International Conference The 14th ICMSS Investment Analysis Kerria & Brothers Universitas Indonesia
PT Malindo Feedmill Tbk.
Malindo Feedmill: The Rising Star Market Profile
52-Week Price Range
We initiate coverage of PT Malindo M alindo Feedmill Tbk. (MAIN) with a BUY
IDR 2,045 - IDR 3,715
Average Daily Volume
5,576,121
Beta
0.99
Dividend Yield (Estimated)
0.94
Shares Outstanding
1,791,000,000
Market Capitaization
3,850,650,000,000
Institutional Holdings
59.10%
Public Holdings
Debt to Total Capital Return to Assets Return to Equity
Stock Price Movement MAIN.JK
Chicken is by far the most common and popular meat products for Indonesian consumers. However, chicken product consumption in Indonesia (8 kg/capita per year) remains low in comparison to other 698.19 South East Asian countries (16 kg – 47 47 kg/capita per year). The market 63.46% still has a lot room to grow and the consumption will potentially increase 8.87% by 11.63% CAGR for the next 5 years. MAIN has consistently increased 19.01% its production capacity to grasp this opportunity and this performance will be expected to continue in the future with considerable capital expenditures.
JKSE
Favorable Market Landscape Renders Sustainable Margin
4500 4000 3500 3000 2500 2000 1500 1000 500
5500 5000 4500 4000 3500 3000 1 1 0 2 / 3 / 6
Strong Opportunity in Domestic Poultry Business
40.90%
Book Value per Share
1 1 0 2 / 3 / 1
recommendation by putting target price of IDR 2,590 reflecting potential upside of 19.06% from current price of IDR 2,150. MAIN is able to capitalize its main operation through strong cash flow and good business performance. MAIN will be able strengthen its position in poultry industry in the future by capturing more market share and profit.
1 1 0 2 / 3 / 1 1
2 1 0 2 / 3 / 4
2 1 0 2 / 3 / 9
3 1 0 2 / 3 / 2
3 1 0 2 / 3 / 7
3 1 0 2 / 3 / 2 1
4 1 0 2 / 3 / 5
4 1 0 2 / 3 / 0 1
Feedmill as the main business line is exposed to raw materials price volatility as its main cost components, soybean meal and corn, are commodities-related. However, final consumers are unlikely pricesensitive in that costs can be passed on farmers and end products. In addition, the market is oligopolistic in nature that is concentrated towards some big players, which enables swift price adjustment. Meanwhile DOC segment remains a challenging landscape with selling price fluctuation. But this segment acts as barrier to entry that ensures security for incumbents to grasp further market share. New Processed Food Segment: Potential Growth Driver MAIN launched its customers processed food products in 2013 with “SunnyGold” and “Ciki Wiki” brands. MAIN is predicted to spur competition in downstream business by targeting 2.2% market share within five years, and this segment will contribute 3 – 5% 5% of total revenue
Investment Summary We issue BUY recommendation on PT Malindo Feedmill Tbk. (MAIN) with target price of IDR 2,590. The valuation method used is Discounted Free Cash Flow to Firm (FCFF) model, offering 19.06% upside from its closing price of IDR 2,150 in December 28 2014. MAIN has demonstrated solid business performance and is expected to continue strengthening its presence in poultry industry. Steady Cash Flow Coming from Core Business Segments All MAIN business segments have resulted in increasing sales over the years this is predicted to continue in line with huge opportunities in market. Revenue is forecasted to increase by 14.1% CAGR 2014F2018F. With favorable margin will come along the way, EBITDA margin is expected to be sustainable 15.9%. Strong Balance Sheet Fundamentals MAIN has a good cash position as shown by its high dan continously rising liquidity. The company also has improved its leverage by decreasing its debt ratio. With ample cash coming from operating cash flow and equity issuance, MAIN can proceed with its expansion plan through capital expenditures and investments in increasing its capacity.
Valuation Method We use Discounted Free Cash Flow to Firm (FCFF) model for our valuation to arrive in our target price. Identifiable Investment Risks
We have identified several risks related to core business operations of MAIN and come up with three main risks: volatility of exchange rates, DOC selling price, and volatility of raw materials prices that may impact on our target price valuation.
Business Overview Figure 1: Sales and EBITDA Margin s n o i 4,000 l l i M
5,000
25.0%
3,000
15.0%
2,000
10.0%
1,000
5.0%
20.0%
-
0.0% 2009 2010 2011 2012 2013 Sales
EBITDA Margin
Source: Company Data
Figure 2: Breakdown of 2013 Sales Segments
10.7% 0.2%
20.4% 68.7%
Feedmill
DOC
Broiler
Processed Foods
Source: Company Data
Figure 3: Area of Operations
Source: Company Data
PT. Malindo Feedmill Tbk. (MAIN.JK) is a rising star within Indonesian poultry sector, established in 1997. The company went public in 2006 to be listed in the national stock exchange. Currently, 59.1% shares are held by Dragon Amity, a Malaysian firm; while the rest of shares are held by public. Initially, MAIN’s lines of business comprise of feedmill division, breeder division, and broiler division. But since 2013, the company added another line of business: processed food division through its subsidiary, PT. Malindo Food Delight. The company has operations through plants and firms across Indonesia as indicated in Figure 3. Business segments – the company’s main business segments are segregated into following divisions:
– F eedmill division: the main driver of revenue is from this segment, accounting for 68.7% of total revenue. Feedmill division has a total production capacity amounting 900.000 tpa. MAIN provides variety of feeds for broilers, layers, commercial meat ducklings, and other livestock. – Br eeder divi si on: the product of this division is day-old chicks (DOC). The production capacity for this product is 200 millions chickens per annum, making up 20.4% of total revenue in 2013. – Br oiler division: as an integrated company, MAIN also raises and produces broilers with capacity of 28millionskg per anum, contributing 10.7% of total revenue. – F oods pr ocessi ng divi si on: MAIN introduced the division as supporting unit for its downstream business, under the brands “SunnyGold” and “Ciki Wiki”. Its current production capacity is only 9,000 tpa with contribution for total revenue of 0.2%.
