Unilever Indonesia: A long road to recovery
Downgrade to FULLY VALUED with lower TP of IDR1,800. We downgrade our call on UNVR to FULLY VALUED as earnings continue to deteriorate, and recovery is likely to take longer than expected. We cut our FY24/25F earnings forecasts by 20%/23%, respectively, due to sluggish sales trends and margin compression caused by sales deleveraging and transformation costs. We now project FY24F earnings declining 22% y/y, followed by a modest improvement of 3.8% y/y in FY25F. That said, our FY25F earnings forecast is still c.45% below its pre-COVID earnings.
Hence, we lower our TP to IDR1,800, pegged to a 17.5x FY25F PE, -2.5SD of its five-year historical mean PE, to incorporate the slowing growth profile and loss of market share. We believe UNVR may be unable to warrant the high valuation commanded before the COVID-19 pandemic unless it can regain its growth momentum to outperform the industry and restore its earnings to the 2019 level of above IDR7tn. Despite UNVR’s share prices dropping by c.30% YTD, we still expect negative share prices following the disappointing 3Q24 results and low clarity on turnaround.
Transformation journey may still drag earnings in 4Q24 and early 1H25; benefits to emerge in 2H25. The company’s transformation efforts, particularly in addressing customer stock reduction in key channels and price harmonisation to resolve channel price conflicts, are ongoing and may continue to incur transformation costs, negatively impacting performance through 4Q24 and into early 1H25. Moreover, continued investments in advertising and promotion amidst fierce industry competition, along with the lingering effects of the boycott movement, may further impact UNVR’s earnings.
UNVR is experiencing pricing discrepancies across channels due to varying levels of promotional activities, leading to different prices for shoppers and creating a wider range of market pricing. This price inconsistency is disrupting the distribution system. To address this, the company is working to harmonise its promotional programmes across all channels to ensure equal treatment and narrow the price differences between various channels. However, implementing this strategy will take a few quarters and may result in lower sales and higher costs in the near term.
Meanwhile, benefits from the company’s turnaround initiatives to win back customers and regain market share – such as product innovations and superiority, cost-reset programmes, brand loyalty strengthening, portfolio expansion, and a channel transformation programme, including digital enhancements – are expected to take time to materialise, likely in 2H25.
Earnings revision: FY24/25F earnings cut by 20%/23%. Following the weaker-than-expected 9M24 results and subdued outlook, we cut our FY24/25F earnings forecasts by 20%/23%, respectively. This adjustment is driven by a 4%/7% reduction in our FY24/25F net revenue projections, assumption of lower margins due to impact from deleveraging sales, and ongoing transformation costs, as well as higher advertising and promotion spending. We now project FY24F net revenue and earnings to decline by 7.3% and 22% y/y, respectively, before seeing modest improvements of only 0.7% and 3.8% y/y in FY25F, as restructuring benefits begin to materialise in 2H25.
Further earnings deterioration in 3Q24
Disappointing 3Q24 earnings fell short of expectations. UNVR reported 3Q24 earnings of IDR543bn (-62% y/y, -47% q/q), bringing 9M24 earnings to IDR3tn (-28% y/y). This fell below expectations, representing only 64% and 65% of our and the consensus’s FY24 estimates, respectively. The 62% y/y earnings decline in 3Q24 can be attributed to several key factors: (i) Domestic sales falling 18% y/y, driven by negative price growth of 2% and a 16% drop in volume amid customer stock reduction and channel price conflict; (ii) a contraction in gross margin, which dropped to 45.5% in 3Q24 from 50.5% in 3Q23 due to a 1.9% transformation cost; and (iii) higher expenses in advertising (+2% y/y), promotion (+14% y/y), and remuneration under marketing and selling expenses (+9% y/y). The 62% y/y earnings drop consists of a 50.9% impact from sales deleverage and an 11.1% impact from transformation costs. On a q/q basis, 3Q24 earnings fell 47%, mainly due to lower net revenue (-7% q/q), a gross margin decline (-394bps), and increased advertising (+10% q/q) and promotion spending (+17% q/q).
Sluggish sales due to customer (distributor & retailer) stock reductions and channel price conflicts. UNVR’s 3Q24 net revenue fell by 18% y/y and 7% q/q to IDR8.4tn, bringing 9M24 net revenue to IDR27.4tn (-10% y/y). This is relatively within expectations, representing 74% and 73% of our and the consensus’s FY24 estimates, respectively. The decline in 3Q24 net revenue was primarily driven by customer stock reductions, price instability affecting distributor sales, and lingering impacts from the boycott movement. Consequently, UNVR’s market share – both in value and volume terms – declined to 34.9% and 28.4% during Jun-Aug 2024, down from 35.5% and 29% in 2Q24, and still below the YTD October 2023 figures of 38.5% and 31.7%, respectively.
Sales dropped across segments in 3Q24. In terms of segments, Home and Personal Care (HPC) saw total net revenue fall by 20% y/y and 9% q/q, while Food and Refreshment (F&R) experienced a 14% y/y and 2% q/q decline in total net revenue during the quarter. Domestically, UNVR’s sales declined 18% y/y in 3Q24, reaching IDR8.1tn, driven by a 2% contraction in prices and a 16% drop in volume. HPC’s domestic sales fell by 21% y/y, while F&R’s domestic sales dropped by 13% y/y in 3Q24.
FY Dec | 3Q2023 | 2Q2024 | 3Q2024 | % chg y/y | % chg q/q |
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Revenue | 10,214 | 8,964 | 8,374 | (18.0) | (6.6) |
Cost of Goods Sold | (5,057) | (4,529) | (4,561) | (9.8) | 0.7 |
Gross Profit | 5,157 | 4,435 | 3,813 | (26.1) | (14.0) |
Other Oper. (Exp)/Inc | (3,328) | (3,127) | (3,084) | (7.3) | (1.4) |
Operating Profit | 1,828 | 1,308 | 729 | (60.1) | (44.3) |
Other Non Opg (Exp)/Inc | 0.0 | 0.0 | (5.8) | nm | nm |
Associates & JV Inc | 0.0 | 0.0 | 0.0 | nm | nm |
Net Interest (Exp)/Inc | (11.3) | 0.90 | (27.6) | (145.3) | nm |
Exceptional Gain/(Loss) | 0.0 | 0.0 | 0.0 | nm | nm |
Pre-tax Profit | 1,817 | 1,309 | 696 | (61.7) | (46.9) |
Tax | (388) | (291) | (153) | (60.6) | (47.6) |
Minority Interest | 0.0 | 0.0 | 0.0 | nm | nm |
Net Profit | 1,430 | 1,018 | 543 | (62.0) | (46.7) |
Net profit bef Except. | 1,430 | 1,018 | 543 | (62.0) | (46.7) |
EBITDA | 2,021 | 1,483 | 875 | (56.7) | (41.0) |
Margins (%) |
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Gross Margins | 50.5 | 49.5 | 45.5 |
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Opg Profit Margins | 17.9 | 14.6 | 8.7 |
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Net Profit Margins | 14.0 | 11.4 | 6.5 |
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Source of all data: Company, DBSVI
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