Nippon Indosari Corpindo (ROTI IJ)
FY24 outlook: Focusing on profitability
- Post the tepid FY23 results, ROTI aims to focus on profitability in 2024 onward amid fewer catalysts for purchasing power in 2Q24 onward
- We lowered our FY24/25F net profit estimates by 11%/2.4% due to lower volume estimates and a higher return rate
- Maintain Buy with a lower TP of Rp1,400. Expect improved performance in the upcoming quarters to act as catalyst for the stock.
FY23: a bad year for ROTI
For ROTI, maintaining the exact balance between volume expansion and prudent product dropping in stores is crucial in minimizing the sales return rate and keeping profitability intact. The rainy season in early FY23 amid ROTI’s aggressive product dropping, softer demand during the Ramadan season and the year-end were factors behind the high return rate (FY23: 16% vs FY22:11.1%), leading to sluggish revenue (-2.9% yoy) and a weak FY23 net profit (-23% yoy, 2%/5% below cons/ our est.).
FY24 focus on profitability with lower sales returns.
Entering FY24 with the fasting season in Mar24 (part of 1Q – which is generally a weak quarter for ROTI), the management aims to focus on profitability with a cautious approach toward product dropping. We believe the sales trend which favors ROTI’s affordable products will persist this year, as we see less support for purchasing power in 2Q24 onward. With the wheat price remaining low, we expect to see minimal ASP adjustments which shall offer some support to volume growth (our FY24/25F vol growth estimates: +2.5%/+5.2% vs FY23: +2.6% yoy).
FY24/25F net profit est. cut on lower volume assumptions.
We project ROTI to maintain its gross margin in FY24-25F at 53.9%/54.1%. Lower sales returns (FY24F/25F: 13.5%/12.5% vs FY23: 16%) should translate into lower expired inventories (FY24F/25F: 6.8%/6.2% vs FY23: 8.3%) which is part of opex. This should pave the way for stronger growth in FY24/25F net profit of 14.7%/18.3% yoy. As a result, we revise lowered our FY24/25F earnings by 11.1% and 2.4%, respectively, given our lower volume assumption and higher sales returns estimate.
Maintain Buy with a lower TP of Rp1,400.
ROTI trades at FY24F PE of 17.7x, 8.5% premium to peers but with expectation of FY23-26F net profit CAGR of 17% (vs peers’ 8%). We believe the key to securing better profitability and valuation rerating is the improvement in volume and return rate which we expect to happen in 2Q23. We maintain our Buy rating with a lower TP of Rp1,400 (FY24F PE of 20.9x). Key risks include continued high return rates and higher wheat prices.
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