MAIN is currently tailing behind two big players in the industry: Charoen Pokphand (CP) and Japfa. In feedmill segment, MAIN holds 8% market share while CP and Jpafa hold 32% and 24%, respectively. In DOC segment, MAIN’s market share is 9%, behind Charoen (30%), and Japfa (9%). Company strategy – MAIN strives to excel in growing poultry market through expansions in every of its product segment. It keeps expanding its marketing coverage over animal feeds, and broadens market penetration by vigorous establishment of new feedmill, new breading farms, and food processing factories.
Industry Analysis ECONOMIC FUNDAMENTALS UPHOLDING GROWTH Figure 4: Indonesian GDP per Capita and GDP Growth 4000
7
3500
6
3000
5
2500
4
2000
3
1500 1000
2
500
1
0
0 2007 2008 2009 2010 2011 2012 2013 GDP Per Capita
GDP Growth
Source: World Bank
0 20 Demographic 40 60 80 Figure 5: Indoensian Transition
Resilient macroeconomic outlook – Indonesian economy remains subdued this year following slowdown in 2013. Depreciation of rupiah, increase in fuel price in mid-2013 and mid-2014 have triggered hike in interest rate (7.75%) that has deterred economic growth. Economic growth is forecasted to be 5.3% in 2014. Although inflation is likely to be 7%, private consumption remains robust as the main driver of economic growth. Strong domestic consumption will support demand for foods as daily necessities, in which chicken is very common and popular among most Indonesians. Stabilizing exchange rate – rupiah depreciated by 30% since January 2013. Nevertheless, it has stabilized and is currently entering a new equilibrium at around Rp 12,500/USD. This is a favorable outlook for MAIN and poultry industry in general as raw materials are mainly imported therefore change in exchange rate will affect margin. Rising disposable income and middle-class – in the past five years, GDP per capita of Indonesia has seen a 53% increase, currently at USD 3,475. The emerging economy is also indicated by growing middle-class society, in which currently there are 74 millions out of 250 millions population. The number of middle-class is predicted to increase by 8 – 9 millions per year, making up roughly 141 millions in 2020. This is in line with the surge of demand for food chicken in two ways: the number of consumption of chicken per capita and consumption penetration as now there are more affluent customers pouring the market.
Elite Affluent Upper middle Middle Emerging middle Aspirant Poor
2012
2020
Source: Boston Consulting Group, Team Estimate
Figure 6: Indonesian Chicken Consumption
Source: Poultry Breeding Firms Association (GPPU)
HUGE POTENTIAL DEMAND FOR POULTRY SECTOR Strong domestic chicken consumption – chicken is by far the most preferred meat product as majority of Indonesian consumers are Muslim that are barred in consuming pork, and beef remains a very expensive alternative. However, chicken product consumption in Indonesia remains low compared to other South East Asian countries. In 2013, chicken consumption was around 8kg/year, far below four neighboring countries: Brunei, Singapore, Malaysia and Thailand. The consumption rate of these nations are at 47kg, 38kg, 38kg and 16kg per year respectively. However, according to Poultry Breeding Firms Association ( GPPU ), this level of consumption will increase by 11.63% CAGR for the next 5 years. Resulting from the increasing number of consumer spending and demand for more nutritious food. This condition implies that Indonesian poultry sector has tremendous space for players to rake in profit.
Figure 7: Chicken Consumption Countries Comparison
45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 -
39.0
17.8 12.8 12.0 10.5
7.0 2.0
Potential expansion across Indonesian wide regions – poultry market is concentrated in Java 56% - 67% of poultry farms are located in Java island. This offers a wider cross-regional expansion as chicken is also strongly consumed in other regions outside Java, with the most potential lies within Northern part of Sumatera and Kalimantan. MAIN has sufficient capability supported by its vast distribution networks. Infrastructure support remains a main constraint for logistics but the new Indonesian government seems to improve the landscape. MODERATING MARGIN IN BUSINESS SEGMENTS
2012
2013
Source: World Bank, USDA
Figure 8: Regional Distribution of Chicken Farms
Source: Statistics Indonesia, Ministry of Agriculture
Figure 9: Corn and Soybean Meal Prices
Source: Bloomberg
Long-term stable margin in feedmill – the main components of cost for feedmill (70% contributor of total revenue) are soybean meal and corns, whose prices fluctuate in commodities market. Surging commodities prices have affected margin in 2013 and 2014. However, we expect the margin will be lenient in the future based on three things: 1) final consumers have robust demands that are willing to accept higher prices, as well as farmers who accept higher feed price; 2) the market is concentrated into three players controlling 50% market share (Charoen Phokphand, Japfa, Malindo Feedmill), enabling them to adjust selling prices accordingly; 3) big players also have ample inventories thus high inventory period allows more time to adjust selling prices. Challenging DOC landscape – margin in this segment used to be very lucrative (more than 20% in 2010) but it had leveled out due to oversupply. Selling price can swing from IDR 2.000/DOC to above IDR 6.000/DOC, making this a challenging market. In Q3 2014, ASP for DOC is IDR 2.980/DOC while company needs IDR 4.000/DOC to breakeven, which is caused by oversupply in market after Eid-ul Fitr. We do not expect margin to be sustainable in the future but this segment is tactical consequence embraced by big players as barriers to entry for new entrants. DOC is usually used as bundles to penetrate in new market areas in further enlarging market shares. Special gift from Japan in 2014 year-end - Indonesia was banned to export its poultry product to Japan due to Avian Influenza outbreak in 2014. This penalty has caused millions of dollars in loss to the national export income for the last decade. However, with the exposure of Chinese processing scandal, which was also one of their importing sources, caused the Japanese government to seek new alternative sources. In August 2014, the Japanese and Indonesian government were in talk of resuming chicken processed food trade agreement.
