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EQUITY RESEARCHCIPTADANA SEKURITAS ASIA

Please see analyst certification and other important disclosures at the back of this report 2

UNVR – Reinitiation of Coverage - 22 January 2018

BUY Unilever IndonesiaTP: Rp60,265(+10.8%) Valuations stretched, but upside still exist

Food margins is expected to improveUnilever Indonesia (UNVR) saw its food and refreshment margins growing while home andpersonal care’s sales slowing. The company is likely to roll out more of these items ataffordable price points to capitalize on this shift. Variety of packaging size launched tocapture social class E market and bring higher margins to UNVR. We believe the companyhas prepared to limit the impact of sales volume slowdown from household and personalcare division. Moreover, sales from food and refreshment have been improving with CAGR14% in 2013-2017.We have seen that the company is able to maintain its market shareand expand its volume growth. We expect the division’s sales to grow 11% in 2018F withGPM inching up to 45.5% 2018F (+150bps) and higher contribution towards UNVR revenueby 33.4% in 2018F. Overall, higher margins on food and refreshment will provide asignificant contribution for the company’s 2018F earnings growth.

Smaller packaging to drive volume and marginsThere is a signal movement the spending on UNVR products shifting from the middle classincome to lower class. To anticipate the declining revenue, UNVR launched severalpackaging size at affordable price points to capitalize on this shift, driving the transactiongrowth towards lower segment. Sold in lower price and higher margin, this is the solidopportunity to boost the transaction growth. Smaller packagingare sold at 2-4 timeshigher price/ml than regular size, benefiting UNVR to strengthen its financial. We expect tosee UNVR gross profit growth by 7.4% in 2018Fand net profit is able to secure 9.4%growth in 2018F.

Lucrative market in personal care industryIndonesia cosmetic market remains strong, despite the weakening consumer spendinglast year. Not only for women, men’s skin care is also growing rapidly and is believed togrow as much as 300% compared to 5 years ago. Realizing the opportunity, UNVR productlaunch and re-launch plans are dominated by skin care products (60% of total).We believethe nation’s cosmetic market still exhibits huge potential, as value recorded Rp36tn lastyear. We believe UNVR would be able to achieve 6% sales growth in personal care divisionand bring up its gross margin to 55% (+60bps) in 2018 as UNVR offering various types ofnew products, including newly launched Lakme makeup during 3Q17.

Valuation and recommendationWe re-initiate our coverage on UNVR with a BUY rating and DCF-based target price ofRp60,265 per share (11% upside). UNVR is currently trading at 2018F PER of 53.1x, apremium valuation compare to its peers average valuation of 24x. We like UNVR as it iscurrently Indonesia’s premier FMCG company, occupying a dominant market position in arange of household care and personal care product categories, as well as having apresence in a number of select food and refreshment segments. We see UNVR’s premiumvaluation is justified by its 1) Solid balance sheet and cash flow generation, 2) enviabletrack record and 3) strong ownership and governance. The stock may continue to benefitfrom positive investment flows, robust Indonesia consumer story, and its heavy weightposition, that are capable of delivering steady return.

Sector Consumer

Bloomberg Ticker UNVR IJ

Share Price Performance

Last price(Rp) 54,400

Avg. daily T/O(Rpbn/USDmn) 95.1/7.1

3m 6m 12m

Absolute (%) 9.2 13.7 34.0

Relative to JCI (%) 1.4 3.2 12.7

52w High/Low price(Rp) 58,100/39,400

Outstanding shrs (bn) 7.63

Mkt. Cap (Rpbn/USDmn) 415,644.3/31,213.9

Estimated free float (%) 15.0

Major shareholders

Unilever Indonesia 85.0%

Public 15.0%

EPS Consensus

Ciptadana Cons. % Diff

2017F 936.23 953.2 -0.022018F 1,024.42 1,059.6 -0.032019F 1,087.90 1,179.8 -0.08

Stella Amelinda+62 21 2557 4800 ext. 740

[email protected]

http://www.ciptadana.com

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UNVR 1yr Rel. to JCI (RHS)

Year to 31 Dec 2015A 2016A 2017F 2018F 2019F

Revenue (Rpbn) 36,484 40,054 41,968 44,614 47,656

Operating profit (Rpbn) 7,944 8,707 9,692 10,599 11,257

Net profit (Rpbn) 5,852 6,391 7,143 7,816 8,301

EPS (Rp) 766,946.9 837,571.7 936,227.8 1,024,423.9 1,087,895.6

EPS growth (%) -1.3 9.2 11.8 9.4 6.2

EV/EBITDA (x) 0.1 0.2 0.2 0.2 0.2

PER (x) 0.1 0.1 0.1 0.1 0.0

PBV (x) 0.0 0.0 0.0 0.0 0.0

Dividend yield (%) 184.6 201.3 225.7 246.9 262.2

ROE (%) 121.2 135.8 138.7 138.8 135.2

Source : UNVR, Ciptadana Estimates

Exhibit 1 : Financial Highlights

Year to 31 Dec 2015A 2016A 2017F 2018F 2019F

Revenue (Rpbn) 36,484 40,054 41,968 44,614 47,656

Operating profit (Rpbn) 7,944 8,707 9,692 10,599 11,257

Net profit (Rpbn) 5,852 6,391 7,143 7,816 8,301

EPS (Rp) 767.0 837.6 936.2 1024.4 1087.9

EPS growth (%) -1.3 9.2 11.8 9.4 6.2

EV/EBITDA (x) 49.2 45 40.6 37.1 34.9

PER (x) 70.9 64.9 58.1 53.1 50.0

PBV (x) 85.7 88.2 80.5 73.7 67.6

Dividend yield (%) 1.4 1.5 1.6 1.8 1.9

ROE (%) 121.2 135.8 138.7 138.8 135.2





Industry outlook2017 in reviewIn 2017, we initially were optimistic the growth for consumer sector will be much higher. Aswe believe that recovery in some FMCG manufacturer has yet to be reflected in 2016financial results. However, the long-anticipated result was sluggish. Despite the traditionallypeak consumption observed during Ramadhan, household goods sales and consumptionwere not as high as expected.

