Unilever Indonesia (UNVR.IJ Rp 2,390 SELL; TP Rp 2,300) Broadly inline 1Q24 earnings, but still challenging outlook in 2Q24 onwards

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Unilever Indonesia (UNVR IJ)

Broadly inline 1Q24 earnings, but still challenging outlook in 2Q24 onwards

UNVR’s 1Q24 earnings was inline thanks to a higher gross margin and royalty savings; sales volume was +0.2% yoy while prices fell 4.9% yoy.
FY24 strategy will focus on volume growth to obtain market share at the pre-boycott level with continued price intervention/promotions.
We revise down our FY24/25F by 9.9% and 13.6% with negative ASP growth and lower margins. Maintain Sell with lower TP of Rp2,300.

1Q24 NP up 3.1%yoy due to the higher gross margin and royalty savings

UNVR reported a 1Q24 revenue of Rp10tr (+24.4% qoq but -5% yoy). The management stated that in Mar24, the sales run rate had already recovered to the 3Q23 level and the Feb24 market share had picked up from its low in Dec23, but still below the pre-boycott level of 37% in 9M23. In 1Q24, Underlying Price Growth (UPG) was -4.9% yoy (FY23: -1.1% and 4Q23: -2.4%) with volume growth of +0.2% yoy (FY23: -4.1% and 4Q23: -13%). UNVR’s 1Q24 gross margin expanded by 60bps to 49.9% thanks to lower commodity prices. A reduction in royalty rates to 5% (1Q23: 7.1%) also offset higher A&P/revenue spending of 9% (1Q23: 8%) and higher promotional expenses (4.2% vs 1Q23’s 3.5%). This led to 1Q24 net profit of Rp1.45tn, +3.1% yoy. The 1Q24 net profit is 28% of the consensus and 29% of our FY24F, i.e., broadly inline. (In the past years, 1Q ranging from 25-28% of FY).

Challenging outlook in 2Q24 onwards

In FY24, UNVR aims to focus on volume growth with continued price intervention/promotions potentially leading to negative UPG, with the assumption of stable raw material prices. In 2Q24 onward, royalty expenses will also return to the normal rate (7.5-7.8%) as the 1Q24 royalty savings came from the recovery of the actual service fee expenses that had already been paid in FY23. We believe it will take some time for UNVR to recover its market share to the pre-boycott period. The weakening rupiah, geopolitical issues and soft recovery in purchasing power will add to the major obstacles to the recovery in 2Q24 onward.

Maintain Sell with lower TP of Rp2,300.

We revise down our FY24-25F net profit by 9.9% and 13.6% following the expectation of negative ASP with lower gross margin from soft top line with continued high opex/revenue to offset continued A&P ahead (despite lower royalty) (Exhibit 2). Our revised forecast leads to lower DCF-based TP to Rp2,300 (implying FY24F PE of 19x). We maintain our Sell rating. Key risks to our call are stronger recovery in the coming quarters.

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