Equity Research

Japfa Comfeed Indonesia BUY

JPFA IJ / JPFA.JK (Unchanged)

Company Update | BCAS Vignette | Poultry Sector

3 March 2017

Golden eggs with many hands Johanes Prasetia

johanes.prasetia@bcasekuritas.co.id
Facts: NP: +304.9% YoY, below ours, but above consensus +6221 23587222 ext 185
JPFA registered strong 2016 net profit of IDR2.1tn (+304.9% YoY) vs. 2015
net profit of IDR468bn, which was below our expectation at 87.2%, but above
consensus at 122.7%. This was driven by volume growth rather than price Current Price: IDR1,705
growth in feed and DOC segment, which brought revenue of IDR27.1tn Target Price: IDR2,220
(+8.2% YoY) vs. IDR25.0tn in 2015. Another driver emerged from 420bps (IDR2,410 previously)
gross margin improvement, on the back of price increases in commercial farm Upside potential: 30.2%
and consumer product segments (at 39%, the highest contributor to revenue
in 2016). Lower debt in 2016, at IDR5.9tn vs. IDR6.8tn in 2015, translate to
interest expense reduction from ST and LT bank loans (-47.6% YoY) and
12M PRICE PERFORMANCE
bonds payable (-3.2% YoY).
(IDR) (%)
Outlook: Not without interference 2,500 150.0
As the number two poultry player with vertically integrated poultry operation 2,000 100.0
after CPIN in terms of feed production capacity (25% market share) and DOC 1,500
production capacity (22% market share), we think JPFA should benefit from 50.0
1,000
its position. We expect poultry consumption per capita to continue to increase
-
going forward, due to 1) Indonesia’s huge population, 2) rising urbanization 500
rate, and 3) household income increase, which drives poultry demand growth - (50.0)
for feed, DOC, commercial farm and consumer products segment (83% JPFA IJ (LHS) Rel. to JCI performance (RHS)
contribution to revenue). For cattle and aquaculture segments, we expect a 60
higher contribution in the future, on the back of beef consumption in Indonesia Vol (mn)
30
estimated to rise more than 13x between 2009 and 2050, according to the
Australian Bureau of Agricultural and Resource Economics and Sciences. -
Having said that, there are many challenges faced: 1) DOC pricing cap which Mar-16 Jun-16 Sep-16 Dec-16 Mar-17

may limit JPFA’s margin to expand, 2) limited corn supply, as about 50% of Source: Bloomberg
raw feed material comes from abroad, given the halt in corn import quotas
this year, 3) possible outbreak of disease (bird flu) may pose a risk to the
STOCK PERFORMANCE
poultry business, and 4) weather conditions.
YTD 1M 3M 12M

Recommendation: Reiterate Buy, our top pick Absolute 17.2% -1.7% 8.3% 101.8%
We reiterate a Buy recommendation on JPFA on the back of diversified JCI Return 2.1% 1.0% 3.1% 11.8%
business in cattle and aqua segments in addition to poultry segment, catering Relative 15.1% -2.7% 5.2% 89.9%
to changing demand for protein from animal sources minimizing or spreading Source: Bloomberg
the risk (outbreak of disease). Post-2016 result adjustment, we reduce the
margins with results in downward earnings revision of 11.9% and 9.4% in
FINANCIAL HIGHLIGHT
2017-2018F. As such, we revise down our TP to IDR2,220 based on 5-year
DCF valuation, which translates into a potential upside of 30.2%. Downside EV/EBITDA EPSG P/E P/BV
(x) (%) (x) (x)
risks: IDR volatility, given a large part of raw feed materials are still imported,
higher commodity prices and disease outbreak. 2016 1.0 328.4 9.0 2.0
2017F 5.4 11.1 8.1 1.8
2018F 4.7 22.3 6.7 1.5
Exhibit 1. Poultry and Beef consumption to rise more than 13x Source: BCA Sekuritas

MARKET DATA
12M price range (IDR) : 775 - 1,960
12M PE range (x) : 4.1 - 10.4
Outstanding shares (mn) : 11,411
Market cap (IDRbn)/(USDmn) : 19,455 / 1,457
Avg daily turn. (IDRbn/USDmn) : 12.2 / 0.9
Source: Bloomberg

SHAREHOLDERS
Japfa Ltd. : 51.0%
KKR Jade Investment : 12.0%
Public (each below 5%) : 37.0%
Source: Bloomberg

Source: Australian Bureau of Agricultural and Resources and Sciences, BCA Sekuritas
Exhibit 2. JPFA’s Financial Summary
Income Statement
Year–end 31 Dec (IDRbn) 2014 2015 2016 2017F 2018F
Revenue 24,459 25,023 27,063 30,255 33,322
Cost of revenue 21,033 21,030 21,584 24,052 26,424
Gross profit 3,426 3,993 5,479 6,202 6,898
Operating profit 1,285 1,728 2,921 3,343 3,748
Interest income 16 18 26 46 23
Interest expense (694) (681) (510) (487) (357)
Forex gain/(losses) (78) (479) 11 (160) -
Other income/(expense) 22 112 319 89 30
EBITDA 1,752 2,289 3,547 4,019 4,436
Income before tax 551 698 2,767 2,831 3,444
Taxes expenses (160) (173) (595) (656) (769)
Minority interests 53 56 107 120 132
Net income 339 468 2,065 2,295 2,806
EPS (IDR) 32 44 189 210 256

