FOCUS alee a ae ease eee) SoU atch J Indofood CBP CBP Etre Yohan Seto Industry's jewel Indofood CBP (ICBP), whose 96% operating profit came from noodle and dairy (based on 2009 financial statement), is one of the largest packaged food producers in Indonesia, according to the company, with FY10F net income of Rp1.4tn. It was previously a division inside Indofood Sukses Makmur (INDF) that was spinned of in 2009. Compared to INDF flour and cooking oil segment that faces fierce competition from foreign players, and volatile margin, it enjoys better competition and more stable sweet margin. The company, benefited from Indonesia robust economic growth, has all round competitive advantages that could enable it to grow earnings by 21.8% CAGRO9-12F. We estimate its equity value between Rp28.0-34.8tn, equal to 16.1-20.0x PERT1F. Solid foundation. CBP has all-round competitive advantages. Perfect ‘combination of strong brand equity and wide product range enable it to capture new customers and win their loyalty. Key benefits from being Indofood (INOF) subsidiary is a good supply chain management in term of reliable raw material supply and extensive distribution network, as well asin experienced management team, Being a major packaged food company in Indonesia, according to the company, they enjoy economies of scale benefit. The company also enjoys operating in Indonesia with growing consumer purchasing power, and Urbanization trend that will encourage higher packaged food consumption. Strong earnings growth. Capitalizing on the above competitive advantage, we estimate ICBP to have double digit revenue CAGRO9-12F of 13.9%. The company’s growth should be sustainable as it relies more on volume, rather than selling price growth, Translating to bottom line, we forecast net income to grow at 21.8% CAGRO9-12F, thanks to margin expansion as a result of better competition, strengthening rupiah, and economies of scale benefit. Valuation range of Rp28.0-34.8tn. We estimate company’s equity value range of Rp28.0-34.8tn based on DCF valuation using WACC range of 125-13.5% and terminal growth rate range of 4.5-5.5%. At this valuation range estimate, the company’s equity value is equal to an estimated PERT 1F of 16.1x to 20.0x. Underlying risks. The main risks faced by ICBP is raw material costs that generally follow commodity prices, and transaction tisks with related parties. FINANCIAL SUMMARY YEDec (Rpbn) 2007 2008A-2008A2010F_«-2011F——2012F Revenues 9485 12043 «1633318784 21,224 24,152 Grovith 6) 270 «356 150130138 EBITDA 253 67320752673 3244 3.694, Growth (6) 60-2082 288— ZB Net profit so 33907814837 1987 Growth %) 5069218029 SB ROAE (4) 30 64612373 (2007-200), Mandi Sekurtas (2010-2012)Indofood CBP | 16 August 2010 Investment thesis Attractive consumer goods industries. Based on BPS (indonesia Statistics Agency), Indonesia's nominal GDP tripled from Rp1,822tn to RpS,613tn just in 7 years during 2002-2009 with CAGR of 17.49%, in our calculation, In more details, GOP growth has been mainly driven by private consumption which accounted for around 64% of the total GDP. In term of market potential, Indonesian population is the 4th largest in the world with total population of around 232mn as of 2009 (CEIC data). In addition to that, GDP-per-capita also improved significantly from US$928 in 2005 to 1US§2,590 in 2009 (CEIC data) or equal to CAGROS-09 of 15.8%, in our calculation. We assume that Indonesian GOP growth will be sustained at least around 7% per year until 2015. This level could be easily surpassed if the government improves infrastructure in the near time. Better income distribution equality is also good for consumer goods industries due to higher number of customers, Based on Euromonitor International, packaged food industry size in Indonesia reached Rp153tn, growing by 15.1% CAGRO2-09 in our calculation. Especially for 2008 and 2009 when global economy slowed down, Indonesia packaged food