Nippon Indosari Corpindo

If you use a standard method of valuation, then with PER of 22.3 and PBV of 5.2 times at the price of Rp1,085 per share, Nippon Indosari Corpindo (ROTI) at first glance seems unattractive. However, if we talk about ‘wonderful company’ like this company, then we probably can not afford to buy it at a ‘wonderful price’, or in other words, the current price is fairly reasonable and worth the buy. And indeed, ROTI is a wonderful company (in Indonesian language, ‘roti’ means bread), and I'll tell you why.

ROTI is a bakery company and the owner of ‘Sari Roti’ brand, one of the most famous brand of bread products in Indonesia. The Company was founded in 1995 by Wendy Yap, in the form of foreign direct investment from Japan (the Japanese investors are still become the shareholders of the company until today). Ms. Wendy is the daughter of Piet Yap, one of founders and general manager of the largest wheat flour producer in Indonesia, Bogasari, since the company's founding in 1969 until the 1990s. So it seems like ROTI has secured its wheat flour supplies directly from Bogasari since the very beginning, and to this day ROTI still buy flour from Indofood Sukses Makmur (INDF), the parent entity of Bogasari.

ROTI operate its first bakery in Jababeka Industrial Estate in 1996, in the same year for the brand ‘Sari Roti’ was launched. Although Indonesia was hit by the financial crisis a year later, but the plant is still a huge success, until in 2001 the company increase its production capacity. In 2005 the company opened its second plant in Pasuruan, East Java, followed by the third plant in Cikarang, in 2008. Finally in 2010, with the status as an already market leader in the mass-market bread industry in Indonesia, ROTI held an IPO with the initial price of 1,275, or Rp255 per share after the stock-split (ROTI conduct a stock-split in the ratio of 1:5 in 2013).

(Note: Bread industry in Indonesia is divided into three segments, namely the home-industry/home made production, mass production (at the plant/bakery), and boutiques (such as BreadTalk, Holland Bakery, etc.). The home industry bread is a low quality bread that is sold at low prices in traditional markets and groceries not far from the location of production, and does not have a brand. While mass-produced bread, or you can call it mass-market bread, is a medium quality bread that is sold at the groceries, mini markets, to the supermarket, the products can reach a more wide market (hundreds of kilometers from the bakery site), and have brands. The price is slightly higher than home industry bread, but the quality is also much better. While the boutique bread is usually produced and sold in the same place (and at the same time), namely in stores or shopping malls, and also have brands.

And ROTI plays in the segment of mass-market bread, with a market share of more than 90%. Indonesian bakery industry has a value of approximately US$ 2 billion in 2014, and 20% of them coming from mass-market segment.

I think ROTI can be considered as a 'wonderful company', and here’s why:

1. Business of bread/bakery, as well as instant noodles, flour, or any other food, is relatively immune to the crisis, and it can be seen from the fact that the company was able to grow and flourish in the late 90s at the eve of monetary crisis. And in 2008, when Indonesia was once again affected by the US financial crisis, ROTI built three bread factories in Cikarang instead.
2. ROTI have a priceless brand equity, ie the famous 'Sari Roti' brand. If you have the stock of Trada Maritime (TRAM), then you may be confused when someone asks, 'Trada Maritime? What company is that? A marine company company?' But if you hold this ROTI, then you can immediately answer, 'This is the one which makes Sari Roti, you know!'
3. With more than 90% market share in its segment, ROTI can be referred to as a monopoly company. However, because the consumption of bread in Indonesia is still relatively low, ROTI is able to expand its business until today (so the company's growth prospects are still wide open), usually by setting up a new bakery. Since its IPO in 2010 until today, the company has set up at least seven new bake factory in Medan, Palembang, Makassar, Cikande (Tangerang), Cibitung (Bekasi), Purwakarta, and Semarang.
4. The company produces bread with a range of selling prices that reach all consumers, ranging from dorayaki at a price of Rp4,000 per pcs, until soft-milk bread at a price of Rp17,000 per pcs.
5. Between 2007 - 2012, ROTI net earnings continue to rise for an average of 50% annually. And in the first half of 2015, the earnings still grew by 23.0% over the same period of the previous year, when most of other company’s earnings began to slowing down because of poor conditions of economy.
6. Unlike the other bread products that only sold in stores or boutiques, ROTI probably the only bakery company in Indonesia that sells its products by coming up to the customers, with its famous Sari Roti carts.

Well, I think that’s why Salim Group, one of the largest conglomerate in Indonesia, also invest in ROTI by acquiring a 31.5% stake in 2013, through Indoritel International Makmur (DNET). And Salim Group’s presence in the management of the company would further strengthen the company's position, because now ROTI can synergize with Bogasari (wheat flour producer belonged to Salim Group) to obtain supplies of raw materials, and also with the retail chain of Indomaret (belonged to Salim Group, too) to market its products. If all goes well, ROTI may join with Indofood CBP (ICBP), another Salim Group company, as companies that successfully market its products overseas (if you live in Netherlands or Nigeria, please check the grocery stores near your house, you may find the flagship products of ICBP, Indomie).

And fortunately Salim Group has been well known as a good conglomerate, especially when compared with Lippo, Sinarmas, or Bakrie. ROTI financial statements are fairly clean with a reasonable amount of debt (there are two bonds worth a total of Rp1 trillion issued in March and June 2015, but with low interest rates ie 8 – 10% per annum, so it does not interfere with company earnings). So we can say that ROTI is now in the hands of the right management.

And what about the shares?

As already mentioned above, at the price of Rp1,085 per share, ROTI scored PER and PBV of 22.3 and 5.2 times respectively, and it certainly is not an attractive valuation, especially in the current market conditions where there are a lot of other stocks, including consumer goods stocks, which have much lower valuations. And ROTI itself is already gained of more than 300% since its IPO. Based on experience, the best timing to buy expensive stocks like ROTI is when the company posting a financial performance that is not as good as usual, for example, when its profits fell, or if the company has certain problems which caused investors dispose the shares. In such conditions, ROTI may down to a level where its PBV would be 2 or 3 times only.

But since 2007 until today, or perhaps since even longer, ROTI’ net earnings has always been rise steadily, as well as its equity. As far as I can observe, ROTI also never get caught with the problems nor legal cases. And, face it, for a good consumer goods company like this ROTI, it is very difficult to imagine that the company would be caught in serious trouble in the future, just like Kalbe Farma (KLBF), Unilever Indonesia (UNVR), HM Sampoerna (HMSP), or ICBP, that will also continue to operating well from time to time.

And if the valuation of ROTI compared with valuation of ‘super stocks’ which have already been mentioned above, then PBV of 5 times still seems low, is not it? Actually in 2013 ROTI had climbed to Rp1,800 per share but then dropped, though the financial performance was still fine, because the price was indeed too high. But at the current price, PER of 20 - 25 times are still relatively reasonable for a stock with excllent fundamentals and bright outlook. If you're asking for stocks to be owned for 2 – 3 years from now or longer, ROTI may be the answer.

PT Nippon Indosari Corpindo, Tbk

Rating of Performance for First Half 2015: AA

Rating of Share Price in 1,085: A

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