UNVR - Poor 1Q23 yoy, stronger qoq

We expect UNVR soon to be able to take the benefit from continuing lower commodity prices expectation this year which will resulting to an improving margin. Lower cost input could provide stronger earnings power and at the same time cushioned its limited ability to increase ASP in the middle of uninterrupted stiffer competition among FMCG manufacturers. We also view, focus on value brands would bring greater advantage to earnings visibility. YTD stock underperformance seems has fairly priced-in its fundamental. Maintain HOLD with TP of IDR4,580 (27.9x ‘23F P/E), while it is currently trading at 27.4x ‘23F P/E, or below its -1SD of 10- yr historical mean of 30.4x P/E Poor 1Q23 result, came below KBVs and street expectation UNVR booked 1Q23 net profit of IDR1.40 tn, faded by 30.5% yoy, on the back of inched drop in top line by 2.2% yoy (HPC -4.3% yoy, +2.0% qoq) and higher opex by 28.1% yoy. The weakening earnings which caused by sluggish sales growth was mainly as a result of UNVR’s policy to reducing trade stock channel (since 2H22) both in modern and traditional channels. The mounting opex was triggered by rising marketing and sales expenses by 18.4% yoy which leads by A&P expenses acceleration by 15.4% yoy and 20.1% yoy, aside from surging G&A expenses of +57.6% yoy which mainly driven by a sharp increase on trademark / royalty fees by 79.7% yoy. PATMI in 1Q23 arrived below ours and street forecast at 22.4%/22.2%, whereas in 5-year historical average, 1Q contribution to full year figures is around 27.4%. Stronger qoq results on solid topline and lower cost Despite the yoy poor results, on quarterly basis, 1Q23 results demonstrates solid growth from top to bottom with net sales noted 9.6% qoq higher. Lower cost input by 3.3% qoq coupled with manageable opex at 9.8% qoq (28.1% yoy) has overall underpinned net profit growth which surged 86.7% qoq. Worth noting that UNVR’s first quarter result at IDR1.40 tn was beating KBVs 1Q23F for UNVR around 2.9% at IDR1.36 tn. We expect 2Q23 result will get better on the back of continuing muted commodity price hikes and potential stock normalization along with uninterrupted innovation as well as stronger product portfolio. On this back drop, we might see ‘23F net profit to arrive at IDR6.26 tn or 16.7% yoy (cons. ‘23F growth for UNVR at 18.3% yoy). Distressed yoy margin, yet improving on quarterly basis The company saw declining margin year-on-year across the board in 1Q23. GPM was at 49.3% slid by 70bps yoy, with EBIT squeezed hardly by 680bps to 17.5% vs 24.4% a year earlier, while NPM shrunk to 13.3% from 18.6% in 1Q22. Nonetheless, profitability was improving qoq from top to bottom with GPM rising by 6.8% from 42.6% in 4Q22. Likewise for EBIT margin which saw 670bps improvement to 17.5% vs 10.8% in 4Q22, while NPM arrived at 13.3% or 550bps higher compared to previous quarter at only 7.8%. We expecting ‘23F GPM margin could improve by approximately 3.5% (cons at around 3%), while NPM likely to record at 14.4%. Benefit from lower commodity price will soon kick-in We highly expecting the company starts to get benefit from continuing softer commodity price expectation this year, despite our assumption that volume growth seems would not rising that much as competition remain intense and limited ASP increase may not be able also to boost margins. UNVR consistently will focus on its five priority strategies which are: (1) unlocking potential value from its main brand (2) enriching and widening product portfolio to premium and value segment (3) strengthening position in both GT and MT as well as future promising channel such as e-commerce (4) implementing e-everything in al business line and (5) remain as a pioneer in sustainability business improvement. Maintain HOLD with target price of IDR4,580 Aside from DCF as a commonly used valuation, we also run another methodologies to fairly valued UNVR using DDM, single stage fair PBV and rolling P/E and came up with a blended intrinsic value of IDR4,580 (implying 27.9x ‘23F PE). Risks to our call: a) lower-than-expected purchasing power, volume and asp growth, b) higher than expected input costs which could pressure and dragged down margin further, c) lower-than-expected market share and intensifying competition from substitutes brands.