2Q26: the beat never reached the bottom line

Net profit came in at IDR1,129bn (-62.5% YoY, -56.1% QoQ), taking 1H26 to IDR3,703bn (-33.1% YoY), only 31.8%/41.6% of our/cons.. Revenue was never the problem: 1H26 of IDR41,863bn (+11.3% YoY) landed at 48.7%/53.1% of our/cons., squarely on run rate, with overseas as the engine. Indomie holds the #1 position across MENA, at roughly a quarter of Indonesia's per capita consumption, and Management is thus adding 1.5bn packs of capacity at the Bogor facility.

The damage sits entirely below the revenue line. GPM slipped to 34.3% (2Q: 33.5%, down 160bps QoQ), opex rose +17.2% against gross profit of +9.1%, and EBIT grew just +3.8% to IDR8,282bn, a 19.8% margin, with 2Q at 18.4% and already below the Company's 20% to 22% guidance. On top of that, net interest expense jumped to IDR3,637bn (vs. IDR808bn), mostly an unrealized loss on USD debt, and that finished off whatever was left.

Cutting 26F/27F by 26.9%/26.3%

Based on the segment breakdown, this isn't “one bad division dragging the average down”; it's broad-based. Noodles grew +11.4% but EBIT margin fell to 22.9%, from 24.6%. Snack foods EBIT dropped -30.5% to a 3.3% margin, seasonings fell 6.1%, beverages 8.8%. Dairy was the one bright spot, EBIT of IDR551bn vs. IDR361bn at a 9.8% margin, though that is actually riding on a nutrition program volume that normalizes away in 2027

Cutting 26F/27F by 26.9%/26.3%

We’re lowering net profit to IDR9,272bn/10,059bn/10,735bn on revenue of IDR79.4tn/83.8tn/88.5tn, cutting revenue by 7.0%/8.4% and EBIT by 23.6%/21.5%. In terms of what has changed, this is really a margin reset more than anything. Our prior model carried a 40.0% GPM, and 1H26's actual 34.3% simply doesn't support that anymore, so we've rebuilt the model around 34.3% GPM and a 20.8% EBIT margin, which is the low end of the Company's own guidance. We sit below the 1H run rate for three reasons:

Pricing has not been taken. The input basket is up roughly 5.8% QTD, with wheat +9.4% and polyethylene +11.9%, implying about 4.6% of COGS inflation to absorb, against wheat flour at 30% to 35% of COGS, and packaging at 16% to 20%. No broad based noodle price increase has been announced, peers have already moved on pricing, ICBP has not, and El Niño peaks between October and December, which exacerbates with a palm oil risk, right on top of everything else.
Growth is coming from the thin-margin half of the business. Overseas volume runs double digit while domestic sits at low single digit, and domestic noodles are the highest-margin part of the group. The fastest-growing segments are also the least profitable ones: dairy +15.3% at a 9.8% EBIT margin and nutrition +16.4% at 8.4%, against noodles at 22.9%. Volume growth therefore dilutes the blended margin rather than defending it.
No Lebaran quarter in 2H, against a high base and a 7.2% QoQ exit rate.

Even after the cut, we still model +12.6% net profit growth in FY26F. One thing we'd rather flag upfront than have someone find later: 1H is only 40% of our new full-year number, meaning our FY26F is baking in an IDR5.6tn second half that assumes the FX charge doesn't repeat. Kindly note that is a currency call we're making, not an operating one, and it's important to be honest about that distinction.

Valuation: reinitiate at BUY, TP IDR9,150/sh (from IDR13,400/sh)

We’re rolling forward to FY27F EPS of IDR863 at 10.6x, a modest discount to our adjusted mean of 11.5x, which is anchored on the current risk-free rate of 8.3%, rather than a five-year average struck when money was cheaper. The discount we are applying reflects what is still unresolved on pricing and FX, not anything structurally broken in the business. At IDR7,600 the stock trades on 8.8x FY27F, roughly 0.7sd below that mean, so a good part of the margin risk is already in the price. The balance sheet is not the constraint, with FCF of IDR13.1tn/13.8tn on capex of just IDR1.7tn, gearing easing to 56.5% then 52.1%, and no bond maturity before 2031.

Risks: no pricing action taken, further IDR weakness, nutrition program normalization in 2027. Upside risks: an earlier price increase, faster overseas scaling, and IDR recovery reversing the 1H translation loss.

Banking - Not Getting any Easier

Banking - Not Getting any Easier

Andre Benas

03 June 2024 - 07.00am

Banking - Not Getting any Easier

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