In the late of December 2014, Japan’s Ministry of Agriculture, Forestry, and Fishery has officially opened its chicken processed food market to Indonesia three big players: CP, Japfa, and MAIN. According to
Figure 10: DOC Selling Prices
Indonesia Poultry Breeders Association (GAPPI), this export agreement could potentially grab US$2 billion per year or equal to 10% of Japanese poultry market.
Competitive Positioning
Source: Association of Poultry Society ( PINSAR)
Figure 11: Porter's Five Forces
Source: Team Estimate
MAIN’s position in the market is driven by its business segments. In this competitive analysis, we initially provide landscape analysis using Porter’s Five Forces, than we identify MAIN ’s competitiveness in the following sections: strength in feedmill segment, capacity expansion in DOC and broiler segments, and launch of processed foods segment. Porter’s Five Forces analysis – in this paper, we use Porter’s Five Forces model to distingusih five external forces driving competitive position of MAIN in poultry market and measure magnitude of each factors.
– Bar gaini ng power of suppli er :Raw materials such as corns and soybeans are mainly importedfrom feoreign supplier.MAIN is dealing with high bargaining power of foreign suppliers in terms of foreign exchange and commodity price volatility, and in terms of amount of supply. – Bargaining power of customers : The bargaining power of MAIN is considered as medium-to-high due to the nature of poultry industry. Most of revenues are generated from related parties that already have business partnership with MAIN (business-to-business). However, there is always risk that business customers move to other competitors. – Thr eats of new entr ants : By nature, poultry is high-capitalized industry with considerable barriers to entry. The declining numbers of company from 1464 players in 2004 to 176 players in 2013. We consider the threats of new entrants is medium-tolow. – Th r eats of substi tut es :there is currently no direct substitute for poultry feeds. While chicken is main consumption where other meat alternative such as beef remains highly expensive. Therefore, the threat of substitute is low. – Rivalr y among exi sti ng competit ors : As industry getting more concetrated, each player tries to maximize their market share that creates stiff competition among big players in poultry industry. Concentration ratio reaches approximately 70% as quite tough rivalry exists among existing competitors. Thus, we put high in this type of forces.
Figure 12: Peers Competitive Comparison
Source: Team Estimate
Figure 13: Production Capacity
Source: Company Data
Competitive position in feedmill market – we can identify several factors affecting competition among players in feedmill segment: – DOC bundli ng: bundling strategy is used to attract farmers to buy feed as chicken growth is assured by quality DOC and profit for farmers is maximized by dealing with only one supplier for both feed and DOC. – Post-sal es servi ce: guidance of best practice in farming will enhance customer loyalty. vast distribution networks not only reach – Di str ibuti on networks: larger nationwide markets but strategic location near will also create cost advantage. – Br and equity: brand is indicator of feed quality and consistent yield result. These competitive factors are difficult to fulfill and possessed by big players in market. It also creates barriers to entry for new competitors. Strong commitment for capacity expansion – historically, MAIN has consistently increased its production capacity in order to capture growing market demand. The most recent additions of capacity was in 20: one feedmill with 450.000 tpa capacity, two DOC farms with 15 millions chicken per annum capacity, and one GPS (grand parent stock) with 720.000 PS (parent stock) capacity. Currently MAIN has 80-90% utilization rate in each segment production plants. The expansion continues with establishment of feedmill in Central Java and Makasar with 600.000 tpa total capacity addition, breeder farms with 30 millions DOC, broiler farm with 6.000.000 kg, and food processing plant with 15.000 tpa capacity addition. MAIN has competitive edge to keep making investments for capital expenditure (capex), even it has recently made rights issuance to further flow its funding. Introduction of downstream business: food processing – MAIN launched its customers processed food products in 2013 with “SunnyGold” and “Ciki Wiki” brands. The segment merely contributes 0.2% of company total revenues in 2013 and is expected to contribute 1.1% in 2014F. Its market share in this new segment is barely 1%, but it is already a rapid gain as processed food market is crowded by small players with each having below 1% market share. MAIN is predicted to stand its presence in this market by grasping 2.2% market share within five years, and this segment will contribute 3 – 5% of total revenue.
Financial Analysis
Figure 14: Du Pont Identity
2014: the turning point - MAIN experiences declining in return on earning (ROE) as equity multiplier began to slump 2012. As company try to correct its leverage due to high amount of debt compared to equity, ROE began to stabilize after 2014. Going forward, ROE will normalize near to industry ROE of 16.3% as earning power begin to surge.
Source: Company Data and Team Estimate
Figure 15: Revenue Segment Growth
Strong growth despite low caps – In 2014, MAIN experience lowest profit margin due to deteriorated margin caused by soaring raw material prices by 28% in 2013 and 25% in 2014. Notwithstanding the past experience, MAIN has recorded strong growth from 2009 to 2013 by 17.54% CAGR. We are optimistic that revenue will continue to growth at pace of 11.76% CAGR from 2014 to 2018. This growth are propelled mainly by feedmill segment in which we believe it will reach Rp 5 trillion sales in 2018 with aprroximately 70% by total revenue. Better maintenance of leverage – From 2008, MAIN has been improving its leverage by lowering its debt-to-equity ratio from 3.73 in 2009 to 1.13. Going forward, we are optimistic that MAIN will continue until the number reach 0.42, near to industry median debt-to-equity ratio of 0.21. While maintaining leverage, MAIN has been and will be also improving its interest coverage. As per data in Appendix, its ability to meet interest payment increased from 2.71 in 2009 to 5.58 in 2013.
Source: Company Data and Team Estimate
Figure 16: Profit Margin Peer-To-Peer
Cash position in the aftermath of 2014 – In spite of the fluctuation of cash flow before, in the turning point of 2014, MAIN is able to generate huge amount of cash flow due to its massive change in equity and inventory. In the aftermath, we are sure that MAIN can improve its cash position by pushing its operating cash flow to increase its capability of meeting its short term liabilities, expansion project, and dividend payment.