industry grew by 16.0 and 10.9%, respectively, mainly supported by Indonesian demographic structure that is prone to urbanization and modernization trend, Consistent earnings growth. We estimate ICBP to have strong and sustainable double digit revenue CAGRO7-12F of 20.6%. The company’s growth should be sustainable as it relies more on volume, rather than selling price growth , which shows improving competitiveness. While we estimate revenue to grow by 20.6% CAGRO7-12F , we forecast net income to grow almost 5 times faster at 103.4% CAGRO7~12F. This is due to margin expansion as a result of better competition , strengthening rupiah as most raw materials are based in USS , and economies of scale, Perfect combination of strong brand equity and wide product range. ICBP, in our opinion, has very strong brand equity by controlling dominant position in packaged food business (according to Euromonitor Intemational), supported by wide products breadth to cater various customers taste and needs. These two competitive advantages, are perfect elements in winning business in consumer goods industry. Strong brand equity serves as a tool to ‘maintain repeated purchases from existing loyal customers, while wide product breadth serves as a tool to win new customers who likes to explore into various new products Reliable supply chain management. Excellent supply chain network is one of the key success factors to serve Indonesian customers scattered in the S'th largest nation in the world by area. From supply side, ICBP has an advantage of having relationship with one of the world biggest wheat flour producers in one location by volume ~ Bogasari-, according to the company, and with Salim Ivomas Pratama, its cooking oil supplier. From distribution side, ICBP sells around 70% ofits products through Indofood's distribution arm which covers extensive convenience store chain actoss Indonesia. For the remaining 30% of sales, the company has been able to maintain long term relationship with 3rd party distributors who then sell to wholesalers as well as retailers Economies of scale. ICBP has economies of scale advantages as it operates 15.6bn packs of noodle production capacity, 204k tons solid milk, 122m liters of liquid milk, 101k tons of food seasonings, 34k tons of snack foods, and 24k tons of nutrition and special foods annually, as of March 2010. in addition to that, the company also plans to increase production capacity in all of their product lines within the next couple of years. This huge business scale helps the company for example in advertising effectiveness and efficiency, products distribution, and in negotiation with third parties. Solid management and shareholders. INOF’s presence as the biggest shareholders of ICBP henefits the company {as INDF can support ICBP by aligning both INDF and ICBP’s strategy. INDF can bring its expertise in consumer goods industry as most ICBP's management team came from the INDF group.mandin uns Indofood CBP | 16 August 2010 Valuation Equity value range estimates of Rp28.0tn to Rp34.8tn. We view that DCF (discounted cash flow) valuation method is the most appropriate valuation method for ICBP as the company operates in packaged food business in stable- growth consumer goods industry and recurring income. This method captures the growth phase of the company as ast as the stabilization and declining phases. We do sensitivity analysis for ICBP with WACC and terminal growth rate wr the variables, For base case, we assume WACC of 13:0% and 5.0% terminal growth rate, The base case of the DCF valuation is derived using the following assumption: Cost of equity is assumed at 14.5% with after-tax cost of debt of 6.8%, With 2 target debt-to-asset ratio of 30.0%, we arrived at a weighted average cost of capital (WACC) of 13.0%. For cost of eaulty calculation, we apply 5.0% equity risk premium and risk-free rate of 9.5%. 