Brokers' take: UOBKH sees upward rerating of Unilever Indonesia; raises target price to 6,300 rupiah

UOB Kay Hian (UOBKH) believes that home and personal care products manufacturer Unilever Indonesia's price-to-earnings (PE) ratio multiple could further rerate upwards once its earnings recovery is delivered.

In a research note on Tuesday (Oct 26), the brokerage's analyst Stevanus Juanda raised the target price of Unilever Indonesia to 6,300 rupiah from 5,900 rupiah, maintaining its "buy" call on the counter observing that it has a "nearly 30 per cent upside".

Although Unilever's financial results for the first nine months of 2021 came in lower than the consensus' expectations, with net income down 19.5 per cent year on year at 4,379 billion rupiah (S$416.2 million) , Juanda noted that the results are in line with the brokerage expectations and as such, has made no change to the company's earnings forecasts.

The current weakened share price caused by the results, "presents an opportunity for investors" to establish positions, the analyst said.

"Although the pandemic has caused many companies to suffer losses, Unilever has only seen a 20 per cent decline in its earnings so far. Unilever's brand equity is intact, and the company should benefit from the recovery post-pandemic," added Juanda.

Citing Unilever's 26.7 per cent year-on-year decline and 1.1 per cent quarter-on-quarter decline in Q3 2021 net income at 1,333 billion rupiah, Juanda believes that the decline in earnings caused by the pandemic has "bottomed out in Q3 2021".

Juanda also views the "maximum impact" of the pandemic to cause a 30 per cent decline in Unilever's earnings from pre-pandemic levels.

"The resiliency of UNVR's (Unilever Indonesia) business and its brand values have remained intact during the pandemic, and should remain so after the pandemic," observed the analyst.

Noting that the company's share price has risen by more than 20 per cent since UOBKH's Sep 22 report, Juanda highlighted that Unilever Indonesia could benefit from the recovery post-pandemic.

Juanda raised the 2022 PE ratio multiple from 1.5 standard deviation points lower (30.9 times PE ratio) to 1 standard deviation point lower (34.3 times PE ratio), noting that the company is now trading at 2 standard deviation points lower of its 2022 PE ratio post its recent rally.

The company saw its home and personal care segment decline 12 per cent year on year owing to competition in fabric care, rising material costs, weak purchasing power, and decline in usage of personal care and deodorants, the brokerage noted.

However, the food and refreshment segment "rose nicely" with sales for the first 9 months of 2021 rising 3.3 per cent, while operating profit expanded 26.9 per cent year on year after "excellent operating expense management", added the report.

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