Noodle giant Indofood CBP is set for good times ahead, but increasing commodity prices will trim margins, according to brokerage firm Trimegah Securities.
“We expect profitability to remain lofty toward the third quarter this year,” said Trimegah analyst Ivan Chamdani in his report last week on Indofood CBP, the nation’s largest instant noodle manufacturer and a unit of the Indofood Group.
Ivan estimated a 21 percent increase in Indofood CBP’s net income this year, to Rp 2.4 trillion ($253 million). But he expected higher global prices for commodities, including food ingredients, to hurt the company’s margins.
Prices of Australian and US wheat have increased since the start of the third quarter this year amid drought in wheat-producing regions of the United States.
Trimegah’s technical analysis suggested the Australian wheat price may hit A$332 ($349) per ton by December, up 16 percent on the average price last year, while the US wheat price may reach $367 per ton, 17 percent higher than the average price in 2011. This will put pressure on Indofood CBP’s noodle segment — which contributed 69 percent to the company’s total sales last year — in the fourth quarter.
Ivan cut his profit margin estimate at Indofood CBP by 0.6 percentage point to 10.8 percent for full year 2012. Last year, the margin was 10.2 percent.
Despite the fall in profit margin, Indofood CBP will still dominate the industry, Ivan said. The company’s rivals include Wings Group, which produces noodles under the Mie Sedaap brand. Indofood CBP’s brands include Indomie and Supermi.
Net income at Indofood CBP rose 36 percent to Rp 591 billion in the first quarter this year from the same period in 2011 and revenue increased 12 percent to Rp 5.29 trillion. The company is yet to announce its first-half earnings as it undertakes a review.
“Indofood CBP’s dominant market share in the noodle business is sustainable, and now they are taking steps to become the market leader in other segments,” Ivan said. As well as instant noodles, the company produces dairy products, food seasonings and snacks.
The rise in food prices is not all bad news for the company. Lower whole and skim milk powder prices are expected to boost its dairy business. The average price for the commodities has declined 9 percent so far this year, Ivan said. He said he expected the segment to contribute 19 percent to total revenue this year.
Recently, Indofood CBP began a joint venture with Asahi Group Holdings Southeast Asia to produce and sell non-alcoholic beverages in Indonesia.
Ivan has a “buy” recommendation on Indofood CBP shares, with a Rp 7,500 target price this year. The target price does not include the potential earnings from the beverages business.
Shares in Indofood CBP rose 1.5 percent to Rp 6,650 on Thursday, the most recent trading day. They have gained 30 percent this year, outpacing the benchmark stock index’s 9 percent gain.