Indofood Sukses Makmur is known as the world's largest instant noodles producer. These noodles are produced through its subsidiary Indofood CBP Sukses Makmur. Procurement of wheat flour - required to make noodles - accounts for the biggest portion of the company's production costs. Therefore, the 2-3 percent decline of wheat prices in Q1-2016 has a positive impact on the company's corporate earnings. Moreover, the stable rupiah (which has been appreciating against the US dollar so far in 2016) implies that Indofood will not be affected by foreign exchange losses. Besides lower wheat prices, the lower price of milk skim powder also causes lower production costs.

Instant noodles are the great selling items of Indofood. With its Indomie brand the company is the clear market leader. Indomie has become a household favorite across the archipelago and is among the top five brands that are purchased most often by Indonesian households. It is interesting to mention that sales of instant noodles in Indonesia continued to rise despite the economic slowdown and weakening purchasing power. With its strong Indomie brand, loyal customers, dominant market position, and aggressive advertising campaigning Indofood will remain the clear market leader in Indonesia's instant noodles sector. Therefore, the company is also in a position to determine prices of instant noodles; a small price hike will not result in a decline in market share but does improve earnings.

Market Share Composition Indonesia's Instant Noodles Market (%):

Company   2011   2012   2013   2014
Indofood Sukses Makmur    71.8    71.8    71.8    72.0
Wings Group    14.6    14.6    14.8    14.9
Conscience Food Holding     2.7     2.7     2.7     2.6
ABC President Indonesia     1.9     1.9     1.8     1.8
Jakarama Tama     2.4     3.0     2.9     2.9
Medco Group     1.2     1.2     1.2     1.1
Nissin Foods Holdings Co Ltd     1.1     1.1     1.0     1.0
Delifood Sentosa Corp     0.7     0.6     0.6     0.6

Source: JP Morgan

What Explains the Popularity of Instant Noodles in Indonesia (esp. Indomie & Mie Sedaap)?
available across the Indonesian archipelago
affordable (also by the poorer segments of the population)
wide range of flavors (often new flavors come on the market: innovation)
it is a practical meal (quick and easy to make)
aggressive advertising campaigning in various media (especially television)

Regarding Indofood's agribusiness business segment, the rising trend of crude palm oil (CPO) prices is expected to impact positively on the company's earnings. CPO prices have been rising this year due to curtailed CPO production (caused by El Nino-inflicted dry weather and rising demand from Indonesia's biodiesel sector).

Indofood also has plans to enhance its distribution and logistics network across the Indonesian archipelago by increasing the number of outlets and storages, particularly in the rural areas.

All in all, the aforementioned information is reason for RHB OSK Securities to advise investors to buy shares of Indofood Sukses Makmur (INDF). RHB OSK Securities set its target price at IDR 8,600 per share. Today (13/04), shares of Indofood rose 0.70 percent to IDR 7,175 per piece. So far this year, the company's shares have surged 38.65 percent.

Future Projection Financial Highlights of Indofood Sukses Makmur:

      2014     2015    2016F    2017F    2018F
Net Sales  63,594.5  64,061.9  73,031.0  80,087.0  87,636.0
Net Income   3,941.8   2,968.0   3,934.0   4,441.0   5,110.0
P/E Ratio (x)       17     23.9     17.5     15.4     13.2
P/BV (x)
    2.55     2.36     2.12     1.92     1.73

in billion IDR rupiah, except stated otherwise
Source: RHB OSK Securities (13/04/2016)