UNVR - Valuation says it all

UNVR is expected to take advantage from lower commodity prices in following quarters resulting in improvement in margins whereas a focus on value brands would bring greater benefit to earnings going forward. Stiffer competition in FMCG is likely to affect volume growth, whilst room for ASP adjustment seems to be limited given the availability of product substitutes. In all, stronger purchasing power is expected while domestic economy growth resiliency coupled with the upcoming election could become as a turnaround story. Its weak FY22 results has been fairly priced-in and brought valuation at below -1SD of 5-yr historical mean (27.5x P/E). Downgrade to HOLD with target price of IDR4,580 (27.9x ‘23F P/E). Earnings missed KBV’s and street expectations UNVR’s HPC segment improvement of 3.3% yoy in FY22 to IDR27.25 tn and solid F&B division which saw 6.0% yoy growth, has brought total revenue rose 4.2 yoy to IDR 41.21tn and largely in line with KBVs and street estimates at 99.7% and 98.7%. However, earnings was down by 6.8% yoy to IDR5.36 tn due to spiking input cost and missed ours and consensus expectation at 89.2% and 86.8%. On quarterly basis, top line only saw a mild growth of 1.7% and with soaring cost of revenue by 11.6% yoy which made 4Q22 earnings declined sharply by 45.4% yoy and 36.3% qoq. Distressed margin remains The company saw declining margin across the board both in 4Q22 and cumulative period. GPM was at 42.6% slid by 510bps yoy and 310bps qoq, while NPM shrunk to 7.8% in 4Q22 vs 14.5% in 4Q21 and 11.7% in 3Q22. Likewise, for FY22 period, whereas GPM weakened by 340bps yoy to 46.3%, EBIT margin also stood 2.3% yoy lower to 17.1%, triggered by advertising expenses which rose 39.3% yoy and bringing overall NPM declined by 1.5% yoy from 14.6% in FY21. Flattish top line likely to continue We believe key will remain lies on the stable improvement on people’s mobility. While the company seems has not gain much advantage from softer commodity price in 4Q22, we expect the impact will appear in the following quarter this year. Nevertheless, we also assumed volume growth to be stagnant as competition remain intense, while limited ASP increase may not be able to boost margins. As such, we expect top line to grow by 5.3% yoy (cons at: 5.8% yoy). Cut ‘23F earnings by 3% On the input costs, while we believe UNVR could record softer raw material used as the biggest chunk in the cost structure, we increase direct labor cost assumption and hence make the overall cost of revenue figure up by 2.9% to IDR21.69 tn. Moreover, we doubt that the company will be less aggressive on advertising and promotions expenses, as we believe it is required for global brand like UNVR to remain stand out in the competition landscape. On this backdrop, our EBIT margin forecast for UNVR arrived at 19.3%, or softened vs our previous projection at 20.4%. Our overall new assumption has also brought ‘23F new net profit margin lower by around 54 bps from 15.0% to 14.4%. Our ‘23F earnings is at IDR 6.26 tn, or 1.1% below consensus’ figure. Downgrade to HOLD with target price of IDR4,580 Aside from DCF as a commonly used valuation, we also run another three 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) and downgrade to HOLD. Risks to our call: a) lower-than-expected purchasing power, volume and asp growth, b) higher than expected input costs which could pressure dragged down margin, c) lower-than-expected market share and intensifying competition from substitutes brands.