Indonesia Food &Beverages:Introducing a fresh way to look at the sector

The four Indonesia’s F&B companies we cover – Indofood CBP (Reduce), Indofood SuksesMakmur (Hold), Kalbe Farma (Hold) and Unilever Indonesia (Hold) – appear to be in pretty goodshape. In broad terms, over the past few years, they have recorded strong EPS growth whilemaintaining strong cash positions and low levels of gearing. As a result, they have beenrewarded with higher PE multiples.。

    Today, the valuations of these companies are generally high. The F&B companies with theexception of Indofood Sukses Makmur (INDF) trade at premiums relative to the Jakarta StockExchange Composite Index (JCI) in terms of both PE and EV/EBITDA multiples. This is themain reason behind our Hold ratings on three out of the four stocks under our coverage.。

    Against the backdrop of slower consumption growth in the first half of 2017, we believe it is timeto take a fresh look at the sector’s fundamentals and likely future direction. Thus, we introducewhat we call the “five fundamentals” framework to assess the fundamental strengths andweaknesses of these companies without taking into account their individual valuations.。

    In the first half of 2017, most Indonesian consumer companies reported relatively weakearnings growth y-o-y as consumption growth slowed. Annual GDP growth has been about5.0% since 2014. While the rate was 5.0% in both 1Q and 2Q 2017, it was weaker thanexpected in 2Q as HSBC’s economist had forecast 5.1%. Growth in private consumption wasrelatively weak at 4.9% y-o-y. Another important factor that indicated just how weakconsumption was in 2Q 2017was that Lebaran, a major national holiday associated with strongconsumer spending, was in 2Q in 2017vs. 3Q in 2016. In August, Indonesia's central bank cutits benchmark policy rate – the first change since October – in a bid to boost economic growth.。