2. Wie also assumed a terminal growth of between 4:5%-5.5%, as we believe inthe long term consumer goods industries could grow in tandem with the long term GDP growth pace. EXHIBIT 1. DCF BASED VALUATION pomtond co) food 5.5% 320 333 348 Cost of Capital Cor) 29 310 322 280 289 299 ‘Source: Mond Sehuritas estimates ased on the table above, we estimate the company's equity value range of Rp280tn to RP28 stn at WACC range of 1350 to 13.5% and terminal growth rate assumption range of 45% to 5.5%, At this valuation range estimates, the company equity value is equal to.an estimated PERTIF of 16.1xt0 20.0 EXHIBIT2, ESTIMATE ED PERLIF ne Cee) ost of Capital WTtco} Wa 185 161 166 172 Source: Mandi Sekuritas estimates PERIO-1F of 142-17.7x, excluding goodwill amortization. (CBP books goodil and intangible assets from Trdolakto acquisition amounting to Rp40tn per December 2009, The company annually amort28s it by Rp222bn for 20 years. Therefore, excluding goodwill amortization, our valuation range implies PER! IF of 14.2-17.7 EXHIBIT 3, ESTIMATED PERT1F EXCLUDING GOODWILL AMORTIZATION re Co cost of Capital Trac) wea 142 147 152di Indofood CAP | 16 August 2010 sates, EXHIBIT 4, PEERS COMPARISON (AUGUST 11’ 2010 MARKET PRICE) ma bie ae it ae ct a 1216 trequity UNM-PRESIDENT ENTERPRISES CO 156 20 96 136 322hkequity TINGYI (CAYMAN ISLN) HLDG CO 258 51 138 292 2897 JP EQUITY NISSIN FOODS HOLDINGS COLTD 146 uu 51 79 (004370KS EQUITY ——_NONG SHIM COLTD 96 10 7a 10s cpus equity [CAMPBELL SOUP CO B38 93 Ma 161 is us equity (GENERAL MILLS INC 126 30 99 308 kus equity KELLOGG CO 136 61 120 581 hhnzus equity WuHEINZ.cO 18 51 na 401 sles equity SARA LEE CORP 144 43 16 490 600887 CHEQUITY INNER MONGOLIA VILIINDUS-A 24a 49 66 216 NESzMKEQUITY NESTLE (MALAYSIA) BERHAD 222 136 229 16 600597 CHEQUTTY BRIGHT DAIRY & FOOD COLTD-A 355. 35. aN/ANA 80 2319 HK EQUMTY CHINA MENGNIU DAIRY CO 196 33 na 181 2269 JP EQUITY MEUI HOLDINGS COLTD 16.1 09 aNANA 59 PLTIMEQUITY PARMALAT SPA 155 09 aNIAN/A 61 2267 JP EQUITY \YAKULT HONSHA CO LTD 256 Ww 44 70 NESN VK EQUITY NESTLESA-REG 46 29 95 199 2801 jpequity XKKKOMAN CORP 164 10 a7 67 2802 jp equity ‘AJINOMOTO CO INC 72 09 27 51 2810 jp equity HOUSE FOODS CORPORATION 156 o7 38 51 ‘average ¥, 41 9220 Peer ere in a Source: Bloomberg (companies other than Indofood CBP), Mandi Sekurtas estimates (indofood CAP)mandir sekuntas Indofood CBP | 16 August 2010 ICBP dominates packaged food industry. |C8P has major presence in all segments, The company ranks 1 in noodle ‘with 7396 market shares and no 2 in condensed, flavored milk and UHT milk, according to Euromonitor International, with market share of 38% and 22%, respectively. Dairy segment is the most promising sector among these segments as its consumption increased faster than income growth for mid to low consumer segment which represents largest portion of Indonesia's population. Stil from Euromonitor international, in the baby food, excluding infant formula, segment, ICBP controls 28% market « share, rank 1, despite competition from foreign players. ICBP also ranks 1 in sweet & savoury snacks excluding nuts with 16% market share due to wide product breadth, such as Chitato, Qtela, Chiki,JetZ, Cheetos, Lays, etc. Wide product range is the key to win the snack market as consumers prefer trying diferent type of snacks in their leisure time. Compared to other segment, ICBP's market share for sauces, dressing and condiments is relatively small around 1296. But the company is still one of the major players, ranked 3d inthe industry. 