Household spending growth only expanded by 4.95% in the second quarter of 2017. Eventhough household spending grew slightly higher than 1Q17; however compared to doubledigit growth household spending during Ramadhan 2016, growth stalled.Throughout 2017,GDP only grew by an estimated 5.07%, slower than expected. Despite the previous 5.2%suggested in the beginning of 2017.

As a result, many debated this issue, some opinion focusing on the fact that Ramadan periodhappened to coincide with the new education year: it was stated that this was a main reasonconsumers held back on spending. Some argued the 13th salary (annual bonus duringRamadan) had only been distributed at the end of July; hence the results would be reflectedin the following quarter, nevertheless there was no significant increase in the third quarter.

The elimination of the electricity subsidy during the first and second quarter also pressuredconsumers to tighten up on spending. Some argue that consumers are now become smarter,as they purchase their needs in mini-markets instead of supermarkets to avoid over-spending, only purchasing products they need in a smaller quantity. This supposition wasbased on the Rp167 bn net loss reported by hypermart in 2Q17, compared to the salesgrowth recorded by Alfa Trijaya, whose revenue rose by 13.5% as Alfa Midi sales grew by18.7% in 2Q17.

In such an anomaly, government and central bank revealed their confusion about theweakening of consumer spending. Despite improved investment and exports, inflationremained comfortably low at 3-4%, even rising only by 0.69% in Ramadhan period, thelowest movement in 5 years. FMCG growth hits new low at 2.7% in 2017 vs 10.4% in 2016.

2018 outlookBetter macroeconomic condition, including higher money supply and government spending,lower interest rate, made Indonesia the promising market for Unilever and overall consumersector. Our economist projects the economy to expand by 5.3% in 2018 supported by themodest budget increase to address the inequality in Indonesia.

Higher government spendingWitnessed weakening of consumer spending in 2017, Ministry of Social increased its budgetby 138% from Rp17.318 tn in 2017 to Rp41.295 tn in 2018 for the two programs. First isFamily Hope Program (PKH) budget increased from 6 mn to 10 mn beneficiaries. Second isthe Prosperous Rice Social Assistance, shifting of subsidy budget into Non-Cash FoodAssistance (BPNT). This means, beneficiary family (KPM) get top up assistance of Rp110,000every month for staple foods. Hence,beneficiary families can convert food aid in the form ofrice, eggs, cooking oil and sugar.

Further, there is additional Rp10.5 tn for 19.7 mn beneficiaries towards education andRp25.5 tn for National Health Insurance(JKN) for 92.4 mn beneficiary families. With all ofthese subsidy,a household might get additional Rp110,000 food assistance per month as wellpay less tuition cost. As the biggest manufacturer of consumer product in Indonesia, weexpect UNVR will be one of the top beneficiaries of the higher disposable income fromconsumers.

Regional elections about to drive FMCG demandHistorically, there is a significant increase in the sales of beverages, tobacco and snackproducts during the elections campaign periods. Money supply and velocity are also expectedto increase near the election date. Especially this year, regional elections that will be held insimultaneous local elections will take place on June 27 2018, after the Idul-Fitri holidays.More than 170 regions across the archipelago will hold local elections. Among them are 17provinces, 39 cities and 115 districts, including in East, Central and West Java that the




biggest contributor area for FMCG and tobacco products. We expect consumer sector willenjoy a positive impact from this event. UNVR might experience transaction growthespecially on its foods and refreshment division.

Supportive regulationUntil the first quarter (March 2018) there will be no increase in the prices of Oil Fuel (BBM),Liquid Petroleum Gas (LPG) and electricity; because there is an allocated budget of Rp103.4tn for energy subsidy in 2018. There is about Rp51.1 tn for oil fuel and LPG subsidy, andanother Rp52.2 tn for electricity. This regulation will bring a positive impactto strengthenpurchasing power especially for the middle-low segment, benefiting the consumer sector.

Commodity price Likely to increaseExpected increase in commodity prices will boost income particularly for those residingoutside Java.Prices for energy commodities which include oil, natural gas, and coal areforecasted to climb by 4% in 2018 according to World Bank. In addition, favorable weatherpatterns, well-supplied global food markets, and relatively stable food prices also expectedin 2018 (see Exhibit 4). We believe an upward correction to global commodity prices wouldpositively impact the performance of Indonesia’s economy and consumer market.UNVR thatis expanding its distribution by adding more refrigerators for refreshment products inoutside Java, especially rural areas should enjoy a significant share from consumer’s wallet.

Exhibit 2: Consumer Confidence IndexExhibit 3: Indonesia GDP growth

Source : Company and Ciptadana Sekuritas Asia Source : Company and Ciptadana Sekuritas Asia

Exhibit 4: State budget (APBN) 2018 Exhibit 5: Commodity price forecast

Rp(tn)Beneficiary(Temporary)

Subsidy 145.5Family Hope

Program (PKH) 17.310 mn

families

Education Program 10.5 19.7 mnNational HealthInsurance (JKN) 25.5 92.4 mn

Food Program 20.815.6mnfamilies

The Village Funds 6074,958villages

College Scholarship 4.1

Source : Ministry of Finance Source : World Bank

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2011 2012 2013 2014 2015 2016 2017F 2018F




High and stable marginsBetter macroeconomic condition, including higher money supply and government spending,lower interest rate, made Indonesia the promising market for Unilever and overall consumersector.Unilever Indonesia revenue growth was recorded on an order of CAGR 15% for aperiod of ten years. Meanwhile gross margin and net margin have been on an average of 51%and 17%, respectively between 2011-2016. We expect gross margin and net margin toimprove to 51.9% (+60bps)and 17.5% (+70bps) respectively this year. We project operatingmargin improved to 23.8%, compared to the previous year at 23.1%.

Its strong position as a market leader enabled the company to operate with more efficientvolumes and earn higher profits. Due to its strong position as a market leader, Unilever isable to operate with more efficient volumes and earn higher profits than its competitors innarrow market niches. Unilever can charge premium prices while incurring relatively lowmarketing costs. In contrast, newly- launched brands must endure costly marketing in aneffort to become known by consumers, giving an advantage for existing players.

As a leading manufacturer,UNVR personal care sales volume growth in the country has beenunderpinned by increased demand, particularly from middle and lower-class consumers.After all, the female population in Indonesia, the largest cosmetic users, has now reached126.8 mn. In addition, there has been a recent increase in the number of men, especially inurban areas, buying and wearing cosmetics and skin care products; thus Unilever has alsoentered this segment by launching Pond’s men facial wash last year.

