Company Results Note: Nippon Indosari Corpindo (ROTI IJ, BUY, TP: IDR1,290), Better Inventory Management Boosted Earnings

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Company Results Note:

Nippon Indosari Corpindo (ROTI IJ, BUY, TP: IDR1,290)

Better Inventory Management Boosted Earnings

1Q14 earnings were above our expectation, reaching IDR61.2bn (+9.5% y-o-y). They were driven by lower-than-expected sales return and expired inventories expenses. We raise our FY14/15F earnings estimates to IDR225bn/IDR272bn (+14.8%/+15.5%) on the back of a widened EBIT margin. Also, we upgrade Nippon Indosari Corporindo (Nippon) to a BUY (from Neutral) with IDR1,290 TP (from IDR1,120), based on 29.0x/24.0x FY14/15F P/Es.

¨       Better than expected. 1Q14 earnings reached IDR61.2bn (+9.5% y-o-y), which were above our/consensus expectations, accounting for 31.1%/28.1% of our/consensus full-year estimates. Notably, Nippon’s earnings were highly cyclical, in which 1Q earnings accounted for merely 22%-23% of its full-year earnings. The higher-than-expected earnings were driven by lower-than-expected sales return and expired inventories expenses, boosting its EBIT margin to 16.1%, higher than our full-year estimates’ 14.7%.

¨       Better inventory management. Last year, Nippon strengthened its information technology (IT) units by installing a new system and hiring more IT workers. This improved inventory management system was indicated by a lower sales return to sales ratio, which declined to 11.3% in 1Q14 from 13.3% in 4Q13. It also lowered expired inventories expenses to gross sales ratio to 4.8% in 1Q14 from 6.2% in 4Q13. Going forward, higher sales contribution from the traditional market – which has a no-sales-return arrangement – will further lower the sales return ratio. Nippon aims to increase its traditional market sales contribution to 40% at end-2014 from 32% in 2013.

¨       Upgraded estimates and TP. Given its robust 1Q14 results, we raise FY14/15F earnings estimates to IDR225bn/272bn (+14.8%/+15.5%) on the back of a widened EBIT margin, boosted by a lower sales return ratio. We upgrade the counter to BUY (from Neutral) with a TP of IDR1,290 (from IDR1,120), based on 29.0x/24.0x FY14/15F P/Es.

Best regards,

RHB OSK Indonesia Research Institute

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