Broker: UOB Kay Hian
Date: 30 October 2024
Indonesia Market Overview
Indonesia’s market offers a unique opportunity for investors, especially within the consumer staples and packaging industries. This report dives into Nippon Indosari Corpindo, the largest bread manufacturer in Indonesia, alongside SCG Packaging’s Fajar unit, shedding light on the strategic initiatives shaping each business’s growth trajectory in the face of current challenges.
Nippon Indosari Corpindo: Growth Amidst Rising Competition
Nippon Indosari Corpindo (ROTI), a household name in Indonesia’s mass bread production, has maintained its market presence with the well-established “Sari Roti” brand. Despite facing competitive pressures, ROTI has shown resilience, navigating the market with careful brand positioning and strategic adjustments.
Financial Performance
- 3Q24 Net Profit: ROTI posted a net profit of Rp104 billion in the third quarter, marking a 6.3% year-over-year decrease but a significant 47% increase quarter-over-quarter, driven by seasonally stronger demand. The year-over-year decline is primarily attributed to elevated selling, general, and administrative (SGA) expenses.
- 9M24 Cumulative Performance: For the first nine months of 2024, ROTI recorded a net profit of Rp249 billion, an 8.2% increase year-over-year, aligning closely with expectations. ROTI’s consistent growth trajectory reflects strong operational efficiency and market adaptability.
Strategic Moves
- Shelf Presence Amid Discounts: ROTI reported an increase in its return rate to 17.4% in 3Q24, up from 14.9% in 2Q24, as it prioritized shelf space even amid competitor discounting tactics. While this strategy helps retain visibility, it has slightly impacted profitability. Analysts project that the return rate will remain elevated through the remainder of 2024.
- Market Positioning: ROTI’s commitment to defending its shelf presence underscores its strategic foresight in an environment where competitor promotions are frequent. The long-term outlook suggests that ROTI will continue to balance market share retention with cost management.
SCG Packaging’s Fajar Unit: Targeting Profit Recovery Through Strategic Restructuring
SCG Packaging (SCGP), particularly through its Fajar unit, faces significant challenges within Indonesia’s packaging sector. Fajar, a key packaging player, has been impacted by weak demand from China and intensifying competition in the local market.
3Q24 Financial Snapshot
- Earnings Decline: SCGP reported a 60% quarter-over-quarter and 56% year-over-year decrease in net profit, primarily due to rising recycled paper (RCP) costs and currency fluctuations affecting imported raw materials.
- Underperformance of Fajar: A larger-than-anticipated loss from Fajar exacerbated SCGP’s 3Q24 earnings downturn, with the EBITDA margin also falling below expectations. This underperformance is largely attributed to the intense price competition and limited demand from key import markets, notably China.
Strategic Response
To mitigate losses, SCGP has initiated a multi-faceted strategy to restore Fajar’s profitability:
- Cost Optimization: Efforts include reducing production costs by optimizing raw material and fuel expenses, aimed at enhancing overall cost-efficiency.
- Market Diversification: SCGP is exploring new export markets, such as Vietnam, the Middle East, and the United States, regions where demand for packaging products remains robust. By reducing its reliance on Chinese demand, which is currently subdued, SCGP aims to create a more stable revenue stream for Fajar.
- Financial Restructuring: With an interest cost of 6%, SCGP is evaluating new, lower-interest loans to reduce financing expenses and bolster profitability. The company’s target is to achieve EBITDA breakeven for Fajar by 2Q25, with a full return to profitability projected by 4Q25.
Indonesia’s consumer and packaging industries illustrate the resilience of leading companies like Nippon Indosari Corpindo and SCG Packaging. Both firms are adapting to competitive pressures and exploring growth avenues, reinforcing Indonesia’s reputation as a vital player in Southeast Asia’s market landscape.