Furthermore, personal care products typically target specific customers with higher brandloyalty, unlike food products where substitution is common and consumers can easily switchto other products if they are not satisfied. Therefore, the demand for branded personal careproducts that bring approximately 53-54% gross margin to the company is relativelystable.Unilever Indonesia has proven sustainable in terms of revenue growth andprofitability.

Exhibit 6: Revenue per segmentSegment NetIncome(Rpbn)

2014 2015 2016 2017E 2018F 2019F 2020F

Home&Personal Care 24,634 25,419 27,697 28,166 29,856 31,349 33,856Food &Refreshment 9,878 11,065 12,356 13,296 14,758 16,308 18,787Total 34,512 36,484 40,054 41,462 44,614 47,656 52,643

Net Income Weight (%) 2014 2015 2016 2017E 2018F 2019F 2020FHome&Personal Care 71.38 69.67 69.15 67.93 66.92 65.7% 64.31%Food & Refreshment 28.62 30.33 30.85 32.07 33.08 34.22% 35.69%Total 100% 100% 100% 100% 100% 100% 100%

Net Income Growth (%) 2014 2015 2016 2017E 2018F 2019F 2020FHome&Personal Care 9.90 3.19 8.96 1.69 6.00 5.00 8.00Food & Refreshment 18.40 12.03 11.67 7.60 11.00 10.50 15.20

Total 28.30% 15.21% 20.63% 9.29% 17.00% 15.50% 23.20%Source : Company and Ciptadana Sekuritas Asia

Exhibit 7: Revenue, Gross, Operating and Net Margin

Source : Company and Ciptadana Sekuritas Asia

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2014 2015 2016 2017E 2018F 2019F 2020FRevenue(Rpbn)Gross MarginOperating Margin




Products launch and relaunches

During 2017, we observed that UNVR was increasing its focus on the personal care category,particularly skin care, in terms of product launching and re-launching to strengthen itsposition in the market, even while sales for this Division remain sluggish. We have witnessedconsumer attitudes towards consumption are driving growth in personal care and packagedfood.

In 2018, as the recovery of purchasing power is expected, we might see an improvement inthe sales growth from household and personal care division by 6% sales growth. This year,UNVR allocates Rp1.6 tn for capital expenditure and Rp 880 bn of which will be spent mainlyto expand the production capacity for personal care, while the rest will be used for factoriesexpansion in household care, foods and refreshments and distribution facilities. Aware thatthe margin delivered by personal care division is significantly higher than foods andrefreshments (55% vs. 42%), we have seen UNVR launched more personal care products in2017 (60% of new products). We project UNVR will not shift its focus on the personal carecategory. Going forward, we expect UNVR will launch more personal care varieties.

In addition to skin care, the hair care segment has been the market's most profitablesegment as well. L’Oreal, Procter & Gamble, Wings and Mandom as UNVR main competitorsin Indonesia. Those company are compete with UNVR to potentially enjoy USD 518.3 mnoverall value in hair care and USD 472.6 mn for personal hygiene, with an anticipated CAGRof 7% for the five-year period extending 2014 – 2019; this is expected to drive the market to avalue of USD7.0 bn by the end of 2019.UNVR local market successes include targeting thefemale Muslim demographic, with Indonesia having the largest Muslim population globally.Sunsilk Hijab Fresh was launched in 2014: they highlight how Sunsilk shampoo can help aHijab-wearing woman keep her hair clean and fresh.

UNVR also launched Pure Line Hijab Fresh body lotion in 3Q17, aimed at the huge Muslimpopulation in Indonesia claimed the non-sticky body lotion will be suitable in tropical weatherfor a Hijab-wearing woman at a reasonable price sold at the price of Rp2,000.- Rp9,500 for 9ml-200 ml.We believe UNVR supported by the Indonesian demographic.UNVR personalproducts market grew robustly between 2010 and 2017, and we believe it will continuegrowing at an accelerated rate. We expect, the Indonesian personal products market hadtotal revenues of USD5.0bn, predicting a compound annual growth rate (CAGR) of 6.4%between 2010 and 2017.

Indonesia’s skin care industry has been highly influenced by social media, beauty forums,celebrity endorsements as well as celebrity testimonials. We believe millennial womenspend a lot of time analyzing advertisements and want to see more realistic campaigns, asthey are becoming more careful in experimenting with products, choosing and trying out;that is reflected in the trend to consult blogs and videos, which is accelerated in emergingmarkets, such as Indonesia, where women are so excited and enthused about beauty. UNVRalso catch this opportunity by using the social media and endorsement to promote andintroduce new product.

Unilever introduced Lakme as the first brand of Unilever makeup specifically for Indonesia.Launched in August 2017, along with the “Absolute Reinvent” slogan professional makeupfor trendsetters.Lakme, a cosmetic brand owned by Hindustan Unilever India, partnering upwith several professional makeup artists. Frequently making use of social media to promotetheir brands, products and several events, UNVR invited famous YouTube and Instagrammakeup artists to attract Millennials’ attention. Lakme performance may not gain a positivereturn immediately, as the infant product might absorb company ads and promotional costsinstead of providing profitable revenue for several months and perhaps up to a year.

We see this personal care products launch and relaunch the main focus of the company.UNVR benefits from offering solutions to women, as beauty is still a strong priority. Companyoffers new variants of personal care with different packaging, fragrance and differentbenefits offered. We believe this method will continue to bring benefit to UNVR as theappetite for new products is much larger in Indonesia compared to developed markets (UK,US, Germany and France).




Exhibit 8: UNVR sales growth vs GDP growth Exhibit 9: Launch and Relaunch Products 2017


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GDP growth UNVR growth

Personalcare

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HouseholdCare

Personal Care Food and refreshment Household Care




Shifts in Household spending middle to lower income

It is widely known that for low-income households, a larger share of expenditures goes tohousing and food compared to middle- and high-income households. Housing takes up to41% of spending and the next 30% of expenditures are about evenly split between food andtransportation. For a middle-income household, about one-third of spending is devoted tohousing. The next largest categories are transportation and then food, which comprise 19%and 13%, respectively.