Balance sheet
Year–end 31 Dec (IDRbn) 2014 2015 2016 2017F 2018F
Cash and equivalents 780 912 2,713 1,498 776
Account receivables 1,243 1,200 1,212 1,329 1,470
Inventories 5,836 6,487 5,500 6,787 7,602
L-T Invest & receivables 53 20 154 154 154
Fixed assets 6,411 6,981 7,541 7,676 7,822
Other assets 1,437 1,560 2,132 2,203 2,279
Total assets 15,759 17,159 19,251 19,647 20,102
S-T liabilities 2,494 2,067 2,259 2,359 2,462
Other S-T liabilities 2,422 3,286 2,934 3,432 3,737
L-T liabilities 4,745 4,758 3,609 2,109 459
Other L-T liabilities 918 939 1,076 1,112 1,150
Total liabilities 10,579 11,050 9,878 9,012 7,808
Equity 5,180 6,110 9,373 10,635 12,294
Total liabilities & equity 15,759 17,159 19,251 19,647 20,102

Cash Flows Statement

Year–end 31 Dec (IDRbn) 2014 2015 2016 2017F 2018F
Net Income 339 468 2,065 2,295 2,806
Depreciation 468 561 626 676 688
Change in working capital 763 424 63 (943) (687)
Operating cash flow 1,571 1,453 2,754 2,028 2,807
Capital expenditure (1,598) (709) (787) (810) (835)
Others 10 27 289 - -
Investing cash flow (1,588) (682) (498) (810) (835)
Dividend paid (106) - (240) (1,032) (1,147)
Net change in debt (639) (671) (827) (1,400) (1,547)
Others (220) 5 620 - -
Financing cash flow (965) (667) (447) (2,432) (2,694)
Change in cash (983) 104 1,809 (1,215) (722)
Beginning cash flow 1,746 768 901 2,701 1,487
Ending cash flow 768 901 2,701 1,487 765

Key Ratios 2014 2015 2016 2017F 2018F

Gross margin (%) 14.0 16.0 20.2 20.5 20.7
EBITDA margin (%) 7.2 9.1 13.1 13.3 13.3
Benign margin going
EBIT margin (%) 5.3 6.9 10.8 11.0 11.2
Pretax margin (%) 2.3 2.8 10.2 9.4 10.3 forward on the back of
Net margin (%) 1.4 1.9 7.6 7.6 8.4 DOC pricing cap, which
ROAE (%) 6.5 8.3 26.7 22.9 24.5 limits margin to expand
ROAA (%) 2.2 2.8 11.3 11.8 14.1
Current ratio (x) 1.8 1.8 2.1 2.0 1.9
Acid ratio (x) 0.4 0.4 0.8 0.5 0.4
Gearing (%) 139.8 111.7 62.6 42.0 23.8
Net gearing (%) 124.9 97.0 33.8 28.0 17.5
AR turnover (days) 18 18 16 16 16
Inventory turnover (days) 90 105 100 103 105
AP turnover (days) 26 41 42 42 43

Key Assumptions 2014 2015 2016 2017F 2018F

Feed ASP (IDR/kg) 3,683 3,528 3,540 3,653 3,722
Feed volume (mn tons) 2.8 2.6 2.7 3.0 3.4
Source: Company, BCA Sekuritas

Japfa Comfeed Indonesia, 3 March 2017 2

Exhibit 3. JPFA’s 2016 result
JPFA IJ QoQ YoY YoY FY16F/ FY16F/
Profit & Loss (IDRbn) 4Q15 3Q16 4Q16 (%) (%) FY15 FY16 (%) BCAS Cons.
Revenue 6,287 7,059 6,462 (8.5) 2.8 25,023 27,063 8.2 100.0 95.8
COGS 5,003 5,374 5,381 0.1 7.6 21,030 21,584 2.6
Gross profit 1,285 1,685 1,081 (35.8) (15.8) 3,993 5,479 37.2
EBIT 701 1,112 409 (63.2) (41.6) 1,728 2,921 69.0 100.0 96.5
Other income/(expenses)
Net interest income/(expense) (157) (120) (83) (31.4) (47.3) (663) (484)
Net forex gain/(losses) 135 44 (151) na na (479) 11
Others 18 34 244 na na 112 319
Pre-tax profit 696 1,070 419 (60.8) (39.8) 698 2,767
Net profit 616 761 340 (55.3) (44.8) 468 2,065 340.9 100.0 122.7

Gross margin (%) 20.4 23.9 16.7 16.0 20.2

EBIT margin (%) 11.1 15.7 6.3 6.9 10.8
Pre-tax margin (%) 11.1 15.2 6.5 2.8 10.2
Net margin (%) 9.8 10.8 5.3 1.9 7.6

