AISA’s Future Chances with KKR

On July 22, 2013, Tiga Pilar Sejahtera Food (AISA) stated that two days ago, some main shareholders agreed to sell their shares to Kohlberg Kravis Roberts (KKR), one of the biggest private equity firms in the world, amounting to 9.5% of the total subscribed and fully paid shares. The value of transaction was undisclosed, but it was issued that it reached $ 40 million. The joining of KKR will help the company to grow, where KKR will put their representative in the board of commissioners. While for KKR, this acquisition becomes their initial step to enter the consumer goods industry in Indonesia.

As I explained in my last week article, if we looked closer to the business strategies of private equity (PE) firm, namely KKR, it would be common that they chose to merge with AISA instead of Unilever Indonesia (UNVR) or Mayora (MYOR) due to try consumer goods business in Indonesia. A PE company will be always interested to join with start-up companies, which are new companies with less than 5 years experience. Start-up companies have higher risk in businesses but offer more incredible growth than the well-established companies. If we compare AISA with other consumer companies in Indonesia, AISA will be classified as a start-up company. However, if we refer to AISA’s history as corn vermicelli producer since 1950s, the company will be classified as an experienced company. In fact, the company’s pace as an integrated food company (produces corn vermicelli, dried noodle, snack, vegetable oil) has been begun since 2008. The company has also made a path in rice business since 2010. If we refer to the period of company as an integrated food, it will be true that AISA is a start-up company.

Furthermore, there are two interesting facts. First, AISA is the only company in BEI who plays in rice business, so the shares would be a “limited edition”. If you are interested to invest in a rice business, AISA will be the only choice. Second, AISA seems very serious on its new business. The company has planned to own at least 18 rice mills at the Indonesia’s central rice areas in 2016. From the brand development point of view, AISA has also released some new brands and has strengthened Ayam Jago brand as the company’s flagship product. According to my observation, the Ayam Jago has been distributed in many small shops in Jakarta, and its advertisement has often been appeared in Television.

In addition, this company also expands its snacks business with the same strategy; releasing many new brands of dried noodle, vermicelli, and snack, while improving the old brands distribution such as Taro snack and Gulas candy.

'Taro' snack. One of the most popular brand of PT Tiga Pilar Sejahtera, Tbk

By the way, one year ago, I wrote about AISA (here’s the link) which its conclusion was we should wait to invest at this company because at that time, AISA was a really new start-up company with no track record. Now, after a year, how does it develop? Well, so far so good!  A year ago, AISA asked an executive from Orang Tua Grup, Jo Tjong Seng, to join as branding and marketing director position. What is the result? According to my observation, now, AISA has various products and able to compete with well established companies like Garuda Food and Siantar Top. We can see its success by looking at AISA wide distributed products on stalls in Jakarta, Bandung, and Cirebon.

Based on financial view, AISA’s net income has reached Rp 75 billion on the first quarter of 2013, rose up 39.3% from the previous period. Honestly, it cannot justify that AISA has rapidly grown during this one year but rather to be classified as averagely growth. However, with PBV under 2 times on 1,310, its valuation is not too expensive especially, if we compare with other big consumers goods companies. If AISA can have higher net income where is really possible, its stock will significantly rise and stable.

So, the question is if AISA has a good chance to reach the higher net income, how much is the opportunity rate?

KKR answered this question on their release: ’Indonesia has a chance to be one of ten countries with the biggest GDP  in 2030, and its consumer industry sectors could be the third biggest in the world in 2050. This is an attractive opportunity. We believe that AISA is a great company with an ambition to develop. In addition, we are glad to become the partner of the competent management team who can support the development’.

In a word, KKR consider that AISA: 1. Operates in Indonesia, a potential growth country, 2. Runs in the sector that offers a highest growth which is consumer goods, 3. Is a good company who has an ambition to succeed, and 4. Has a good management. With those complete criteria, how much its opportunity to be a big company will be? Well, no matter how much is the opportunity, it is clear that the chance must not be little, at least based on KKR thought.

Specifically, KKR executive, Henry McVey, explained an analysis about why Indonesia will be a great place for investment by an article which is published in the home page of the firm website, www.kkr.com. The point is McVey believes that from its macro development, Indonesia offers an interesting investment prospect for 5-7 years later with its stimulator sector, consumer goods industry.

However, if we consider the fact that KKR’s investment in Indonesia seems very little which through AISA $ 40 million compare with management cost about $ 80 billion, KKR maybe just testing their business and not invest too many. It is reported that KKR invested in consumer goods in India but it was not successful. GDP of India did not as good as in earlier years. In contrast, it slowed down like China in recent days.

Okay, Mr. Teguh, What do you think about AISA? Well, for me, investment in consumer goods is a traditional investment that offers stable profit for a long term with limited risk. The biggest problem is you will face difficulty in finding good consumer stocks with reachable price because averagely, all consumer stocks are very expensive, UNVR stocks as an example. I am interested with AISA because the stock is cheap compare to other consumer goods stocks whose works are not as good as MYOR or UNVR. Those companies are classified as ‘extremely new’ companies who need to struggle with the big debt for keeping their growth momentum. Based on the latest information which is released by AISA, the company has issued Rp 1 trillion bond for refinancing its long term debts.

In fact, AISA has had a stable growth since 2010 so we could assume that the growth will be continued for the years later, especially after the joining of KKR in its management team. If this assumption comes true, the company value will rise significantly for long term, and its stock will climb up.

To sum up, if you join with AISA, you will be similar with KKR: more interesting to invest in start-up companies who have a high risk (one of the AISA’s risks are about its big debt). In the other hand, AISA also offers a high growth potential. For your note, this investment strategy is opposite to Berkshire Hathaway’s policy: merely buying well-established company with low risk and offering stable growth potential (the main point is stable).

In fact, Berkshire is one of the biggest and the most successful investment firm in the world, and so is KKR. Nevertheless, don’t forget the fact that the super big investment firms like Berkshire and KKR can also make a mistake in investment such as what was reported in India yesterday. So, do you want to join the train?

Original article was written on Monday, July 29, 2013.