There is evidence that the previous middle income household that shop for the UNVRproducts was shifting to low-income household. Low-income households increased theshare of their spending devoted to basic needs by almost 2%, while the share of spending onbasic needs declined slightly for middle-income households.

Despite the middle class expansion, social class-E (poorest households, as their incomeindex is approximately 0.5 times lower than average) remains predominant in the countryand data showed they seems to increase their spending towards the new categories. Webelieve, as their income increases they’re keen on trying new products launched by UNVR,compare to middle class, that spending shift to more exclusive brand as their income rises.Especially there is a higher government budget for this year to boost the Indonesiahousehold consumption.

Exhibit 10: Indonesia FMCG Buyers-> shifting middle to lower income

Source :World Panel

Smaller Packaging to Drive Volume

Looking at potential opportunity on the lower tier to drive volume and margin growth.Consumers want more new products on the market that are affordable and convenient.UNVR launched several packaging size at affordable price points to capitalize on this shift,driving the transaction growth towards lower segment.

UNVR small size packaging targeting on social class-E consumer to snap up the productsinstantly,packaged body lotion and detergent which usually cost less than Rp2,000 for 9ml-10ml(Rp200/ml) of products. Using this strategy, company also helps to scoop highermargin. As 100 ml sell at Rp5,000(Rp50/ml) and 200 ml sell at Rp10,000(Rp50/ml).Detergent Rinso Molto also launch Rp6,000 packaging and Sariwangi introduce 30 g looseleaf and 4 serving size of tea in plastic pouch. Buavita new handy 500 ml packaging andMolto that launched 7 various packaging from 12ml -1.8 liter. Sold in lower price and highermargin, this is the solid opportunity for UNVR to drive the sales volume. Smaller packagingare sold at 2-4 times higher price/ml than regular size, benefiting UNVR to strengthen itsfinancial. We expect to see gross profit growth by 7.4% in 2018F (+2.2%YoY) and net profit isable to secure 9.4% growth in 2018F. Going forward, we believe UNVR might continue tolaunch varieties packages size to drive margin expansion.

UPPERCLASS

MIDDLECLASS

LOWERCLASS

Spend per buyer +2.9% +6% +12.4%Volume per buyer -8% -3% +1.9%

Price/Unit +11.9% +9.3% +10.3%Frequency -14% -7.90% -9.90%

# Categoriesbought change +0.5% +1.5% +2.5%

From 53 to 54categories






Food & Refreshments industry growing rapidlyIndonesia’s ice cream consumption rose up to 158 mn liters, the highest number amongSouth East Asian countries. It is projected that consumption will grow by 16% every yearuntil 2020, and the market value will reach Rp19.8 tn. The ice cream industry is forecast togrow at a CAGR of 7.8%, with estimated volume consumption of 154 mn kg during 2014-2019. We forecast there are three main reasons that boost ice cream sales: first is thepopulation that keeps growing, second is the rising income per capita, and third is the hotweather in Indonesia.

Just like other FMCG products, leading ice cream brands in Indonesia are constantlyinnovating and launching new products in order to seize consumer attention. Not only UNVR,but also Campina Ice Cream, the major competitor of Wall’s, is positive that the ice creammarket will grow by double digits this year. The Company is targeting 10% growth as well.Campina, that holds 22% of the market, will build a new production facility in West Java, tosmooth out distribution for Sumatra and Kalimantan. In addition, once the factory is fullyoperational, Campina is planning to expand its market into Southeast Asia.

Joint venture Glico Wings, a new player in the ice cream industry, is confident they can carveaway 10% of market share by the end of this year. Indofood has expanded their product linewith Indoeskrim, and has been offering a deep 30% discount several times throughout 2017,to capture more consumers.

In addition, better exposure and health awareness rising among Indonesians is evidentamong young adults’ age group, particularly around urban areas. UNVR won’t miss thisopportunity, having launched ice cream products targeted at this segment: BuavitaSmoothiez offers limited-calorie fruit-based ice cream bars compete along with the CampinaCampina LuVeLitee launched in 2014. The company is confident the nutrient-fortified IceCream market will generate a significant demand in Indonesia.

We have notice UNVR product attributes such as new flavors and textures contributes to theaspects of fun and enjoyment. Premium products also support the industry, due to the risingincome levels and the expansion of a middle class. As we can see from the Food&Refreshment Division, 80% of new UNVR products this year are new ice creams.

The biggest contributor was Wall’s Paddle Pop, which targets kids, keep launching newinnovative product promoted through adventure animation movies, which give the producthuge publicity boost. The newest innovation was Paddle Pop Octopus. It is designed toresemble an octopus with a peel able outer jelly layer like an octopus, which kids findattractive and fun.

Premium Ice Cream brands such as Magnum have introduced a variety of products inIndonesia to cater to this indulgence-seeking nature of consumers. We believe the targetmarket for this product often focus on the rich texture and unique flavor of the ice creamssuch as re-launching of White Almond and the newly-launched Red Velvet flavor which wecan assume the flavors were well-received as they can stand out among it’s competitors.

Exhibit 11: New refreshment launch

Source : Company

Exhibit 12: Ice cream market share in Indonesia


66%

22%

12%

UNVR Campina Others




Other than ice creams that contribute to sales growth, UNVR would have to recognize Roycoand Kecap Bango, which also play a significant role. We believe the savory market inIndonesia is growing, now that there are more varieties offered in the market, from foodseasonings to instant meat pouches. Bango sweet soy sauce Brand has also launched friedchicken seasonings and Javanese sweet marinated tofu and tempeh seasonings. RoycoBrand, that focuses on chicken and beef stock, also offers cream soups, fried riceseasonings, fried fish and tamarind soup.

Considering the volatility of food prices such as significant price fluctuation of garlic and saltduring the 2Q17 ( > 50%) and chili prices usually goes up in the rainy season. Further, garlic,chicken, eggs, chili, medium rice experienced a significant price rises in the beginning of thisyear. We conclude sales for instant food ingredients will significantly increase. As anaffordable and time-saving option, offering a flavorful taste, we believe the sales trend willcontinue upwards as the demand undeniably increases.