3. ICBP'S MARKET SHARE exHIBIT 10086 9 cox | ors | 40% 20% 0% : : a Noodle Condensed Babyfoods UT milk = Sweet Sauces, rik exuding savoury snacks dressing infant formula excluding nuts condiments ICBP's market share © Others! market share Source: Euromonitor Intemationalid Indofood CBP | 16 August 2010 soe About the company Company's structure. Indofood CBP Sukses Makmur (ICBP) was established in September 2009 after a series of restructuring processes as previously it was part of Indofood Sukses Makmur (INDF) In tem of legal structure, ICBP is the parent of several companies, namely ‘+ Indofood Fritolay Makmur: 51% owned, operates in snack foods business, ‘+ Drayton Pte. Ltd: 100% owned, an investment company and export agency, ‘+ Surya Rengo Containers: 60% owned, operates in carton packaging business, ‘© Indolakto : effectively 68.6% owned, operates in dairy business, ‘+ Pinnacle Permata Makmur effectively 95% owned, an investment company, * Sukses Artha Jaya: effectively 99.6% owned, an investment company, + Indofood (M) Food Industries Sdn. Bhd: 100% owned, instant noodle manufacturer in Malaysia ICBP is also a 50% shareholder in Nestle Indofood Citarasa Indonesia, a joint venture company, which is a marketing arm for culinary products. EXHIBIT 19. CORPORATE STRUCTURE | tno Ste Mat ws 08, wn | om aces S| PT sya Reng ln || rn Pe. Pr into = cone eae | ye : Pipes oe veer . or tee a ee ox cam | Pensa | Source: Company _ - Products. ICBP is a leader in most food products categories in which it competes, currently they operate in 5 main business areas: ‘© Instant noodles: ICBP produces bag noodle, cup noodle, egg noodle, and instant vermicelli. The brands include Indomie, Supermi, Sarimi, Sakura, Pop Mie, Mi Telur Cap 3 Ayam and Pop Bihun. Indomie is the award-winning ‘main brand, for example Indonesia's Best Brand Awards in the last 7 years consecutively. In 2009, this division contributed 70.4% and 81.8% to the company’s revenue and operating profit. * Dairy: this business is operated under Indolakto, a 68.6% owned subsidiary. The brands include Indomilk, Cap Enaak, Indoeskrim, Nice Yogurt and Orchid Butter. The division produces a range of products including powder, UHT, sweetened condensed, sterilized bottled and pasteurized liquid milk, ice cream, yoghurt drink, and butter. This division contributed 19.8% and 13.5% to the company’s revenues and operating profit in 2008.aoe mandir ritas Indofood CBP | 16 August 2010 * Food seasonings: this business produces soy sauce, chili sauce, tomato sauce, stocks, syrup, and instant seasoning. ICBP sells food seasoning products through NICI, a joint venture company with Nestle SA. For 2009, this division contributed 2.5% and 0.7% to the company’s revenue and operating profit. ‘+ Snack food: some prominent brands under this business include Chitato, Qtela, Trenz, which are produced under license from ISM, while Lays and Cheetos are produced under license from Pepsico Inc. This division contributed 4.7% and 2.4% to the company's 2009 revenue and operating profit. ‘+ Nutrition & specialty foods: this business produces baby cereal and biscuit, also pregnancy and milk for lactating ‘mother. The brands include Promina and SUN. This division in 2009 contributed 2.6% and 1.6% to the company’s revenues and operating profit. EXHIBIT 20. SEGMENTAL REVENUES AND PROFIT CONTRIBUTION (FY09) Brvenues Operating profit 26% "i 47% 2a sow Noodles one os . airy 135% 93% Food seasonings snack foods | Nutrition and 7 special foods 818% Source: Company (raw data fom F/S), Mandi Sekuritas (calculation in percentage) EXHIBIT 21, MAJOR ICBP BRANDS Intellectual Ce ot alt brands licensed from ism, INDOMILK ieee cvs 4 forands indoeskrim atbrands from SM and Nestle SA brands isestom — Carr eZ. Qidla scheetos Hicensed from Pepsico sons a EID licensed from 15M aa Source: Companydint” Indofood CBP | 16 August 2010 sean. Large production capacity. ICBP is one of the largest packaged-food producers in Indonesia with a big production capacity. By spreading their production facilities across Indonesia and supported by extensive distribution network and reliable supply chain from Indofood Sukses Makmur, they can achieve advantageous economies of scale, service demand in timely and cost efficient manner, as well as ensure product freshness. For instant noodle, ICBP operates 16 instant noodle plants (1 in Malaysia) with total