UNVR - Expecting strong rebound

• UNVR’s 1H22 net profit increased 12.6% YoY to Rp3.43tn (-30.3% QoQ in 2Q22) 

• We expect revenue growth of 4% YoY, EBITDA margin of 22.7% in 2022 

• We reiterate our “BUY” call with 10% upside potential on a 12-month view on strong position in HPC segment, manageable B/S 

Exceeding expectation UNVR's net profit soared 12.6% YoY to Rp3.4tn in 1H22 (-30.3% QoQ in 2Q22), accounting for 56.2% of our FY estimate. This strong net profit performance was in line with higher net sales growth of 6.4% YoY to Rp21.5tn in 1H22 (-2.0% QoQ in 2Q22). Nevertheless, the company's gross margin plunged from 50.8% in 1H21 to 48.2% in 1H22 in the midst of higher material costs, resulting in higher COGS by 12.0% YoY. Nevertheless, UNVR managed to lower its operational expenses by 5.5% YoY (+23.0% QoQ), on the back of lower general and administrative expenses. This resulted in operational expenses margin to be stable at 20.9% in 1H22. Furthermore, finance costs also tumbled 52.2% YoY in 1H22. EBITDA margin improved YoY from 22.6% in 1H21 to 23.4% in 1H22. Balance sheet wise, UNVR recorded a net cash position in 1H22. Boosted by main segment of HPC UNVR's revenue growth was driven by HPC segment that grew 5.53% YoY in 1H22 to Rp14.23tn (- 0.33% QoQ), particularly through Oral Care and Deodorant products. Meanwhile, F&R also booked a Rp7.2tn in revenue, growing 8.1% YoY in 1H22 (-5.1% QoQ) thanks to stellar performance of Royco, Bango and Sariwangi. HPC's sales contributed 66.3% to its total sales in 1H22 relatively stable compared to 66.9% in 1H21, while F&R segment’s contribution reached 33.7% compared to 33.2%. In terms of profitability, EBIT margin of HPC segment slid from 29.9% in 1H21 to 28.6% in 1H22. In contrast, EBIT margin of F&R segment escalated from 15.5 in 1H21 to 19.3% in 1H22. Aiming for premium segment We expect UNVR's revenue growth of 4% YoY this year, mostly bolstered by main segment of HPC in line with strengthened purchasing power. In addition, we view that government decision to maintain subsidized fuel prices and electricity will result controllable inflation throughout the year. We estimate HPC's contributio to remain at 66-67% in 2022. Furthermore, we expect UNVR's EBITDA margin to be relatively stable at 22.7% in 2022 as we see signs of easing commodity price hikes in 2H22. UNVR strives to expand premium segment especially for HPC segment through brands of Dove, Tresemme, Lifebuoy and Rinso. We are positive that this move will be able to improve its margin while capturing mid-to-high segment that is less price sensitive. Furthermore, the company is also pushing digitalization aiming for improving distribution channels and improve efficiency. Reiterate BUY on the back of strong leadership in FMCG We maintain our BUY call with a DCF-based price target of Rp5,170/share. The stock is currently traded at a 2022F PER of 32.4x We are positive with UNVR’s outlook driven by 1) leadership in HPC products; 2) improved customer spending; 3) controllable costs thanks to its optimized economies of scale; 4) attractive dividend yield; and 5) manageable leverage ratio. However, we highlight several downside risks to our recommendation including 1) higher inflation due to commodity price hikes; 2) lower-than-anticipated consumer power due to uncertainty; and 3) interest rate hikes and 4) intense competition especially in F&R segment.