Food and refreshment is likely to gain more profit margins as the sales volume growth couldoffset the wages hikes and advertising cost on the newly launched products. Fast-growingfood and refreshment business probably soared as lower raw-materials prices boosted unitmargin. Throughout 2017, inflation towards food prices was relatively low food inflation2017(0.71%). This division’s gains may have surpassed margin growth at the home andpersonal care segment that sales still slowing. In 2018, we expect the transaction on thisdivision is still growing at a double digit phase and we forecast 11% growth

Exhibit 13: Indonesia Seasonings, Dressings& Sauces Market Volume(kgmn) by category2010-2020F

Source : Canadean, EMIS

Exhibit 14: UNVR Foods & Refreshment growth (Rp mn)


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Foods & Refreshment Growth




Cost reduction Advertising and Promotion

When sales and consumer spending are under pressure, we notice demand becomes moreelastic, and hence pricing is crucial. Hence we have noticed that to ensure profitability thecompany squeezed down costs efficiently without sacrificing quality. UNVR adoption of Zero-Based Budgeting (ZBB) implies flexible budgets focused on operations and results in efficientcost management; we believe this helps the company to minimize costs and protectprofitability during periods of weak consumer spending.

We have seen UNVR actively putting personal care advertising in the social media instead oftelevision. As this is one of the most cost-efficient digital marketing methods used toincrease product visibility to it’s targeted audiences. As a result, advertising and marketresearch shrank by 3.65%, despite approximately 40 products having been launched fromthe throughout 2017, marketing and selling expenses up by only 1%.Indonesia is one of thebiggest online markets worldwide, with 93 mn online users, and this number is expected togrow at an average rate of 10% through the end of 2020, to reach over 130 mn Internetusers. We believe UNVR will continue increase it’s digital marketing as this strategy provedeffective and efficient. Hence, we project 2018 marketing and selling expense would be ableto minimize and merely up by 1.2%.

Besides, the price of palm sugar had declined over the period (sugar price index dropped byalmost 9% in 2Q17) bringing cost benefit to sweet soy sauce production. However, we expectadvertising and promotional costs will increase in the second half due to stiffer competition.In addition, approaching the holiday season in the fourth quarter, we have noticed moreintense advertising for its new and existing products. Sales during the fourth quarter aregenerally higher due to Christmas and New Year season and this then is the opportunity forthe UNVR to boost its revenue in Q417.

However, CPO price that’s gradually increased and is expected to strengthen further in thefirst quarter of 2018; it is thus likely to impact raw material costs for personal care andhousehold products.

Throughout 2017, apparently the company chose not to increase their prices since lastFebruary (ASP+1.3%). We are positive that sales will be better in 2018 as living costs aremore stable (no more subsidy cuts or rising BBM prices) and there is a higher governmentspending this year. We are expecting an improvement in purchasing power in 2018 whichwill help the UNVR to create a further plan for ASP increases in 2018( we anticipate 2%-3%ASP increase), once they confirm sales volume is moving on an uptrend. We are optimistUNVR could maintain its gross profit margin and generating a healthy sales volume this year.




Company Background

Established under the name Lever’s Zeepfabrieken N.V. on 5 December 1933. In 1980, thecompanyname was changed to "PT Unilever Indonesia" dated 22 July 1980. The companywent public in 1981 and shares have been listed on the Indonesia Stock Exchange at Jakartasince 11 January 1982. On 30 June 1997, company underwent a further change of name to"PT Unilever Indonesia Tbk".

Employed 6,000 professionals to manage and grow the business responsibly, sustainablyand with integrity. The company has nine factories, located in the Jababeka,Cikarang andRungkut, Surabaya, and new head office located in Bumi Serpong Damai at the end of 2016.The Company’s product range, comprising 39 brands and estimate1,000 Stock Keeping Units(SKU), is marketed through a network of more than 800 independent distributors acrossIndonesia. Unilever Indonesia now is one of Indonesia’s leading fast moving consumer goodscompanies.

Exhibit15: UNVR Sales Breakdown Exhibit16: UNVR Gross Margin


UNVR Brands in Indonesia

We believe that almost every Household in the nation contains UNVR products. The Companyhad two business Divisions: Household & Personal Care Division and Food & Beverages. Theystock 40 brands and estimated thousands of units, to ensure fast and wide distributionacross Indonesia.

Through its well-known branding, the function and art of branding is a major contributor tothe market success of products sold by the company, displaying excellent brand reputations;they remain strong players as number one or two in the personal care and ice creamsegments. Sunsilk shampoo, Pond’s skin care, Rinso detergent, Blue Band margarine,Rexona deodorant, Walls ice cream and Pepsodent toothpaste hold the highest market sharein Indonesia in each category.

Unilever maintains effective brand management in customers’ minds and this leads topositive purchasing behavior. Some of the brands are so powerful that its customer base willrefuse to purchase alternatives if the brand is not available. As a market leader thatdominates in a category, Unilever also easily extends their charter into new / relatedadjacent categories and dominate those as well. For instance: new variants of Ponds, Dovefacial care, Rinso Molto, Paddle pop and Magnum new flavors.

Unilever has a substantial quantity of types and brands, catering to all target markets, fromaffordable facial care (Pond’s, Citra, Fair and Lovely) to luxury skin care(IOMA). Body careincludes Dove moisturizing body foam, Lifebuoy anti-bacterial, Lux lifestyle fragrance soap,Citra whitening body lotion and Vaseline intensive care, refreshing and whitening Close uptoothpaste and Pepsodent family toothpaste.

Furthermore, Unilever provides five shampoo brands that cater to the needs of theconsumers in various price ranges, with a differentiating slogan aimed at different targetmarkets. For example, Dove damage therapy, Clear anti dandruff, Sunsilk black shiny orlively straight, Tresemme used by professionals or Lifebuoy family shampoo. Unilever’sshampoo price also ranges from Rp27,000/360ml to Rp44,000/360ml.

69.67% 69.15% 67.11% 66.92% 65.78% 64.31%

30.33% 30.85% 31.68% 33.08% 34.22% 35.69%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY 2015 FY 2016 FY 2017E FY2018F FY 2019F FY2020F

Home & Personal Care Foods & Refreshment

54.6%

54.6%

53.5%

55.0%

54.0%

54.0%

43.1%

41.8%

44.8%

45.5%

46.0%

46.0%

0.0% 20.0% 40.0% 60.0% 80.0% 100.0%

FY 2015

FY 2016

FY 2017E

FY2018F

FY2019F

FY2020F

Home & Personal Care Foods & Refreshment




With a diverse product range, Unilever sales are protected from the risk of shifting marketpreference. Personal care is comprehensive, from shampoo, body care and skin care. It isundoubted that UNVR products will be purchased and consumed in every household.