Valuation Discounted Cash Flow Valuation
Source: Company Data
We used Discounted Free Cash Flow to Firm (FCFF) method to determine MAIN fair price. We believe this method reflects the fundamental value of the company and captures its long-term perspective growth within the industry. This method involves estimating the firm’s value and adjusting it for the net debt and excess cash to arrive at equity value.
Figure 17: Revenue Breakdown Peer-To-Peer
Source: Company Data Figure 17: MAIN’s forecasted NOPLAT
In applying this valuation, we forecasted MAIN NOPLAT will increase by 35% CAGR 2014F-2018F, slightly higher compared to historical growth 27% CAGR 2008-2013. This is mainly affected by the increased demand of poultry products and company’s diversification strategies. However, MAIN needs an average of 470 million Rupiah to conduct further expansion and also an average of 58 million Rupiah to maintain its operation. Cost of Capital The Cost of Capital for MAIN were generated from several assumptions. We used CAPM to estimate cost of equity which are derived by: 1) 7.91% risk-free rate (using 10-year SUN); 2) Beta is 0.99 which was calculated from covariance between daily return MAIN and IDX; 3) 8.3% market risk premium was obtained from Damodaran. For the cost of debt, we applied the average interest rate from MAIN long-term financial debt. Terminal Growth Rate Considering the historical and future performance of MAIN and Indonesia economic growth, we believe the terminal growth for MAIN valuation will be at least 7%. This is supported by the current condition of chicken consumption which is still underdeveloped, hence, giving more opportunities for MAIN to penetrate the market.
600,000,000 500,000,000 400,000,000 300,000,000 200,000,000 100,000,000 -
Investment Risks Source: Team Estimate
Figure 17: Cost of Capital Components
Cost of Capital Risk Free Rate Risk premium Beta Marginal tax rate Cost of Equity Cost of Debt WACC Source: Team Estimate
7.91% 8.30% 0.999 25% 16.20% 11.50% 12.08%
STRATEGIC RISK
Unsuccessful new food processing business(SR1) – MAIN is trying to diversify its business segment into downstream market. If these products do not meet customers’ needs or tastes, company’s sales may be lower than forecasted. To mitigate this risk the subsidiary that runs this segment, Malindo Food Delight, is supported by a team of experienced personnel who focus on product development. In addition, company may need to review its pricing for the segment should its pricing structure does not offer competitive edge in the market.
FINANCIAL RISK Volatility of exchange rates (FR1) – MAIN is considerably exposed to exchange rate fluctuation: in 2013 the company made Rp109 billions net loss due change in foreign exchange, which plunged net income to Rp 376 billions (16% decrease from Rp 447 billions in 2012). In addition, the company also has net liabilities denominated in foreign currency, totaling 39.8% of total liabilities, increasing from 15.3% in 2012.
Figure 18: Risk Mapping
Yet the company is managing this risk in conservative manner, by closely monitoring fluctuations in foreign currency so as to take the most beneficial step at right time. Change in interest rates (FR2) – this risk is related into fluctuation of future cash flows due to change in market interest rates, mainly on company’s liabilities. The way company mitigates this risk is by only obtaining sufficient funds for business expansion and working capital needs by regularly assessing and monitoring cash balances with reference to its business plans and daily operations.
Figure 19: Risk Mitigation Factors
OPERATION RISK .Lower than expected plant utilization rate (OR1) – MAIN’s plants are currently operating with 90% utilization rate in average and this will even increase in the future. Increase in sales due to capacity expansion by establishing new plants and farms is based on normal utilization rate. Our calculation shows that even with capacity expansion the company is forecasted to operate with 94% utilization rate. However, should this utilization rate decline, there will be lower sales estimated and change in our valuation. MARKET RISK DOC selling price (MR1) – due to the necessity for selling the product within one day, DOC selling price is very volatile. Selling price can swing from IDR 2.000/DOC to above IDR 6.000/DOC. In Q3 2014, ASP for DOC is IDR 2.980/DOC while company needs IDR 4.000/DOC to breakeven. This is caused by oversupply in market after Eid-ul Fitr. GDP growth (MR2) – demand for MAIN’s products is also affected by GDP growth as chicken consumption is in line with household final consumer expenditure that relies on GDP growth. The way to mitigate this risk is by flexible term of production in responding to swing in market demands. Volatility of raw materials prices (MR3) – two major components of raw materials are soybean meal and corns, which have constantly experienced prices volatility. The prices mainly increase in 2013 that made operational costs soared along with rupiah depreciation. However, after hitting its highest point (USD 585.75/metric ton) in May 2014, soybean meal price has declined to level at USD 423.25/metric ton in November 2014. Corn price also has declined from USD 309.49/metric ton in\ March 2013 into USD 178.67/metric ton in November 2014. In order to mitigate such risk, company has implemented effective raw materials procurement.
