The main reason for the weak stock performance of Nippon Indosari Corpindo is bleak corporate earnings. In the first half of 2017 the company's sales declined 1 percent year-on-year (y/y) to IDR 1.2 billion, while its net profit tumbled 64 percent (y/y) to IDR 46 billion. The decline in net profit is caused by the decline in sales, while there was also an increase in operational expenses because of higher employee salaries. In addition, there was a burden from the increase in the number of new products that are to be launched this year coupled with the expansion of its distribution networks.

Weaker sales still continue. In August 2017 Nippon Indosari Corpindo's sales were down 4.3 percent (y/y) compared to the same month one year earlier. The management of the company did not dismiss the idea that increasing competition in Indonesia's bread product sector has also impacted on its corporate earnings. In order to keep consumers attracted, Nippon Indosari Corpindo will add more production lines and launch new bread variants this year.

However, after Nippon Indosari Corpindo announced in early July 2017 that its shareholders had approved the plan to conduct a rights issue in a bid to generate new funds to expand its business in Indonesia and the Philippines the company's shares started to recover.

The bread-maker will issue 1.15 billion shares in the rights issue to raise funds for the construction of new factories in Java, outside Java (Sumatra and Kalimantan) as well as abroad (the Philippines). These factories will produce white bread and sweet bread. If everything goes according to schedule, then four or five new factories will be opened within the next five years. Through this (partly international) business expansion program Nippon Indosari Corpindo aims to become one of the biggest bread producers in the Southeast Asian region.

UOB Kay Hian Sekuritas is optimistic about the prospects of Nippon Indosari Corpindo and believes the company's corporate earnings will rise in the fourth quarter of 2017 as well as in the first quarter of 2018. Therefore, it also advises investors to buy stocks of the bread-maker (this is a revision because earlier it advised investors to "hold") and raised its year-end target for Nippon Indosari Corpindo's shares at IDR 1,400 a piece.

Stock Quote Nippon Indosari Corpindo - ROTI: