Sierad Produce: Too Bad to be True

What is the staple food in Indonesia? The answer is definitely rice, unless you’re agree with the Minister of Agriculture who told the society to replace the rice with cassava (aw come on!). But what is everyone's favorite dishes? Believe it or not, the answer is chicken, whether it be fried, baked, or processed into sausages or nuggets. Yup, chicken is a favorite food of Indonesian people from all social status, ranging from factory workers to the owner of the factory itself. The taste is so delicious and the price is more affordable than other types of meat, causing the demand for chicken is always increases over time, in line with the growth of population.

Because the chicken business is always prospective, would not be surprised if local poultry companies almost always recorded brilliant financial performance. You name it, Charoen Pokphand Indonesia (CPIN), Japfa Comfeed (JPFA), Malindo Feedmill (MAIN), and Multibreeder Adirama (MBAI), they are all good and profitable companies. Luckily, these four companies are listed on the Stock Exchange so we can buy their shares. Only the latter, MBAI, has delisted from the exchange after it was acquired by JPFA.

Other than those four, there's another one that is Sierad Produce (SIPD). Unfortunately, as you know, SIPD has poor financial performance when compared to other companies in the same sector, so as a result, its stock was not ever go anywhere, but just moving around at low range of Rp50 – 60 per share. At first I had thought that this SIPD, although its business is interesting, but perhaps it was only a small company without real business, so it was natural that its stock was at ‘gocap’ (Indonesian term for share that is stuck at the bottom price of 50).

But in fact, SIPD is a fairly large company with assets of Rp3.1 trillion or about US$ 300 million on September 30, 2012, or nearly one and a half times greater than MAIN. But strangely SIPD net income in the period of nine months of 2012 was only Rp17 billion, aka faaa...aar below net profit of MAIN in the same period, that was Rp267 billion.

So what is the problem? Well, before we discussit, let's take a look at this company from the beginning.

Belfoods logo, a brand of processed chicken products of Sierad Produce

SIPD established in Jakarta in 1985, as a small trading company of animal feed. The company listed on the Stock Exchange in 1996, and became a major corporation in 2001 after receiving merger of some other companies. The merger, which is followed by the several business developments, making SIPD as an integrated poultry company. Today, SIPD have almost every line of business in the poultry industry, ranging from producing equipment of livestock, chicken feed, egg hatching, day old chicken (DOC), chicken breeding, slaughterhouse, and making processed foods from chicken meat (nuggets, sausages, etc.) with the brand of Belfoods. Not only as a producer, SIPD also has several business units in distribution and retail trade (Belmart), until the chickens partnership with individual farmers. One more, SIPD have one business unit in the field of fish meal manufacturer, but its contribution to the company's total revenue is still not significant.

Having the business integrated from upstream to downstream, and the size of the corporation itself is quite big, but SIPD is still continue to expand. Here are some of the business development plan outlined in the company's latest public expose, dated July 17, 2012:

1. Construction of five chicken breeding facilities in Lebak, Banten
2. Construction of a chicken hatchery facility, also in the Lebak
3. Construction of three poultry farm facilities in Bogor, West Java, does not include the acquisition of a poultry farm from other companies.
4. Construction of a slaughter facility in Mojokerto, East Java.
5. Adding several Belmart outlets in several cities in Indonesia
6. To increase the production capacity of processed food (Belfoods) up to 60%.

Most of the projects will completed in the third or fourth quarter of 2012, and will be operational in early 2013. So, it is obviously that SIPD has exciting prospects. Moreover, historically, the value of the assets and revenue of the company in the last five years have always risen steadily. There is the data, the numbers in billions of Rupiah:

Year	2007	2008	2009	2010	2011	2012*)
Asset	1,295	1,385	1,641	2,037	2,642	3,082
Revenue	1,632	2,332	3,243	3,643	4,029	3,071
*) until third quarter

By the way, one of the indicators in the fundamental analysis is the asset turnover (ATO). The numbers obtained from dividing the revenue by the asset value of the company concerned. The greater the ATO, the better the company, as it shows the ability of the company to optimize its assets to obtain maximum turnover. Here is the data for SIPD’ annualized ATO and other companies in the same field (CPIN, JPFA, and MAIN), for the period of third quarter of 2012.

