From Company's Prospectus
1. Business Description
Agri-food company that produces multiple protein foods, with operation in 5 high growth emerging Asian markets. Indonesia Japfa Limited (Japfa) is a agri-food company that produces multiple protein food, with operation in 5 high growth emerging Asian Markets.
From Company's Prospectus
Vertically integrated business model that covers the entire value chain for protein products. Japfa has a vertically integrated business model that covers the entire value chain for many its protein products, for feed production and breeding to commercial farming and processing, In addition, they also expand its downstream into consumer food business.
From Company's Prospectus
Animal protein contributes the highest revenue and profit after tax. Japfa is divided into 3 operating segments - (1) Dairy, (2) Animal Protein & (3) Consumer Food. Below provides summarize this 3 operating segments:
From Company's Prospectus
Indonesia Handojo Santosa is the ultimate shareholders of the company. Indonesia Handojo Santosa is the ultimate shareholders of the company.
Who is Handojo Santosa?
According to Forbes, Handojo Santosa is the 40th richest man in Indonesia. He inherited Ometraco Group from his father and managed to turn Japfa Comfeed into the second-largest poultry feed producer in the country. Age 47, he is currently worth approximately US$670m.
Japfa Comfeed Debt Restructuring?
During the early 2000s, due to the financial crisis, Japfa Comfeed did enter into a debt restructuring with its creditors before. Thus, this is something that I wished to highlight to investor.
See Japfa Comfeed:
Annual Report 2000 - http://www.japfacomfeed.co.id/profile/annualreport/JapfaAnnualReport2000.pdf
Annual Report 2001 - http://www.japfacomfeed.co.id/profile/annualreport/JapfaAnnualReport2001.pdf
2. Use of Proceed
Table below summarizes the use of proceed, 44% will be used to pay off debt while the other 44% will be used for its China farm expansion:
From Company's Prospectus
3a. Financial Highlights
Low Margin Business. Despite the big revenue and profit contribution from the Animal Protein business, it is largely a low margin business. I see growth opportunity in the Dairy business which should be of higher margin.
Corn is the biggest cost driver. As of FY13, corn accounts for approx 84.5% of the cost of good sold. Thus corn will be a good leading indicator for how the stock/result will perform.
Leverage seems high. With a net debt-to-equity (net gearing) of 108%, the company leverage seems high. Even after the repayment of the US$70m from the IPO proceed, the net gearing will still remain at approx 100%. This is pretty aggressive for a low margin business like Japfa because the margin of error have to be very low.
From Company's Prospectus
Below provides a more detailed financial statement:
From Company's Prospectus - Income Statement
From Company's Prospectus - Balance Sheet
3b. Valuation
Based on price multiple, you are paying approx 22x P/E for the IPO. This compares favorably to other regional and global competitors:
From Company's Prospectus
4. Investment Highlight
Growing affluence = Higher protein consumption. Japfa will benefit from a growing affluence in its core market, Indonesia (>80% of revenue). As the country grows, the population will be more affluence and this will result to more consumption for meat/protein as they seek improvement in their quality of life.
Diary is a key growth driver. I see the Diary segment as one of the most important growth segment for the company. Given the food safety concern in China, good and reputable diary sources is a key going forward. Japfa premium raw milk in China is consistently at the top of the market in terms of quality, consistently exceeding Chinese and international standards for nutrition and safety. The quality of our raw milk is also reflected in its selling price. In 2013, the average selling price of our milk was RMB 4.51 per kilogram, which was approximately 25% higher than the average price of milk from ten major milk production regions in China, according to the China Ministry of Agriculture.
5. Investment Weakness
Concern over animal diseases? Naturally, investors will be concerned about the outbreak of avian flu or any cow/swine related diseases.
Mitigating Factor - The company has been in the industry for more than 40 years and their ability to grow into today size is a testimony of its good & established operating track record. Thus although I recognized this risk, I reckon that the company is experience enough to prevent and handle, in the event of any outbreak.
6. Conclusion
I think this will be a decent bet for the long term and given the small public tranche, the short term IPO performance might be good.
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