Indofood CBP

Indofood Sukses Makmur (INDF) is identical with Indomie, because it’s its flagship product, which until today, it seems that there is no rival to that (Wings Food indeed tries to replace Indomie with Mie Sedaap, but so far apparently has not been successful). But actually, the business coverage of INDF is broader than just merely selling the instant noodle with Indomie as its brand. As the name implies: Indofood. INDF is one of the largest integrated food producers companies in Indonesia, that control the food sector from upstream to the downstream.

Logo Indofood

As a big company, INDF has lots of subsidiaries. The following are some of INDF’s subsidiaries that have assets of above Rp1 trillion:

1. PT. Salim Ivomas Pratama, an oil palm plantation company and its derivatives.
2. PT. Indomarco Adi Prima, a distributor company.
3. Drayton Pte Ltd (Singapore), an investment company.
4. Indofood Oil and Fats (Singapore), an oil and margarine company.
5. Indofood Agri Resources (Singapore), an oil palm plantation company. Listed in the Singapore Stock Exchange.
6. PT. PP London Sumatra, an oil palm plantation company. Listed in IDX with ticker LSIP.
7. PT Lajuperdana Indah, a sugarcane plantation company.
8. PT Indolakto, a milk company (Indomilk).

In addition to the above companies, INDF also has a subsidiary that is not placed as a subsidiary, but rather as a division, namely Bogasari (a flour producer). Overall, INDF produces and sells wheat flour, instant noodles, milk, flavoring, snack (chiki, crisps and biscuits), nutritious food, cooking oil, and plantation crops as well as its processed products, including syrup and soy sauce from their sugarcane and soybeans plantation. If we look at the companies above, it would seem that the main business of INDF is actually not in instant noodles, but in cooking oil. One of its well-known brands is Bimoli.

INDF’s business is also integrated. For example, to create a packet of instant noodles to your hands, the company has the flour processing plants, noodle-making factory, a factory to manufacture packaging and cardboard box, until the distributors. Everything is owned by the company, so can you imagine how big this INDF is? In fact, one of the famed minimarket outlets, Indomaret, although not under the INDF, but also owned by Mr. Anthoni Salim, the owner of INDF. If you shop there, try to check the part of instant noodles, Indomie is guaranteed to dominate.

Let’s return to the INDF’s subsidiaries. Then where’s the position of Indofood CBP?

Indofood CBP (ICBP) is actually a newly established company in 2009, which is functioned as the holding company of some of INDF’s subsidiaries that engage in instant noodle, snack, seasoning, nutritious foods, and milk sectors, including Drayton Pte Ltd and PT. Indolakto. So the analogy is, if INDF is the chief executive officer, then ICBP is equivalent to director, and Drayton and Indolakto is the manager under ICBP. In the company’s structure of INDF, ICBP is under Bogasari. Before ICBP is established, the production of instant noodle and the other is handled directly by INDF itself.

Then how big is ICBP? On the first half 2010, the total assets placed under ICBP was Rp11.2 trillion, or only 16.6% of INDF’s total assets that amounted to Rp42.1 trillion. Again from here, it looks that the main business of INDF is not in instan noodle sector, but cooking oil.

What about the ICBP’s performance?

Because of Indomie, milk, and chiki products always become huge hit in the market, then ICBP’s performance is considered very excellent. On the first half 2010, ICBP recorded sales of Rp8.9 trillion, or contributed 49.2% from INDF’s total sales. Its net income was Rp800 billion, or 56.7% from INDF’s total net income. For a company with only a quarter size of assets of its holding company, then the contribution of income to more than half of the total revenue of the holding company, is remarkably extraordinary. Thanks to the Indomie price that never goes down, in contrast to the fluctuating global price of crude palm oli (CPO), which caused INDF’s revenue from cooking oil business can sometimes go up, or also go down.

The problem is, INDF as the holding company of ICBP, has quite great debts. On the first half 2010, the total liability of INDF was Rp25.8 trillion, or 2.5 times of its equity that was only Rp10.7 trillion. From the total liability, Rp8.9 trillion aka 34.5% of it was placed in ICBP. So, from ICBP’s assets amounted to Rp11.2 trillion, most of it was in form of debt. The equity of ICBP was Rp1.9 trillion, or only 17.9% from total equity of INDF. So it seems that ICBP is established just as a place to accommodate the debt of its holding company, INDF.

And that was indeed reflected in its IPO purpose, where 70 - 80% of the IPO funds will be used to pay debts. Thus, IPO of ICBP would make the balance sheet of its holding company, INDF, became healthier, because the debt was reduced. But then what about the ICBP itself? In general, the IPO was certainly have no significant impact to the performance of ICBP, because only 20 - 30% of the proceeds will be used for capital expenditure. But because the performance of ICBP from the beginning has been good (it is the manufacturer of Indomie), then ICBP still has a bright prospect in the future.

Salim Group as the owner of INDF, is known as a conservative business group, aka prefer to do the business in the real sector rather than play the investors’ funds in the market (very different from the Bakrie Group). So it is rather questionable, why now they are like went along with Bakrie's way in finding the money to pay the debt. Hopefully they don’t do it continually.

But on the bright side, now the investors of Indomie fans do not need to invest their funds in INDF anymore, but directly to ICBP. It can be said that the good performance of INDF all this time was supported by its instant noodle product. So, if now ICBP was established to be a special company in instant noodle production, then the investors can shift their funds from INDF to ICBP. INDF’s performance can be easily influenced by the price of global CPO, but ICBP’s performance will almost certainly continue to soar, even though the parents in Indonesia forbid their children to eat Indomie too much.

Now that IPO price of ICBP reaches 4,300 up to 4,500, is it reasonable?

Well, judging from here, INDF as the holding company of ICBP is rather unheard of. With the lowest price of 4,300, then the market cap of ICBP was 25.1 trillion, aka 2.2 times of ICBP’s assets. Expensive! There’s no company that has very expensive stock price right after IPO. Moreover, most of the assets of the ICBP was in form of debt. It seemed that the securities that handled IPO of ICBP was overconfident with the prospect of ICBP that was indeed nice, or maybe they were over-exerting themselves to reach Rp5.0 to Rp6.4 trillion of funds from the public. But if the price is expensive as it is, then ICBP’s stock may be a bit difficult to rose sharply on its first trading day, because from the beginning it's already high.

What about the fundamental valuation? Because ICBP recorded a fairly large net profit, then the price of 4,300 would record the annualized PER of 15.7 times. It was actually reasonable, although still quite expensive for the newcomer’s stock size. Well, how about the PBV? Because equity of ICBP is very small, then the price of 4,300 recorded PBV of about 4 times (after the addition of the proceeds to capital), which was certainly high enough, so the price of 4,300 let alone 5,500 was quite expensive.

In the future, ICBP could probably your long-term choice. But if ICBP keeps insist to sell its initial stock (IPO) at the price of 4,300, then you probably should wait and see. But if the price will be at the level of 3,000 (in average), then just take it!

PT Indofood Consumer Brand Products, Tbk

Performance rating on First Half 2010: AA

Stock rating on 4,300: BBB

Original article was written on September 2^nd, 2010.