Unilever gave up spread businessUnilever had officially sold its spreads and margarine brands to KKR & Co. for 6.83 billioneuros (USD8.1 billion) on Friday (12-15-2017), three years after separating the division fromits main operations. A sustained market decline in Europe and North America because ofreduced consumption of bread has reduced appetite for the division’s brands was the mainconsideration. Butter retail volume is growing, while margarine sales remains flat as seen onexhibit 16. KKR will become the owner of brands like Becel, Flora and Blue Band, amongmany others. These brands are sold in 66 countries and generated EUR 680 mn in EBITDA onrevenues of EUR 3.03 bn.

In Indonesia, the spreads business (Blue Band) contributes for around 1%-2% to UNVR’srevenues. Unilever will use proceeds to aggressively buy emerging brands to attractmillennials. Focus on the personal care division, recently company had acquired Schmidt’sNatural to help the growth profile of Unilever, giving it an upcoming brand in deodorant, soapand toothpaste. If Unilever there is no other acquisition options, company intends to give theproceeds back to the investor.

Exhibit 17: Sales of margarine and butter forecast 2010-2020

Source :Euromonitor, The Wall Street Journal




Valuation and rating

Unilever’s financial performance might not grow as fast as itsstock price; 2016 results revealrevenue for Unilever growing by 9.8% to Rp40 tn, considerably more subdued than back in2011, when growth was 19% YoY. Despite this slowdown, however, the stock price keeprising: since 2011 share value rose 10.91%, 13.93% in 2012, 24.70% in 2013, 24.23% in 2014,14.55% in 2015, 4.86% in 2016 and 44% up throughout 2017.

We re-initiate our coverage on Unilever Indonesia (UNVR) with a BUY rating with target priceof Rp60,265 per share (11% upside). Our TP is derived by using DFC valuation with a WACC of9.2% and terminal growth of 4.5%. UNVR is currently trading at a 2018F PER of 53.1x, apremium valuation compare to its peers average valuation of 23.8x.

We like UNVR as it is currently Indonesia’s premier FMCG company, occupying a dominantmarket position in a range of household care and personal care product categories with anaverage market share estimated of above 30%, as well as having a presence in a number ofselect food and beverage segments. We see UNVR’s premium valuation is justified by its 1)Solid balance sheet and cashflow generation (the company displays one ofthe best balancesheets in the business, with debt to equity of 0.5x and highly cash-generative). , 2) enviabletrack record ( UNVR has been always recording positive growth in revenue ) and 3) strongownership and governance (UNVR is majority owned by Unilever Indonesia BV, whichprovides the company with a strong parent shareholder that hasprovided sound governanceover the years). While in the long-term, the stock may continue to benefit from positiveinvestment flows, robust Indonesia consumer story, and its heavyweight position , that arecapable of delivering steady return.

Exhibit 18 – UNVR vs JCI

Source :Company and Sekuritas Asia

Exhibit 19: DCF Assumption Exhibit 20: UNVR PE Band

DCF Assumption TableCost of equity 9.3%

Risk free rate 6.50%

Beta 0.7

Equity risk premium 4.0%

WACC 9.22%

Terminal growth rate 4.50%

After tax cost of debt 4.2%

Total PV of FCF(Rpbn) 67,151

PV of TV(Rpbn) 395,149

Total PV of FCF and TV(Rpbn) 462,299

Net Debt (Rpbn) 2,476

Equity value (Rpbn) 459,823

Equity value/share (Rp) 60,265

Source : Company and Ciptadana Sekuritas AsiaSource : Bloomberg

-0.5

0

0.5

1

1.5

2

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17

UNVR JCI

253035404550556065

UNVR P/E Ratio

2nd Upper Band

1st Upper Band

Average(Close)

1st Lower Band

2nd Lower Band




Sensitivity Analysis

We measure our DCF-based target price sensitivity against a 0.5% differential for its WACCand terminal growth. The results are presented in Exhibit 20 below.

Exhibit 21: UNVR Sensitivity Analysis

WACC

60,265 7.72% 8.22% 8.72% 9.22% 9.72% 10.22% 10.72%

Term

inal

Gro

wth

3.00% 65,235 58,283 52,562 47,775 43,712 40,223 37,195

3.50% 71,902 63,525 56,770 51,210 46,557 42,607 39,216

4.00% 80,361 70,009 61,869 55,303 49,899 45,376 41,537

4.50% 91,447 78,236 68,176 60,263 53,881 48,628 44,231

5.00% 106,608 89,018 76,178 66,399 58,708 52,504 47,396

5.50% 128,599 103,764 86,666 74,185 64,678 57,200 51,168

6.00% 163,376 125,153 101,010 84,388 72,253 63,009 55,738

Source: Ciptadana Sekuritas Asia

Consumer Peer Comparison

Exhibit 22: Indonesia Consumer Peer Comparison

Source: Bloomberg, Ciptadana Sekuritas Asia

Mkt. Cap EPS Growth ROE PER EV/EBITDA

Ticker Last Price (Rp tn) 18F(%) 19F(%) 18F(%) 18F 19F 18F 19F

UNVR 54,450 415.6 6.3 6.8 139 53.1 50 37.1 34.9

ICBP 8,700 101.5 9.7 9.9 20.4 24.2 22.2 15.2 13.9

INDF 7,925 69.6 7.4 8.5 13.4 14.6 13.5 7.3 7.3

CPIN 3,540 58.4 3.2 15.8 17.9 15.5 12.7 10.3 9.2

MYOR 2,230 49.9 19.4 16.2 20.9 30.3 26.1 16.7 15.1

ROTI 1,215 7.5 8.0 14.9 13.6 23.4 21 13.7 12

ULTJ 1,240 14.3 10.8 7.7 18 17.2 16 10.7 8.4

JPFA 1,475 16.8 30.9 13.8 17.7 9.2 8.4 7.2 6.6

KINO 2,070 3.0 6.8 18.4 8.4 16 13.5 9 8.1

HMSP 5,100 590.3 10.1 10.6 39.7 39.6 35.9 29 26.3

GGRM 84,025 161.5 12.9 13.4 18.2 18.8 16.6 11.6 10.5

Average : 26.1 12.4 29.7 23.8 21.4 15.3 13.8




Risk

Sharpening CompetitionHealthier macroeconomic conditions, including higher GDP growth and a lower interest rateenvironment have made Indonesia a promising market for both local and global players.Domestic players also compete to provide personal care products at a competitive price andattractively packaged. Not only Unilever – P&G and L’Oréal have also diversified their productlines to try to expand market share. We have also seen Wardah and Martha Tilaar strengthenproduct brands and varieties, experiencing great sales growth.