Appendix 1: Income Statement
Feedmill DOC Broiler Food Processing Total Revenue Cost of Revenue, Total Gross Profit Selling/General/Admin. Expenses, Total Depreciation/Amortization Other Operating Expenses, Total Total Operating Expense Operating Income Interest Expense, Net NonOperating Interest/Invest Income - NonOperating Interest Inc.(Exp.),Net-NonOp., Total Net Income Before Taxes Provision for Income Taxes Net Income After Taxes Minority Interest Net Income Before Extra. Items Net Income
2012 2,220.59
2013 2,880.40
2014F 3,237.60
2015F 3,718.20
2016F 4,211.80
2017F 4,867.76
2018F 5,612.25
657.58 471.39 3,349.57 2,711.12 638.44 175.96
855.88 447.83 8.97 4,193.08 3,475.17 717.91 226.35
784.97 502.63 135.89 4,661.09 4,194.98 466.11 251.62
901.50 577.24 163.07 5,360.01 4,509.72 850.28 289.35
1,021.17 653.87 195.69 6,082.52 5,117.62 964.90 328.35
1,180.21 755.71 234.82 7,038.50 5,921.95 1,116.55 379.96
1,360.72 871.29 281.79 8,126.05 6,836.97 1,289.08 438.66
6.94 7.80
8.66 106.41
12.33 34.28
17.13 39.43
23.13 44.74
29.23 51.77
34.74 59.77
2,901.83 447.74 (67.22)
3,816.60 376.49 (67.46)
4,493.21 167.87 (111.92)
4,855.63 504.38 (131.19)
5,513.84 568.68 (146.57)
6,382.90 655.60 (154.47)
7,370.15 755.90 (156.23)
2.55
1.86
5.29
5.29
5.29
5.29
5.29
(64.67)
(65.60)
(88.62)
(125.91)
(141.28)
(149.18)
(150.95)
383.08 80.65 302.42 0.33 302.75
310.89 69.26 241.63 241.25
79.25 17.65 61.60 61.60
378.47 84.31 294.16 294.16
427.40 95.21 332.19 332.19
506.41 112.81 393.60 393.60
604.95 134.76 470.19 470.19
302.75
241.25
61.60
294.16
332.19
393.60
470.19
Appendix 2: Balance Sheet
Assets Cash and Short Term Investments Total Receivables, Net Total Inventory Prepaid Expenses Other Current Assets, Total Total Current Assets Property/Plant/Equipment, Total - Gross Property/Plant/Equipment, Total - Net Accumulated Depreciation, Total Intangibles, Net Note Receivable - Long Term Other Long Term Assets, Total Total Assets
Liabilities Accounts Payable Accrued Expenses Notes Payable/Short Term Debt Current Port. of LT Debt/Capital Leases Other Current liabilities, Total Total Current Liabilities Total Long Term Debt Total Debt Deferred Income Tax Minority Interest Other Liabilities, Total Total Liabilities Shareholder’s Equity Common Stock, Total Additional Paid-In Capital Retained Earnings (Accumulated Deficit) Other Equity, Total Total Equity Total Liabilities & Shareholders' Equity
2012
2013
2014F
2015F
2016F
2017F
2018F
90.56 231.25 359.60 7.61 205.17 894.20 1,258.64 854.68 (403.96) 14.59 36.41 1,799.88
82.82 307.79 518.94 9.87 77.56 996.98 1,621.97 1,128.47 (493.49) 42.43 46.52 2,214.40
475.88 408.74 866.32 39.99 95.33 1,886.26 2,051.97 1,429.64 (622.32) 37.94 68.21 3,422.05
500.68 612.77 411.99 465.68 570.04 646.88 45.98 52.18 109.63 124.41 1,638.32 1,901.92 2,551.97 3,107.77 1,750.67 2,064.86 (801.30) (1,042.92) 43.63 49.51 78.44 89.01 3,511.06 4,105.29
588.94 507.80 748.55 60.38 143.96 2,049.63 3,576.23 2,227.96 (1,348.26) 57.29 103.00 4,437.88
828.24 561.95 864.21 69.71 166.20 2,490.31 3,972.30 2,261.10 (1,711.20) 66.14 118.91 4,936.46
175.10 13.67 283.89 332.89 47.19 852.74 204.77 821.55 (2.83) 60.49 1,115.18
241.37 27.24 598.50 80.29 39.07 986.47 295.56 974.34 (2.44) 69.89 1,349.47
526.69 33.90 896.52 126.72 44.98 1,628.81 466.47 1,489.71 (2.44) 78.76 2,171.60
412.84 38.99 762.08 145.72 51.73 1,411.37 536.42 1,444.23 (2.44) 78.76 2,024.10
533.09 44.24 864.81 165.37 58.70 1,666.21 608.73 1,638.90 (2.44) 78.76 2,351.25
547.30 51.20 728.89 191.36 67.93 1,586.67 704.40 1,624.65 (2.44) 78.76 2,367.39
623.66 59.11 616.27 220.92 78.43 1,598.39 813.24 1,650.43 (2.44) 78.76 2,487.94
33.90 (100.33) 751.13 684.70 1,799.88
33.90 (100.33) 931.36 864.93 2,214.40
35.82 233.75 980.88 1,250.45 3,422.05
35.82 233.75 1,217.39 1,486.96 3,511.06
35.82 233.75 1,484.47 1,754.04 4,105.29
35.82 233.75 1,800.92 2,070.49 4,437.88
35.82 233.75 2,178.95 2,448.53 4,936.46
Appendix 3: Cash Flow
Cash Flow-Operating Activities Net Income Depreciation and Non-Cash Items Changes in Working Capital Cash from Operating Activities Cash Flow-Investing Activities Capital Expenditures Change in non-current assets Cash from Investing Activities Cash Flow-Financing Activities Change in equity Dividends Change in debt Cash from Financing Activities Net Change in Cash Net Cash - Beginning Balance Net Cash - Ending Balance
2012
2013
2014F
2015F
2016F
2017F
2018F
302.75 171.13 (180.83) 293.05
241.25 59.34 (191.25) 109.33
61.60 294.16 128.83 178.97 198.32 (170.72) (7.89) 643.85
332.19 241.62 19.03 554.78
393.60 305.35 141.16 557.79
470.19 362.94 106.61 726.51
(319.59) 0.48 (319.11)
(353.68) 0.75 (352.93)