Balance sheet (IDRbn) Dec-15 Sep-16 Dec-16

Cash and equivalents 901 1,170 2,701
Total assets 17,159 18,342 19,251
Total liabilities 11,050 9,384 9,878
Interest bearing liabilities 6,825 4,718 5,868
Equity 6,110 8,958 9,373

ROA (%) 2.8 10.0 11.3

ROE (%) 8.3 24.5 26.7
Gearing (%) 111.7 52.7 62.6
Net gearing (%) 97.0 39.6 33.8
Source: Company, BCA Sekuritas estimates

Exhibit 4. Earnings change

---------- 2017F ---------- ---------- 2018F ----------
(IDRbn)
Old New Chg (%) Old New Chg (%)
Net revenue 30,300 30,255 (0.2) 33,385 33,322 (0.2)
Gross profit 6,424 6,202 (3.4) 7,111 6,898 (3.0) We reduce our margin, on the
Operating profit 3,689 3,343 (9.4) 4,098 3,748 (8.5) back of a DOC pricing cap,
Net profit 2,604 2,295 (11.9) 3,098 2,806 (9.4)
despite rising poultry
Gross margin (%) 21.2 20.5 (0.7) 21.3 20.7 (0.6) consumption
Operating margin (%) 12.2 11.0 (1.1) 12.3 11.2 (1.0)
Net margin (%) 8.6 7.6 (1.0) 9.3 8.4 (0.9)
Source: Company, BCA Sekuritas

Japfa Comfeed Indonesia, 3 March 2017 3

Exhibit 5. DCF Valuation
Year-end 31 Dec 2017F 2018F 2019F 2020F 2021F 2022F
Operating profit 3,343 3,748 4,107 4,500 4,930 5,355
Less: taxes (774) (837) (934) (1,014) (1,117) (1,232)
After-tax operating income 2,568 2,911 3,173 3,486 3,814 4,123
Add: Depreciation & amortization 676 688 701 724 748 771 Our target price of IDR2,220 is
Add: Chng in working capital (943) (687) (678) (654) (662) (792) based on DCF valuation, with
Operating cashflow 2,302 2,912 3,196 3,555 3,900 4,102 WACC of 12.1%
Less: Capex (810) (835) (950) (998) (1,000) (980)
Free cash flow 1,491 2,077 2,246 2,557 2,900 3,122

Debt
% pre-tax cost of debt 8.7%
% tax rate 24.2%
% cost of debt 6.6%
Weight Debt 38.5%

Equity
% risk free rate 7.3%
Current beta 1.6
Market premium 5.0%
% cost of equity 15.5%
Weight Equity 61.5%

WACC 12.1%
Terminal Growth 2.0%

Present value of CF until 2022F 9,422

% growth from 2022F to pertuity 2.0%
FCF in 2022F 3,122
Exit FCF multiple (x) 10.1
Terminal value 31,665
PV of terminal value 17,924

Total company value 27,345

(Net Cash) or Net Debts 2,981
Value to equity holders 24,364
Value to equity holders (Rp/share) 2,224
Upside to current price 30.5%
Current share price 1,705
Source: Company, BCA Sekuritas

Japfa Comfeed Indonesia, 3 March 2017 4

 Teguh Hartanto
Director of Equity, ext: 129
teguh.hartanto@bcasekuritas.co.id

RESEARCH DIVISION
research@bcasekuritas.co.id

Darmawan Halim Arga Samudro Igor Nyoman Putra

Head of Research, ext: 168 FI Analyst, ext: 181 Equity Analyst, ext: 178
Strategy, Automotive, Heavy Equipment FI Strategies & Macroeconomist Banking, Industrial Estate
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Jennifer Frederika Yapply Aditya Eka Prakasa Johanes Prasetia

Equity Analyst, ext: 179 Equity Analyst, ext: 182 Equity Analyst, ext: 185
Cigarettes, Consumer, Health Care Telco, Coal, Metal Mining Retail, Poultry
jennifer.yapply@bcasekuritas.co.id aditya.prakasa@bcasekuritas.co.id johanes.prasetia@bcasekuritas.co.id

Michael Ramba Nyoman Widita Prabawa Achmad Yaki Yamani

Equity Analyst, ext: 184 Equity Analyst, ext: 180 Technical Analyst, ext: 186
Construction, Property Residential Cement, Plantation, Oil & Gas Technical Analyst
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Yuni Pratiwi
Research Assistant, ext: 183
yuni.pratiwi@bcasekuritas.co.id

EQUITY CAPITAL MARKET DIVISION

ecm@bcasekuritas.co.id

Ermawati Agustina Erman

Head of Institutional Sales, ext: 159
ermawati.erman@bcasekuritas.co.id

Haslienda Santoso Jodikin Arief Iskandar

Equity Capital Market, ext: 137 Sales Trader, ext: 164 Institutional Dealer, ext: 136
haslienda.rifman@bcasekuritas.co.id santoso@bcasekuritas.co.id arief.iskandar@bcasekuritas.co.id

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Japfa Comfeed Indonesia, 3 March 2017 5