Unilever Indonesia: Navigating Market Challenges and Strategic Shifts

Date of Report: December 2, 2024

Broker Name: PT Maybank Sekuritas Indonesia

Introduction

The latest analysis by PT Maybank Sekuritas Indonesia delves into the strategic shifts and market dynamics impacting Unilever Indonesia (UNVR IJ), a key player in the consumer discretionary sector in Indonesia. The report provides a comprehensive examination of UNVR’s market strategies, recent divestments, and competitive landscape, offering valuable insights into the company’s future trajectory.

Unilever Indonesia: Strategic Divestment and Market Realignment

Unilever Indonesia has undertaken a significant strategic shift by exiting its ice cream business. This move is perceived as a necessary realignment to combat increasing competition and sluggish growth within the USD10 billion ice cream market in Indonesia. The divestment enables Unilever to refocus on its core competencies and address competitive challenges in 17 other market segments.

Ice Cream Business Exit: A Strategic Necessity

The decision to sell off the ice cream division is strategic, allowing Unilever to better compete in other sectors where its presence is stronger. Without the parent company, ULVR’s commitment, new entrants have seized market leadership, offering value-for-money products and incentives to distributors. This strategic exit is poised to unlock shareholder value, with the parent company’s IDR7.0 trillion buyout considered an attractive proposition.

Financial Implications and Earnings Forecast

The financial implications of this divestment are profound. Unilever’s FY24-26 earnings projections have been adjusted downwards, with anticipated reductions in sales and EBIT margins. The company is expected to experience a drop in sales and net profit by 8% and 7%, respectively, pending shareholder approval. This scenario is analyzed in detail through a scenario analysis approach.

Market Dynamics and Competitive Landscape

Unilever’s ice cream market exit highlights the competitive dynamics within Indonesia’s consumer goods sector. The ice cream market, characterized by low penetration and high competition, has seen Unilever’s market share erode due to aggressive strategies by new entrants like Aice and Joyday, which have captured significant market share through competitive pricing and strategic distributor partnerships.

Challenges in Consumer Branded Products

Despite being a subsidiary of a global powerhouse, Unilever faces intense competition in the Indonesian market from other major players like P&G and Henkel. The company’s dominant position in personal care and food segments, traditionally strongholds, is being challenged. This necessitates a strategic focus on sustainable growth and innovation to maintain its market leadership.

Financial Performance and Forecast

The report outlines a cautious outlook for Unilever’s financial performance, expecting low revenue growth and margin pressures. The company is projected to maintain a stable dividend payout ratio, contributing to its appeal as a yield-play rather than a growth-play in the consumer sector. However, pressures from geopolitical tensions and internal supply-chain issues pose additional challenges.

ESG Initiatives and Corporate Governance

Unilever’s commitment to ESG principles is robust, with significant efforts in reducing its carbon footprint and promoting sustainable practices. The company’s adherence to the ASEAN Corporate Governance Scorecard and its proactive stance on eco-friendly product development underscore its dedication to responsible business practices.

Conclusion

Unilever Indonesia’s strategic decisions, particularly its ice cream business exit, are pivotal in navigating the challenging consumer goods landscape in Indonesia. While the company faces significant competitive pressures, its focus on core business segments and commitment to shareholder value through strategic divestments position it for potential recovery and sustained performance.

The report concludes with a SELL recommendation for Unilever, highlighting the necessity for new growth engines to ensure sustainable earnings in the future, while suggesting a preference for Mayora Indah (MYOR IJ) due to its stronger earnings growth trajectory.