annual capacity of 15.6bn packs, supported by 3 food ingredients plants and 6 packaging plants with annual capacity of 840mn meters for flexible packaging and 114k tons for carton packaging. The company operates 4 dairy factories with annual capacity of about 203.5mn kg of solid milk and 122.3mn liters of liquid milk, spreading in 3 locations. Food seasoning division has 2 Plants with 100.6k tons annual capacity. Snack foods plants has annual capacity of 33.8k ton and nutrition and specialty foods has 24.1k tons annual capacity. EXHIBIT 22. PRODUCTION CAPACITY AS OF MARCH 2010 Sree Instant noodle bn packs 156 743% 16 plants Dairy soli mnt 2035 81.0% 4inindonesia Liquid mot 123 703% Food seasoning 000 tons 100.6 578% | 2inIndonesia Snack Food. (000 tons 338 53.6% _2forsnacks, I for biscuits Nutritional and specalfood 000 tons 2a1 748% in Indonesia Source: Companyindi Seeuas Indofood CBP | 16 August 2010 Expansion Plan Despite of huge production capacity already owned by ICBP, the company has a series of expansion plan to meet the demand, As a general rule, the company normally would consider an expansion if capacity utlization rate reaches 80% or more. Below are some of ther expansion plans: + Instant noodle: ICBP expects to build new plant in Jakarta area by 2012 to consolidate existing two plants in Jakarta. Outside Jakarta, they expect new plant in Palembang by 2012 and Semarang by 2014. Total additional capacity is estimated to be 13%. * Dairy: the company expects to add new production line in 2H10. Big expansion, a new plant, is expected to bbe completed in stages starting 2012 to double the existing capacity. + Snack food: new chips plant is planned at Semarang by 2011, and new plant to be relocated Tangerang plant. The capacity for potato chips is targeted to double after these expansions. * Food seasoning: ICBP expects to double chili sauce production capacity in Semarang by 2011. + Nutrition and specialty food: new plant will be bul, which fs expected to be completed in stages starting 2013, Upon completion capacity will ncrease by 40%,aoe mandin sekuritas Indofood CBP | 16 August 2010 Risk Factors We identify the flowing risk factors as some of the most important risks for ICBP: 1 ‘Trademark license termination. ICBP is authorized by Indofood Sukses Makmur (INDF) to use INDF's brands. To secure the licenses, the company pays fee amounting to 1.5% of net sales from INDF's brands. Risk arises if INDF is no longer ICBP's majority shareholders and in that case the licensing agreement could be terminated, However, this risk is mitigated as ICBP has a privilege to buy the license fist if such situation happens. Legal lawsuit from stakeholders. The company is involved in packaged food business whose risks include food quality, health concern, halal/non halal status, advertising misstatement, etc. The company mitigates this risk by doing strict quality control in production process and supply chain management, New entrant fierce competition. Packaged food industry is a profitable business that attracts a lot of new entrants either small or big players. For example, the company’s margin was eroded sharply when Wings with its Mie Sedap product came into the market. However, natural selection prevailed where only the best producer in consumers’ eyes survived. ICBP proved it with its noodle business now enjoying a sweet margin. Raw material cost surge. Raw materials contribute around 84% of total manufacturing costs. Surge in wheat flour, milk, cooking oil, and packaging material prices could negatively impact the company's profit as the company does not hedge these costs. Dependency on related parties’ performance. IC8?'s significant related party transaction includes raw ‘material sourcing and distributorship, Therefore, ICBP’s performance could greatly depend on these parties. Transfer pricing risk. still regarding the above-related party transaction, transfer pricing risk exists