Increasing reliance on social media, rising demand for premium and branded cosmetics,lower tariffs resulting in various imported brands becoming available in the market –especially brands from Asia that claim to be more suitable for the Indonesian skin types.

Foreign CurrencyUNVR has receivables and payables whose values are directly affected by currency exchangerates, and thus currency rate fluctuations may affect the company’s position. The Company isexposed to foreign exchange risk arising from various currency exposures especially fromUSD and EUR. Foreign exchange risk arises from committed future transactions andrealization of monetary assets and liabilities in foreign currencies. Weakening of Rupiahmight erode company’s margin.

To manage its foreign currency fluctuation exposure, UNVR need to maintain the exposure atan acceptable level by buying foreign currencies that will be needed to avoid exposure fromshort-term fluctuation. As of end-2016, 11% and13.5% of UNVR receivables and debt were inforeign currency; however, we have seen the percentage decrease to 12.6% of total debt and7% of total receivables in 3Q2017.

Higher raw material pricesManufacturers of detergents, shampoos and soaps will be impacted by fluctuating palm oiland its derivative’s prices. As raw materials become more expensive, margins will eventuallybe eroded. Weak consumption means demand for the product is more elastic, hence limitingthe company’s ability to raise prices.

Rise on oil pricesOil price that keep rising will impact on fuel price. Government assure the fuel price will notrise until the first quarter of 2018, however if the fuel price increase, it will hurt theconsumer buying power and heighten the company’s distribution cost.


EQUITY RESEARCHUNVR – Reinitiation of Coverage - 22 January 2018

CIPTADANA SEKURITAS ASIA

Exhibit 23 - Income Statement

Year to 31 Dec (Rpbn) 2015A 2016A 2017F 2018F 2019F

Revenue 36,484 40,054 41,968 44,614 47,656

COGS -17,835 -19,595 -20,436 -21,478 -22,913

Gross profit 18,649 20,459 21,532 23,136 24,743

Oper. expenses -10,705 -11,752 -11,839 -12,537 -13,487

Oper. profit 7,944 8,707 9,692 10,599 11,257

EBITDA 8,448 9,258 10,275 11,246 11,967

Interest income 11 7 3 4 5

Interest expense -121 -143 -115 -120 -129

Other income (exp.) -4 1 1 1 1

Pre-tax profit 7,829 8,572 9,582 10,484 11,134

Income tax -1,978 -2,181 -2,438 -2,668 -2,833

Minority interest 0 0 0 0 0

Net profit 5,852 6,391 7,143 7,816 8,301

Exhibit 24 - Balance Sheet


Cash & cash equivalent 628 374 170 201 482

Acct, receivables 3,245 3,708 3,894 4,034 4,309

Inventory 2,298 2,318 2,406 2,471 2,511

Other curr, asset 453 188 370 393 420

Total current asset 6,623 6,588 6,839 7,099 7,722

Fixed assets - net 8,321 9,529 10,608 11,582 12,493

Other non-curr.asset 786 628 567 599 635

Total asset 15,730 16,746 18,014 19,280 20,850

ST debt + curr. maturity 1,700 2,393 2,728 2,677 2,859

Acct, payable 4,842 4,642 4,874 5,378 5,875

Advances received 1,120 1,660 1,940 2,062 2,203

Other curr. liab 2,466 2,183 2,118 2,252 2,405

Long term debt 0 0 0 0 0

Other non-curr, liab, 775 1,163 1,205 1,281 1,368

Total liabilities 10,903 12,041 12,865 13,650 14,711

Shareholder equity 4,827 4,704 5,149 5,630 6,138

Minority interest 0 0 0 0 0

Total liab + SHE 15,730 16,746 18,014 19,280 20,850

Exhibit 25 - Per Share Data

(Rp) 2015A 2016A 2017F 2018F 2019F

EPS 767.0 837.6 936.2 1024.4 1087.9

BVPS 632.7 616.6 674.9 737.9 804.5

DPS 100.4 109.4 122.7 134.3 142.6

FCF per share 682.9 748.3 822.4 987.9 1051.1





Exhibit 26 - Cash Flow


Net income 5,852 6,391 7,143 7,816 8,301

Depreciation 505 551 583 647 711

Chg in working cap. 402 227 34 607 537

Other 110 136 112 116 124

CF-Oper activities 6,868 7,304 7,872 9,186 9,673

Capital expenditure -1,477 -1,759 -1,661 -1,621 -1,621

Others -180 165 64 -27 -32

CF-Investing activities -1,657 -1,594 -1,597 -1,649 -1,653

Net change in debt 450 693 335 -51 183

Net change in equity 0 0 0 0 0

Dividend payment -5,784 -6,096 -6,786 -7,426 -7,886

Other financing 13 -417 88 90 93

CF-Financing activities -5,441 -5,964 -6,478 -7,507 -7,739

Net cash flow -231 -254 -203 31 281

Cash - begin of the year 859 628 374 170 201

Cash - end of the year 628 374 170 201 482

Exhibit 27 - Key Ratios

Year to 31 Dec 2015A 2016A 2017F 2018F 2019F

Growth

Revenue (%) 5.7 9.8 4.8 6.3 6.8

Operating profit (%) -1.1 9.6 11.3 9.4 6.2

Net profit (%) -1.3 9.2 11.8 9.4 6.2

Profitability Ratios

Gross margin (%) 51.1 51.1 51.3 51.9 51.9

Operating margin (%) 21.8 21.7 23.1 23.8 23.6

EBITDA margin (%) 23.2 23.1 24.5 25.2 25.1

Net margin (%) 16.0 16.0 17.0 17.5 17.4

ROA (%) 37.2 38.2 39.7 40.5 39.8

ROE (%) 121.2 135.8 138.7 138.8 135.2

Liquidity Ratios

Current ratio (x) 0.7 0.6 0.6 0.6 0.6

Quick ratio (x) 0.4 0.4 0.4 0.4 0.4

Cash conversion cycle(days)

