Unilever Indonesia (UNVR IJ)

Expect FY24 earnings downside as 4Q23 miss indicate volume remains at risk; downgrade to Sell

 

  • UNVR reported tepid 4Q23 earnings (-57% qoq/ -19% yoy), hit by the negative impact of the product boycott in Nov23 and Dec23
  • Following FY23 earnings miss (11/15% below our/ cons.), we lowered FY24-25F net profit by 10.4/10.3% on lower volume assumption
  • We lowered our DCF-based TP to Rp2,650 and cut our rating to Sell as we see tepid performance will continue in 1Q24.

Volume hit across all segments; soft Jan24 recovery imply downside for FY24

Based on market data Nielsen, UNVR’s Nutrition segment experienced the biggest setback (FY23 vol growth 0% vs +2.1% in 9M23), followed by Personal Care (FY23 vol growth minus 1% vs 0.1% in 9M23) and Home Care (FY23 vol growth 0% vs 1% in 9M23). These implied volume contraction of 13.4% yoy in 4Q23 across all segments. While UNVR stated that its Jan24 sales run-rate improved to 92% of 3Q23 sales, recovering from the low of 74% (after the MUI fatwa in Nov23), the current rate still translates to downside risk from our previous forecast as conflicts in the Middle East remain unresolved. Based on our checks, we see the weak revenues may persist in 1Q24 given the availability of similar products lower prices (around 10-25%).

 

FY24-25F earnings est. cuts as weak volume outlook persists

We lowered our FY24 revenue est. by 6.5% on the expectation of weak volume (0.7% yoy) and cut our gross margin est. to 49.5% (vs. FY23: 49.7%) given the soft top line and the possibility of more value products in the product mix. We expect this to result in FY24 net profit of Rp5tr, +4.9% yoy, a downward revision of 10.4%.

 

Downgrade to Sell with a lower TP of Rp2,650

Taking into account our revised forecast, we lowered our DCF-based TP to Rp2,650 (implying FY24F PE of 20x). Despite recent share price drop, we think current valuation (29% premium to peer) is demanding as earnings downside risk persist. We note that domestic funds still had neutral positions in UNVR in Jan24, translating to possible reduction in positioning as we also expect further consensus earnings downgrades (FY24 consensus growth of +10% yoy). Upside risk to our recommendation includes faster and stronger recovery in the coming quarters leading to higher FY24 earnings.

 

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