(430.00) (500.00) 17.20 15.92 (447.20) (515.92)
(555.81) 16.45 (572.26)
(468.45) 21.77 (490.22)
(396.07) 24.77 (420.84)
(149.93) (42.38) 221.82 29.52 3.38 87.18 90.56
167.70 (61.02) 127.08 233.76 (7.74) 90.56 82.82
336.00 (12.07) (57.66) 524.23 (45.48) 848.16 (103.14) 393.06 24.80 82.82 475.88 475.88 500.68
(65.11) 194.68 129.57 112.09 500.68 612.77
(77.15) (14.26) (91.40) (23.83) 612.77 588.94
(92.16) 25.78 (66.37) 239.30 588.94 828.24
Appendix 4: Common Size Balance Sheet % of Total Assets Assets Cash and Short Term Investments Total Receivables, Net Total Inventory Prepaid Expenses Other Current Assets, Total Total Current Assets Property/Plant/Equipment, Total - Gross Property/Plant/Equipment, Total – Net Accumulated Depreciation, Total Intangibles, Net Note Receivable - Long Term Other Long Term Assets, Total Total Assets
Liabilities Accounts Payable Accrued Expenses Notes Payable/Short Term Debt Current Port. of LT Debt/Capital Leases Other Current liabilities, Total Total Current Liabilities Total Long Term Debt Total Debt Deferred Income Tax Minority Interest Other Liabilities, Total Total Liabilities Shareholder’s Equity Common Stock, Total Additional Paid-In Capital Retained Earnings (Accumulated Deficit) Other Equity, Total Total Equity Total Liabilities & Shareholders' Equity
2012
2013
2014F
2015F
2016F
2017F
2018F
5.03% 12.85% 19.98% 0.42% 11.40% 49.68% 69.93% 47.49% -22.44% 0.00% 0.81% 2.02% 100.00%
3.74% 13.90% 23.43% 0.45% 3.50% 45.02% 73.25% 50.96% -22.29% 0.00% 1.92% 2.10% 100.00%
13.91% 11.94% 25.32% 1.17% 2.79% 55.12% 59.96% 41.78% -18.19% 0.00% 1.11% 1.99% 100.00%
14.26% 11.73% 16.24% 1.31% 3.12% 46.66% 72.68% 49.86% -22.82% 0.00% 1.24% 2.23% 100.00%
14.93% 11.34% 15.76% 1.27% 3.03% 46.33% 75.70% 50.30% -25.40% 0.00% 1.21% 2.17% 100.00%
13.27% 11.44% 16.87% 1.36% 3.24% 46.18% 80.58% 50.20% -30.38% 0.00% 1.29% 2.32% 100.00%
16.78% 11.38% 17.51% 1.41% 3.37% 50.45% 80.47% 45.80% -34.66% 0.00% 1.34% 2.41% 100.00%
9.73% 0.76% 15.77% 18.50% 2.62% 47.38% 11.38% 45.64% 0.00% -0.16% 3.36% 61.96% 0.00% 0.00% 1.88% -5.57% 41.73% 0.00% 38.04% 100.00%
10.90% 1.23% 27.03% 3.63% 1.76% 44.55% 13.35% 44.00% 0.00% -0.11% 3.16% 60.94% 0.00% 0.00% 1.53% -4.53% 42.06% 0.00% 39.06% 100.00%
15.39% 0.99% 26.20% 3.70% 1.31% 47.60% 13.63% 43.53% 0.00% -0.07% 2.30% 63.46% 0.00% 0.00% 1.05% 6.83% 28.66% 0.00% 36.54% 100.00%
11.76% 1.11% 21.71% 4.15% 1.47% 40.20% 15.28% 41.13% 0.00% -0.07% 2.24% 57.65% 0.00% 0.00% 1.02% 6.66% 34.67% 0.00% 42.35% 100.00%
12.99% 1.08% 21.07% 4.03% 1.43% 40.59% 14.83% 39.92% 0.00% -0.06% 1.92% 57.27% 0.00% 0.00% 0.87% 5.69% 36.16% 0.00% 42.73% 100.00%
12.33% 1.15% 16.42% 4.31% 1.53% 35.75% 15.87% 36.61% 0.00% -0.06% 1.77% 53.34% 0.00% 0.00% 0.81% 5.27% 40.58% 0.00% 46.66% 100.00%
12.63% 1.20% 12.48% 4.48% 1.59% 32.38% 16.47% 33.43% 0.00% -0.05% 1.60% 50.40% 0.00% 0.00% 0.73% 4.74% 44.14% 0.00% 49.60% 100.00%
Appendix 5: Common-Size Income Statement
Total Revenue Cost of Revenue, Total Gross Profit Selling/General/Admin. Expenses, Total Depreciation/Amortization Other Operating Expenses, Total Total Operating Expense Operating Income Interest Expense, Net Non-Operating Interest/Invest Income - Non-Operating Interest Inc.(Exp.),Net-Non-Op., Total Net Income Before Taxes Provision for Income Taxes Net Income After Taxes Minority Interest Net Income Before Extra. Items Net Income
2012 100.00% 80.94% 19.06% 5.25% 0.21% 0.23% 86.63% 13.37% -2.01% 0.08% -1.93% 11.44% 2.41% 9.03% 0.01% 9.04% 9.04%
2013 100.00% 82.88% 17.12% 5.40% 0.21% 2.54% 91.02% 8.98% -1.61% 0.04% -1.56% 7.41% 1.65% 5.76% 0.00% 5.75% 5.75%
2014F 100.00% 90.00% 10.00% 5.40% 0.26% 0.74% 96.40% 3.60% -2.40% 0.11% -1.90% 1.70% 0.38% 1.32% 0.00% 1.32% 1.32%
2015F 100.00% 84.14% 15.86% 5.40% 0.32% 0.74% 90.59% 9.41% -2.45% 0.10% -2.35% 7.06% 1.57% 5.49% 0.00% 5.49% 5.49%
2016F 100.00% 84.14% 15.86% 5.40% 0.38% 0.74% 90.65% 9.35% -2.41% 0.09% -2.32% 7.03% 1.57% 5.46% 0.00% 5.46% 5.46%
2017F 100.00% 84.14% 15.86% 5.40% 0.42% 0.74% 90.69% 9.31% -2.19% 0.08% -2.12% 7.19% 1.60% 5.59% 0.00% 5.59% 5.59%
2018F 100.00% 84.14% 15.86% 5.40% 0.43% 0.74% 90.70% 9.30% -1.92% 0.07% -1.86% 7.44% 1.66% 5.79% 0.00% 5.79% 5.79%
Appendix 6: Key Financial Ratios 2012
2013
2014F
2015F
2016F
2017F
2018F
Current Ratios
1.05
1.01
1.16
1.16
1.14
1.29
1.56
Quick Ratio
0.48
0.35
0.47
0.53
0.53
0.55
0.65
Cash Ratio
0.11
0.08
0.29
0.35
0.37
0.37
0.52
Total Assets Turnover
1.86
1.89
1.36
1.53
1.48
1.59
1.65
Fixed Assets Turnover
3.92
3.72
3.26
3.06
2.95
3.16
3.59
NWC Turnover
80.79
398.98
18.11
23.62
25.81
15.2
9.11
Account Receivable Turnover
16.52
15.56
13.01
13.06
13.86
14.46
15.19
22
23
28
28
26
25
24
7.88
7.91
6.06
