Unilever Indonesia (UNVR.IJ Rp 2,490; SELL; TP Rp 2,200) Inline 1H24 earnings, but weak 2Q24 top line; price cuts and flat volume growth may continue ahead

Stock Code	Last Price	Change	Change %
DSSA	44,950	2,700	6.39%
DCII	169,200	2,250	1.35%
MFIN	5,400	800	17.39%
RDTX	12,450	700	5.96%
PTRO	2,910	460	18.78%
MKPI	25,200	450	1.82%
CUAN	7,300	325	4.66%
RATU	5,675	275	5.09%

Unilever Indonesia (UNVR IJ)

Inline 1H24 earnings, but weak 2Q24 top line; price cuts and flat volume growth may continue ahead

UNVR indicates a weak top line may continue with further price cuts on the table; we estimate lower vol. growth at -0.2%/1% in FY24-25F.
On the back of persisting challenges, we anticipate 3Q24 earnings may likely see negative yoy growth due to the high base in 3Q23.
We maintain our Sell rating on a continuing challenging outlook and premium valuation; with a lower TP of Rp2,200 (FY25F PE of 18.3x).

Lackluster 2Q24 revenue and earnings despite promotion and price cuts

UNVR’s 1H24 net profit of Rp2.5tn (-11% yoy) was still broadly in line with expectations (49%/54% of cons./our FY24F est.). Post the weak 4Q23, volume growth proved to remain weak in both 1Q24 and 2Q24, even as UNVR raised promotional efforts, including price adjustments (2Q24: UPG -5.2%, see exhibit 3). Negative consumer sentiments due to lingering geopolitical issues, coupled with still soft purchasing power (core inflation of 1.9% in Jun24 vs May: 1.93% and May24 forecast of 1.96%), have induced consumers to switch to competitors’ products which also offer better value (e.g., Mama Lemon vs. Sunlight Dishwasher). On a positive note, 2Q24 earnings saw a slight support from gross margin, which benefited from persistently low commodity prices.

We continue to expect -5% FY24F earnings contraction on weak sales

The management indicated that soft demand stemming from negative sentiment may continue in 2H24, and thus, it aims to continue implementing promotions and price cuts to support volume. On the back of this, we now forecast lower volume growth to -0.2%/ 1% in FY24-25F (from 0.5%/2.6% prev.) and a reduction in ASP assumptions to -5.6%/0.9% (from -4.2%/0.9%). We anticipate that soft commodity prices (such as CPO and Crude Oil) will help sustain gross margins at 49.6% during FY24-25F, despite potential price reduction and our expectation of an increase in FY24-25F A&P/sales to 9%/8.5%. Overall, our FY24-25F net profit only sees a slight revision to Rp4.5tr/4.6tr, (-5.4% yoy and 0.3% yoy).

Maintain Sell rating on still challenging outlook and premium valuation

UNVR trades at FY25F PE of 21x with +0.3% yoy EPS growth, still at a premium to peers. We anticipate that 3Q24 will likely see another negative EPS growth due to a high base in 3Q23, with expected recovery only in 4Q24 (from a low base) but with lingering uncertainties surrounding geopolitical issues. Thus, we lower our TP to Rp2,200 (based on DCF, assuming lower 2027-30 FCFF growth to 4% from 5.4% prev.) and maintain our Sell rating. Upside risks include a significant turnaround in 3Q24 volume, improved geopolitical sentiment, and stronger purchasing power.

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