30.3 31.6 34.6 32.5 28.9

Activity Ratio

Inventory turnover (days) 47.0 43.2 43.0 42.0 40.0

Receivable turnover (days) 30.7 31.7 33.1 32.4 31.9

Payable turnover (days) 47.4 43.2 41.4 41.9 43.1

Solvency Ratio

Interest cover (x) 70.1 64.6 89.5 93.4 93.0

Debt to equity ratio (x) 0.4 0.5 0.5 0.5 0.5

Net debt to equity (x) 0.2 0.4 0.5 0.4 0.4





EQUITY RESEARCH

HEAD OF RESEARCH ANALYST ANALYSTArief Budiman Erni Marsella Siahaan, CFA Yasmin SoulisaStrategy, Automotive, Heavy Equipment, Banking Property, PlantationsConstruction, Shipping T +62 21 2557 4800 ext 919 T +62 21 2557 4800 ext 799T +62 21 2557 4800 ext 819 E [email protected] E [email protected] [email protected]

JUNIOR ECONOMIST ANALYST ANALYSTImanuel Reinaldo Niko Margaronis Fahressi FahalmestaT +62 21 2557 4800 ext 820 Telecommunication, Tower, Healthcare Cement, Toll Road, PoultryE [email protected] T +62 21 2557 4800 ext 734 T +62 21 2557 4800 ext 735

E [email protected] E [email protected]

ANALYST ANALYST TECHNICAL ANALYSTStella Amelinda Fransisca Maharani Putri Trevor GasmanConsumer Media, Retail T +62 21 2557 4800 ext 934T +62 21 2557 4800 ext 740 T +62 21 2557 4800 ext 760 E [email protected] [email protected] E [email protected]

RESEARCH ASSISTANTSumarniT +62 21 2557 4800 ext 920E [email protected]

EQUITY SALES

Co HEAD OF INSTITUTIONAL SALES Co HEAD OF INSTITUTIONAL SALESDadang Mulyana The Fei MingPlaza ASIA Office Park unit 2 Plaza ASIA Office Park unit 2Jl. Jend. Sudirman Kav. 59 Jl. Jend. Sudirman Kav. 59Jakarta - 12190 Jakarta - 12190T +62 21 2557 4800 ext 838 T +62 21 2557 4800 ext 807F +62 21 2557 4900 F +62 21 2557 4900E [email protected] E [email protected]

SURABAYABRANCH OFFICES

SURABAYAJAKARTA - MANGGA DUA JAKARTA - PURI KENCANA SURABAYAKomplek Harco Mangga Dua Perkantoran Puri Niaga III Intiland Tower SurabayaRukan Blok C No.10 Jl. Puri Kencana Blok M8 No.2E Ground Floor Suite 5 & 6Jl. Mangga Dua Raya Kembangan Jl. Panglima Sudirman 101-103Jakarta - 10730 Jakarta - 11610 Surabaya - 60271T +62 21 600 2850 T +62 21 5830 3450 T +62 31 534 3938F +62 21 612 1049 F +62 21 5830 3449 F +62 31 534 3886

SEMARANGGedung Menara Suara Merdeka6th Floor Unit 02Jl. Pandanaran No.30Semarang - 50134




Analyst Certification

Each contributor to this report hereby certifies that all the views expressed accurately reflect his or her personal views about thecompanies, securities and all pertinent variables. It is also certified that the views and recommendations contained in this report are notand will not be influenced by any part or all of his or her compensation.

Disclaimer

This report does not constitute an offer to buy or sell any security/instrument, invitation to offer or recommendation to enter into anytransaction. Nor are we acting in any other capacity as a fiduciary to you. When making and investment decision, you should determine,without reliance upon us or our affiliates, the economic risks and merits (and independently determine that you are able to assume theserisks) as well as the legal, tax and accounting characterizations and consequences of any such transaction. In this regard, by accepting thisreport, you acknowledge that (a) we are not in the business of providing (and you are not relying on us for) legal, tax or accounting advice,(b) there may be legal, tax or accounting risks associated with any transaction, (c) you should receive (and rely on) separate and qualifiedlegal, tax and accounting advice and (d) you should apprise senior management in your organization as to such legal, tax and accountingadvice (and any risks associated with any transaction and our disclaimer as to these matters.

The information contained in this report is based on material we believe to be reliable; however, we do not represent that it is accurate,current, complete, or error free. Assumptions, estimates and opinions contained in this report constitute our judgment as of the date of thedocument and are subject to change without notice. Any projections are based on a number of assumptions as to market conditions andthere can be no guarantee that any projected results will be achieved. Past performance is not a guarantee of future results. PTCIPTADANA SECURITIES AND ITS AFFILIATES SPECIFICALLY DISCLAIMS ALL LIABILITY FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL OROTHER LOSSES OR DAMAGES INCLUDING LOSS OF PROFITS INCURRED BY YOU OR ANY THIRD PARTY THAT MAY ARISE FROM ANYRELIANCE ON THIS REPORT OR FOR THE RELIABILITY, ACCURACY, COMPLETENESS OR TIMELINESS THEREOF.

Analyst Certi ficationDisclaimer: This document is not intended to be an offer, or a solicitation of an offer, to buy or sell relevant securities (i.e. securitiesmentioned herein or of the same issuer and options, warrants or rights to or interest in any such securities). The information and opinionscontained in this document have been compiled from or arrived at in good faith from sources believed to be reliable. No representation orwarranty, expressed or implied, is made by PT CIPTADANA SECURITIES or any other member of the Ciptadana Capital, including any othermember of the Ciptadana Group of Companies from whom this document may be received, as to the accuracy or completeness of theinformation contained herein. All opinions and estimates in this report constitute our judgment as of this date and there can be noassurance that future results or events will be consistent with any such opinions, forecasts or estimates. The information in this documentis subject to change without notice; its accuracy is not guaranteed; and it may be incomplete or condensed.

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