and it depends on how good the company's corporate governance is. The company, however, states that they do intersegment transaction at market price. This risk is mitigated by supply agreement in which INDF agrees to supply ICBP’s raw materials at the same price it sells to third parties. In addition to that, external auditor will serve asa watchdog for this type of risk. General economic condition and changes in consumers’ taste. Consumer goods industry heavily depends on the general economic health as well as consumers’ taste changes. Regarding taste changes, ICBP responds it by continuously launching new products to keep pace with customers trend shift.aoe mandin seKuritas Indofood CBP | 16 August 2010 Appendix | - Financial tables EXHIBIT 31, PROFIT AND LOSS STATEMENT YEDec(Rp bn} 20078-20088 2009A = «2010F 2001F 2012F Revenue 9485 12,083, 16333 18,784 21,224 «24,152 Gross profit 12713, 3913 4,603, 5272 5,823 ‘Operating profit 102 315 1,800 2,401 2,881 3,289 EBITDA 253 673 2075 2673 3,248 3,694 Net interest ° a (57) 26) 34 44 Forex losses/gains 7 6 37 m ° ° Goodwill amortization & others B 19 a7 (22) (222) (22) Pre-tax profit a 529 603277 2,693 3a Income tax 69) (174) (430) (600) (729) (833) Minority interests 3) (16) (04) (4a) (222) @3n Net Profit 56 339 1078 1433, wat 1947 ‘Source: Company (2007-2009), Mandi Sekuritas estimates (2010-2012) EXHIBIT 32. BALANCE SHEET YEDec (Rp bn) 2007A 208A 2009A —2010F 2001F 2012F {Cash and ST Investment (incl cash equiv) 37 503 696 1165 1,506 1933 Trade Receivable 11090 11580 1448 1878 2022 2684 Inventory 92 1392 aan 1576 wm 2291 Others 167 1765 1850 sri 1867 1865 Current assets 2320 5240 5305 6.490 7267 8773 Investments 5 v 19 2 4 26 Fixed assets 1sat 207 2180 2,909 3.246 3.842 Others vay 270 279 2632 2539 2445, Total assets 4017 10,206 10.224 12,052 13,077 ‘15,086 Current labilties 1619 6476 7378 2846 2294 2537 ‘Ace. payable 391 1a 907 900 1013 146 ST borrowings 20 456 5476 221 23 23 Others 608, 78 996 1125 11259 1.366 Long-term liabilities 339 11205 war 1,503 1.690 1876 Long-term payable ° 56 31 34 o ° ‘thers 339 1149 1190 1468 1,680 1876 Total liabilities 1958 7,681 35994349 3,984 aanz Shareholder's equity incl minority interest 2,059 2,525, 1625, 7,702 9,093 10,674 Source: Company (2007-2005), Mandi Sekurtas estimates (2010-2012),mandir Indofood CBP | 16 August 2010 sekuntas, EXHIBIT 33. CASH FLOW STATEMENT YEDec (Rp bn) 2007A 2008, 20098 2010F 2001F 2012F Operating Profit 102 515 1,300 2401 2881 3,289 Other recurring income / (expenses) 15 8 34) 248) (189) 78) Depr & Amort 155 156 493 494 585 er Tax 55) (7a) (430) (600) (729) (33) Change in working capital (163) 285 as) (sn 9) an) Other operating cash flow 28 (406) 230 7 28 30 Operating Cash Flow 319 368 1,604 1,499 2.266 1,832 Capital expenditure (245) (97) (30) a.019) (720) (1.022) Free Cash Flow ” 70 1374 480 1,545, 809, (Other investing cashflow av @ (9) (29) 2) (9) Cash Flow From Investing (276) (306) (279) (1,048) (743) (1,04) Net change in debts 420 @) ° aest) 831) 4 Equity funds raised (598) B (1.235) 4500 CO} o ‘ther financing cash flow 167 na 65 144 G51) (366) Cash Flow From Financing an 64 (1,169) ™ «ara G63) [Net change in cash 38 132 193 469 341 28 ash at beginning 332 an 503 696 1165 1,506 Cash at End an 503 696 1164 1,505 1933 ‘Source: Company (2007-2009), Mandi Sekuritas estimates 2010-2012), EXHIBIT 34. KEY RATIOS YEDec 2007A 208A 2009R 2010 2001F 2012F Growth (% yoy) Sales na 270 356 150 130 138 est na. 4053 249.2 3B 200 142 EaITDA na. 1609 27 262 197 130 Net Profit na. 506.9 2180 329 218 ns Profitability (9) Gross Profit Margin 161 5 240 205 28 24 Oper. Margin 43 no 28 136 136 EBITDA Margin 27 56 140 154 163 162 Net Margin 06 28 66 76 32 a ROAR 4 48 106 29 Bo BB ORE 30 164 612 337, 223, 216 Leverage Net debv/equity (%) 24 1588 296.1 ao) (163) 79) EBITOAGr055 Interest (0) 134 279 296 61727984 29744 Source: Company (2007-2009), Mandi Sekurtas estimates (2010-2012)