Share analysis: Sido Muncul – pharmaceuticals

The Company

Sido Muncul (SIDO) is one of Indonesia’s top manufacturers of herbal and consumer health products. Its popular products include the revolutionary Tolak Angin and Kuku Bima Ener-G, both market leaders in their respective segments, with market shares of 60% and 75.1% as of 2012, according to Capricorn Indonesia Consult. Despite its sturdy balance sheet, with a 0.1x debt-earnings ratio as of July 2013, the company decided to list its shares on the Indonesia Stock Exchange in December 2013. This initiative was considered necessary to expedite the process of becoming the top consumer health company in Indonesia. As of 2014, herbal medicine was the largest revenue contributor (48%), followed by energy drinks (37%), health drinks (7.1%), and beverages and sweets (5.7%). SIDO tapped into the pharmaceuticals business by acquiring Berlico Mulia Farma in September 2014. Contribution from this business is still very small, at 1.2% of total revenue in 2014. Profitability wise, herbal medicine offers the highest gross margin, reaching 56.5% in 2014, while that of energy drinks, health drinks, beverages and sweets, and pharmaceuticals was 20.5%, 25.5%, 13.5% and 32.6%, respectively.

Development Strategy

Construction of a new herbal plant, with an annual capacity of 1m packs, will be completed in 4Q 2016. This is important because use of the legacy herbal plant, which has an annual capacity of 1m packs, neared its optimal level of 75-80% in 2014. A new extraction plant will also start commercial operations in 4Q 2015, thus doubling daily capacity to approximately 9000 litres of herbal extract from 4500 litres at present.

This, along with the commencement of a new 18000-sq-metre warehouse in 2H 2014, will increase the company’s flexibility in managing its inventories amid increasing volatility in raw material supply and prices. In 2015 SIDO plans to introduce seven new product lines, as well as refresh its packaging and advertisements to anticipate changes in consumer preferences, particularly among the younger generation (the Y generation).

The company also intends to provide more products to national health programmes and to increase penetration into public health care centres (Puskesmas) and hospitals, one example of which is Suprasi (a supplement for breastfeeding women).

Forecast

Any negative impact from the general elections should dissipate in 2015, thus we expect FY2015 herbal medicine and health drink sales to grow by 15% and 13% year-on-year (y-o-y), respectively. However, we still project sales from the energy drink and beverages and confectionary segments to decline by 20% and 15%, respectively, in 2015.

Overall, FY2015 revenue should still post positive growth of 0.3% y-o-y. Meanwhile, we project FY2015 operating profit to increase by 14.6% y-o-y, due to a few factors. First, the gross margin should expand, from 38.2% in 2014 to 39.5% in 2015, given the rising contribution from herbal medicines, which should grow from 48% of revenue in 2014 to 55% in 2015. Second, the operating expense ratio should decline, from 18.7% to 16.3%, given stricter cost control initiatives in 2015, particularly in selling and marketing expenses. This, followed by the decline in the effective tax ratio, from 29.6% in 2014 to 28.5% in 2015E, will mitigate the impact of a 45.4% y-o-y fall in FY2015 interest income. As a final result, FY2015 net profit will still be able to rise, by 0.8% y-o-y.

For 2016, we expect net profit to be able to grow by 19.9% y-o-y, mainly as we foresee revenue to rise by 8.9% y-o-y while the operating margin will expand from 22.8% in 2015 to 24.9% in 2016. We believe the FY2014 earnings disappointment has been priced in and should see a future re-valuation of the company’s stock, given the positive turnaround in earnings growth in 2015E onward. At the moment, SIDO is trading at a bargain FY2015 P/E of 20.2x vs. KLBF’s 35.2x and JAKCONS’ 28.6x. We set SIDO’s 12-month share price target at Rp675 ($0.056) per share.