commodity prices; 2) soft purchasing power in the wake of BBM price hike ; and 3) USD appreciation and higher finance costs.