6.28
8.41
8.49
8.48
46
46
60
58
43
43
43
13.82
16.69
10.92
9.6
10.82
10.96
11.68
Gross Profit Margin
19.10%
17.10%
10.00%
15.90%
15.90%
15.90%
15.90%
EBIT Margin
13.40%
9.00%
3.60%
9.40%
9.30%
9.30%
9.30%
EBITDA Margin
13.60%
9.20%
3.90%
9.70%
9.70%
9.70%
9.70%
Net Profit Margin
9.00%
5.80%
1.30%
5.50%
5.50%
5.60%
5.80%
Return on Assets (ROA)
16.80%
10.90%
1.80%
8.40%
8.10%
8.90%
9.50%
Return on Equity (ROE)
44.20%
27.90%
4.90%
19.80%
18.90%
19.00%
19.20%
Debt to Assets Ratio
0.46
0.44
0.44
0.41
0.4
0.37
0.33
Debt to Equity Ratio
1.2
1.13
1.19
0.97
0.93
0.78
0.67
Equity Multiplier
2.63
2.56
2.74
2.36
2.34
2.14
2.02
Interest Coverage Ratio
6.66
5.58
1.5
3.84
3.88
4.24
4.84
0.3
0.34
0.37
0.36
0.35
0.34
0.33
OCF to Sales Ratio
0.09
0.03
0
0.12
0.09
0.08
0.09
Short Term Debt Coverage
1.03
0.18
-0.01
0.84
0.64
0.77
1.18
Dividend Coverage (CFO/Dividend)
6.92
1.79
-0.65
11.17
8.52
7.23
7.88
Capex coverage (CFO/CAPEX)
0.92
0.31
-0.02
1.29
1
1.19
1.83
0.44
0.28
0.05
0.2
0.19
0.19
0.19
9.00%
5.80%
1.30%
5.50%
5.50%
5.60%
5.80%
1.86
1.89
1.36
1.53
1.48
1.59
1.65
Liquidity Ratios
Efficiency Ratios
Days Sales in Receivable Inventory Turnover Days Sales in Inventory Account Payable Turnover Profitability Ratios
Solvency Ratios
Long-term Debt to Equity Ratio Cash Flow Ratio
Du Pont Identity
ROE = Net Profit Margin x Assets Turnover x
Equity Multiplier
2.63
2.56
2.74
2.36
2.34
2.14
2.02
Appendix 7: DCF Analysis
EBIT Tax on EBIT NOPLAT Depreciation Capex Changes in Working Capital
FCFF Terminal Value Discounted FCFF and Terminal Value
2014F 167,874,733 37,396,697 130,478,035 128,828,583 (430,000,000)
2015F 504,380,434 112,358,555 392,021,879 178,972,313 (500,000,000)
2016F 568,681,728 126,682,664 441,999,064 241,621,789 (555,806,756)
2017F 655,595,260 146,044,000 509,551,260 305,347,537 (468,451,821)
2018F 755,897,738 168,387,931 587,509,807 362,935,531 (396,069,405)
198,319,605
(170,718,387)
19,032,774
141,155,689
106,612,799
(369,012,987)
241,712,579
108,781,324
205,291,287
447,763,134 9,424,968,598
(329,230,794)
192,405,219
77,255,736
130,078,557
5,581,248,070
Enterprise Value Excess Cash Outstanding Debt Equity Value Outstanding Share Equity Value per share
5,651,756,788 475,883,068 1,489,709,480 4,637,930,375 1,791,000 2,590
Appendix 8: DCF Assumptions Weighted Average Cost of Capital Variable
Value
Risk Free Rate
7.91%
10-year Government Bond
Risk premium
8.30%
Damodaran
Beta
0.999
Team Computations
Marginal tax rate
25%
Basis
Corporate Income tax in Indonesia
Cost of Equity
16.20%
Team Computations
Cost of Debt
11.50%
Interest rate on company’s financial debt
WACC
12.08%
Team Computation
1. Risk-free rate The risk-free rate was based on 10-year Indonesia government Bonds with yield of 7.91% as of 27 December 2014.
2. Beta The value of beta was derived by computing covariance of daily return MAIN with IDX from December 2009 to December 2014.
3. Market Risk Premium The market risk premium is based total equity risk premium of Damodaran.
4. Capital Structure Capital Structure is based on Company’s disclosure in 2013 Annual Report. The portion of debt
and equity to total capital is 54.37% and 45 .63% respectivel
Sales Feedmill, DOC, and Broiler Divisions were fo recasted using chicken consumption growth rate by GPPU while Processed Food Division was projected using conservative processed food growth from Euromonitor.
2013 2,880,396,549 29.7% 855,884,536 30.16% 447,829,873 -5.00% 8,971,507
Feedmill Feedmill Growth DOC DOC Growth Broiler Broiler Growth Food Processing Food Processing Growth Total Revenue Revenue Growth
Revenue Driver Chicken Consumption by GPPU (kg/capita) Chicken Consumption Growth Processed Foods Growth by Euromonitor
4,193,082,465 25.18%
2014F 3,237,595,425 12.4% 784,970,451 -8.29% 502,628,624 12.24% 135,892,622 1414.7% 4,661,087,122 11.16%
2015F 3,718,201,365 14.8% 901,495,653 14.84% 577,241,499 14.84% 163,071,147 20.0% 5,360,009,664 14.99%
2016F 4,211,796,656 13.3% 1,021,170,185 13.28% 653,870,939 13.28% 195,685,376 20.0% 6,082,523,155 13.48%
2017F 4,867,758,818 15.6% 1,180,211,339 15.57% 755,707,430 15.57% 234,822,451 20.0% 7,038,500,039 15.72%
2018F 5,612,254,334 15.3% 1,360,717,828 15.29% 871,288,504 15.29% 281,786,942 20.0% 8,126,047,608 15.45%
8.6
9.97
11.45
12.97
14.99
17.28263367
16.85%
15.93%
14.84%
13.28%
15.57%
15.29%
10.50%
10.50%
20.00%
20.00%
20.00%
20.00%
Capital Expenditure Capital Expenditure for 2014 fiscal year is based on management allocation which was announced in 3Q2013. For 2015 fiscal years, we forecasted the capital expenditure will increase as company’s diversification strategy to expand its chicken processed food strategy.
