Unilever Indonesia's 3,000% Rally Dries Up as Sell Calls Mount

  • Profits forecast to grow at slowest pace in 10 years
  • Analysts say valuation too high as consumer spending weakens

Buying shares in Unilever’s Indonesia unit used to be an almost guaranteed way to profit from consumer spending growth in Southeast Asia’s most populous nation.

The stock rose every year bar one since the start of 2000, returning an annual average of 27 percent, four times the gain by global peers. A stabilizing political climate, surging commodity prices and economic growth of more than 5 percent a year fueled rising wealth among the country’s 250 million people and a 10-fold increase in profit for the company selling staples from ice cream to detergent.

Then the commodities boom collapsed and rampant inflation squeezed spending power, turning investors and analysts more bearish on PT Unilever Indonesia’s earnings prospects. With the country’s private consumption now growing at the slowest pace in four years and the company’s profits projected to register their smallest increase since 2005, BNP Paribas SA and PT Maybank Kim Eng Securities say the stock has further to fall after tumbling 19 percent from its May peak.

“The valuation is too high, considering the growth potential the company is offering,” said Janni Asman, an analyst at Maybank Kim Eng, who rates the stock a sell and predicts shares will decline an additional 14 percent over the next 12 months.

Unilever Indonesia trades at 48 times estimated earnings, the second-most expensive among the world’s 70 largest consumer-staples companies, which are valued at an average multiple of 24. The stock is also the lowest-rated by analysts among its global peers, with a recommendation consensus of 2.2 on a Bloomberg scale, where 1 is a unanimous sell and 5 means a universal buy call.

Indonesia’s growth story is being buffeted on all sides. The economy is projected to expand this year at its slowest pace since 2009, the currency is trading near a 17-year low, while slumping agriculture and metal prices are hurting earnings from plantations and mines in the resource-rich nation. At the same time, inflation has averaged 7 percent this year, crimping consumer spending power.

The company says while conditions are among the most challenging in its roughly 82 years in Indonesia, it won’t pull back on investment.

“Right now is one of the toughest periods that we’ve faced in our history,” said Sancoyo Antarikso, director and corporate secretary at Unilever Indonesia. “But we remain confident on the economic and business outlook of Indonesia in the medium and long term. We will continue to invest in Indonesia and we will be here for a long time to come.”

Buy Call

Harry Su, head of research at PT Bahana Securities, is sticking to the buy call he’s had on the stock since December 2013. He predicts the stock will climb 23 percent to 46,000 rupiah over the next 12 months.

“Among the things that I like is its very high return on equity of more than 100 percent, reflecting its excellent management,” Su said. “Funds who did not listen to me will have underperformed this year by not having Unilever in their portfolios.”

Unilever rose 1.5 percent on Friday. The stock has gained 15 percent this year, compared with a 13 percent drop in the benchmark Jakarta Composite Index.

Too Pricey

Few other analysts share Su’s optimism. He is one of only two tracked by Bloomberg to have a buy recommendation on the stock. Another 12 advise selling, while nine have a neutral rating.

Michael Greenall, an analyst at BNP Paribas, is the most bearish. He forecasts the shares will tumble 38 percent over the next 12 months. While the company is among the best-run in Indonesia, he says, shares are still too pricey given the slowdown in earnings. Unilever’s net income is projected to grow 3.1 percent in 2015 from a year earlier, according to analyst estimates compiled by Bloomberg, compared with an average 18 percent annual growth over the previous 15 years.

“It’s all about the valuation call,” Greenall said. “The stock is trading at three times the valuation of the market, or even higher. We believe that at the end of the day when there is a compression in valuation or a slowdown in consumer spending, they will have to suffer slower growth.”

(Updates with closing price.)

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