Companies	CPIN	JPFA	MAIN	SIPD
Asset	11,748	10,863	1,807	3,082
Revenue (annualized)	21,215	17,865	3,355	4,095
ATO	1.8	1.6	1.9	1.3

From the data above, you can see that the poulty sector is indeed remarkable, which of the four companies listed on the exchange, all of which recorded the ATO of more than 1 time, or in other words, their income in one year is alreadr greater than the value of their own assets. The same thing applies to SIPD, which recorded 1.3 times of ATO. Although the figure is smaller than the other three, but it is because SIPD assets have increased rapidly in the past two years because of the process of business developments, while the increase in revenue is not as fast as the increase in its assets (SIPD’ revenue may increase significantly in 2013, after the projects which have already been mentioned above are in operational). But if we look at historical data, in 2011 the ATO of SIPD reached 1.5 times, and also had reached 2.0 times in 2009.

Because their revenues are large, then the net income of these poultry companies should also be large. And rightly so, the level of return on equity (ROE) of CPIN et al are very good indeed. There are the following data (for the period of Nine Months of 2012):

Companies	CPIN	JPFA	MAIN	SIPD
Equity	7,962	4,686	647	1,279
Net profit (annualized)	3,288	1,336	356	22
ROE (%)	41.3	28.5	55.1	1.8

Well, from here it appears that there is something wrong with SIPD. When the three other companies recorde fantastic ROE, SIPD was only posted a net profit of Rp16 billion (annualized so Rp22 billion), so that its ROE was just 1.8%. Makes sense? Obviously not. The management had claimed that the small margins is due to the decline in the price of chicken meat and DOC. But if that was the cause, then why CPIN, JPFA, and MAIN are not experiencing the same problem?

And if we explore further, this small net profit of SIPD has happened for a long time. If we use the data of CPIN, JPFA, and MAIN, these three companies recorded an average net profit margin (NPM, the value of net income/net profit compared to income/revenue) between 7 to 15%, so for every income of Rp1 billion, the three companies mentioned above were able to make net profit of between Rp70 to 150 million.

While SIPD? Here, you see it by yourself:

Year	2007	2008	2009	2010	2011
Revenue	1,632	2,332	3,243	3,643	4,029
Net profit	21	27	37	61	22
NPM (%)	1.3	1.2	1.1	1.7	0.5

Notice that the highest NPM of SIPD was achieved in the year 2010, which was 1.7%, and that is, of course, very small for a producer company, especially when compared with other companies in the same sector.

So what is the problem? Well, I do not know, but the production cost of SIPD is very expensive so that the company’s profit was already small from the gross profit account, no matter how great the company's revenue. In the past five years, SIPD’ average gross margin was only about 7 - 10%, and once again, it is much lower than the gross profit margin of three other poultry companies that is more than 20%. It certainly is strange, because if you consider that SIPD also has subsidiaries in the distribution, then its margin should be greater than other poultry companies, because SIPD is not like CPIN and others who gave the distribution process of their products to third parties.

The high cost of production of SIPD, one of which is due to the high cost of feed raw materials. Unfortunately there is no further information about what is the price of corn (one of the raw material for chicken feed) purchased the company, for example. Strangely, though since the beginning the main problem of SIPD lies in its production cost that is extremely high, but over the years, from a variety of business development of the company, none of which that aim to reduce the cost of production. This is very different from the one of its competitors, CPIN, which since three years ago acquired a corn trading company, PT Agrico, for the purpose of securing the supply and controlling the prices of raw material prices of chicken feed.

But whatever it is, the poor performance of SIPD of course causing its stocks stuck at bottom prices and did not going anywhere. Not only that, the amount of taxes paid by the company are also much smaller than the other three companies. The following are the data for the period of nine months of 2012, figures in billion Rupiah:

Companies	CPIN	JPFA	MAIN	SIPD
Revenue	15,199	13,399	2,516	3,071
Income Tax	680	231	78	8
Tax to Revenue Ratio (%)	4.3	1.7	3.1	0.3

Is the management of SIPD deliberately evade the taxes? We will never know.. But after seeing that the company is (actually) good and not inferior to other poultry companies, as well as the prospects are also exciting, then this company is just too bad to be true. Well, someone has to do something here.

Original article was written at February 28, 2013