Depreciation Depreciation was estimated using proportion of historical depreciation to total gross fixed assets. The depreciation also takes into account capital expenditure for each year.
Factory Depreciation Selling and Gen. Adm Total
2013 81,770,644.00 8,655,942.00 90,426,586.00
2014F 116,496,670.13 12,331,912.41 128,828,582.55
2015F 161,840,471.50 17,131,841.77 178,972,313.27
2016F 218,492,925.61 23,128,863.84 241,621,789.46
2017F 276,118,626.69 29,228,910.29 305,347,536.97
2018F 328,194,100.73 34,741,429.95 362,935,530.68
Appendix 9: Revenue Breakdown and Market Share
Revenue Breakdown 2009 - 2018F Feedmill
DOC
Broiler
Food Processing
100% 80% 60% 40% 20% 0% 2009
2010
Day Old Chick (DOC) Market Share Market Share CPIN
JPFA
SIPD
CJ
MAIN
2011
2012
2013 2014F 2015F 2016F 2017F 2018F
Feedmill Industry Market Share CPIN
JPFA
MAIN
CJ
Others
24% 23%
32%
30% 6%
9%
6%
10% 7%
21%
SIPD
8%
24%
Others
Appendix 10: Capacity Expansion Plans
From company data, we can see the breakdown of capital expenditures into establishment of feedmill in Central Java and Makasar, breeder farms, broiler farms, and food processing. Expenditures (billions) Capacity/year
2013
2014F
2015F
Feedmill (Central Java)
360,000 tpa
90
120
5
Feedmill (Makassar)
240,000 tpa
20
160
120
Breeder farms
30,000,000 chickens
150
150
80
Broiler farm
6,000,000 kgs
Processed foods
15,000 tpa
35
70 225
Total capex
295
430
500
From this point of view, we can see that IDR 215 billions is expended for feedmill in Central Java, IDR 300 billions for feedmill in Makasar making it IDR 515 billions for feedmill capacity addition. Breeder farms spend IDR 380 billions; broiler farms spend IDR 105 billions, and IDR 225 billions for processed foods. Hereafter, we can use extrapolation to deduce proportion of capex for each project in the future, which is 42% for feedmill, 31% for breeder farms, 9% for broiler, and 18% for processed foods. Then we can generate the project breakdown of capex in our forecasting periods: Expenditures (billions) 2013
2014F
2015F
2016F
2017F
2018F
Feedmill
110
280
125
233.5
196.6
166.3
Breeder farms
150
150
80
172.4
145.1
122.8
70
47.8
40.2
34.1
225
102.3
86.1
72.9
500
556
468
396
Broiler farm
35
Food processing Total capex
295
430
Based on known capacity expansion plans in 2013 – 2015, we can estimate costs for building production plants to generate each capacity addition. This cost per unit measurement can be utilized to estimate additional capacity generated. Cost for Adding Capacity (IDR thousands) Feedmill
923.6
Breeder
per tpa per chicken
12.67
Broiler
per kgs 17.50
FP
per tpa 15,000
Knowing cost for adding capacity we can get the result of capacity addition in forecasted periods: 2013
2014F
2015F
Mid-Total
2016F
2017F
2018F
Feedmill (tpa) Breeder farms (chicken) Broiler farm (kgs) Food processing (tpa)
128,155
326,214
145,631
600,000
252,834
212,817
180,076
11,842,105
11,842,105
6,315,789
30,000,000
13,607,368
11,453,684
9,691,579
2,000,000
-
4,000,000
6,000,000
2,732,343
2,299,886
1,946,057
15,000
15,000
6,820
5,741
4,858
With additional capacity for each period, we can know the total production capacity for company in eac h year (note that previously was capacity addition for each period, now it is total production capacity that means current production capacity added by accumulated capacity addition in each year): 2013
2014
2015
2016
2017
2018
Feedmill (tpa) Breeder farms (chicken) Broiler farm (kgs) Food processing (tpa)
848,155
1,174,369
1,320,000
1,572,834
1,785,651
1,965,726
175,282,105
187,124,211
193,440,000
207,047,368
218,501,053
228,192,632
24,400,000
24,400,000
28,400,000
31,132,343
33,432,229
35,378,286
7,200
7,200
22,200
29,020
34,761
39,619
Utilization:
For plant utilization rates, we make assumption based on the following table. Each plant established in a certain year period will operate in 50% utilization rate for its first year, 60% in second year, and so on. Plant is expected to utilize 90% capacity in the fourth year of its establishment and is assumed to have stable utilization rate of 90% in the long-term. Year Utilization Rate
1
2
3
4
5
50%
60%
80%
90%
90%
Disclosures: Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report [holds/d oes not hold] a financial interest in the securities of this company. The author(s), or a member of their household, of this report [knows/does not know] of the existence of any conflicts of interest that might bias the content or publication of this report. [The conflict of interest is…] Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director:
The author(s), or a member of their household, does [not] serves as an officer, director or advisory board member of the subject company. Market making:
The author(s) does [not] act as a mark et maker in the subject company’s securities. Ratings guide:
Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute return s of 15% or greater over the next twelve month period, and recom mends that investors take a position above the security’s weight in the S&P 500, or any other relevant index. A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months. Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by
