Indofood Sukses Makmur

Indofood Sukses Makmur (INDF), as you know, is the largest food company in Indonesia, even among the largest in the world, with a variety of products ranging from cooking oil, margarine, flour, instant noodles, snacks, syrups, nutritious food, flavoring, milk, and sugar. Through its subsidiary, Salim Ivomas Pratama (SIMP), INDF is also the largest plantation company in the world in terms of land area that covers 483 thousand hectares. So yep, INDF is a giant. But I was quite surprised when reading the company's annual report, where I find out that INDF continues to expand to become larger. Lastly, INDF has been expanding to China by acquiring China Minzhong Food Corp., a vegetable processing company.

Although Salim Group (the owner of INDF) has been known as a pioneer in the field of food industry in Indonesia by establishing a flour mill (under the banner of PT Bogasari) in 1974, and then create the legendary instant noodles, Indomie, in 1982, but their major steps in the food industry only began after the monetary crisis of 1998. After the crisis, the Salim Group decided to focus on expanding their food business, which is entirely placed under the banner of PT Indofood Sukses Makmur. Since the early 2000s, INDF has entered into the business field of production of cooking oil, margarine, milk, nutritious foods, sugar, soy sauce, and food flavoring. Previously in 1997, the Group also began to enter the field of oil palm plantations, cooking oils, and margarine, where these subsidiaries also entirely placed under INDF through SIMP.

Then after a long 'holiday' for a few years, in 2007 INDF again add plantations to its portfolio, by acquiring PT PP London Sumatra (LSIP) which is placed as a subsidiary of SIMP. In 2008, INDF went into the business of sugar plantation by acquiring PT Lajuperdana Indah, and acquired a dairy company, PT Indolakto (producer of ‘Indomilk’). In 2009, INDF set up PT Indofood CBP (ICBP) to serve as the holding companies for its subsidiaries in the field of consumer brand products (including Indomie) which then held an IPO a year later. And the next year ie in 2011, it was SIMP that held an IPO. Of the two IPOs, INDF reaped funds about Rp10 trillion (equal to US$ 1 billion), which is then used to continue the expansions.

And the expansion does not take long to be executed. In 2012, INDF through ICBP collaborates with Japanese Asahi Group to enter the business of non-alcoholic beverages in Indonesia by set up two joint-ventures which is engaged in the production and distribution of beverages. And the ventures are already running. Today you can easily find tea bottled drink with brand 'Ichi Ocha' in supermarkets. Beyond that, still through ICBP, INDF also entered the business of making mayonnaise, restaurant chain, to the production of cream for cake factories, most of them by working also with the Japanese company.

Finally, throughout the year 2013, INDF started to 'go international' by acquires Companhia Mineira de Açúcare Álcool Participacoes, a sugar company in Brazil, Roxas Holdings, the largest sugar company in the Philippines, and China Minzhong Food Corp., a vegetable cultivation and processing company in China whose shares are listed on the Singapore Stock Exchange. In contrast to other companies that are placed under ICBP or SIMP, these overseas companies are directly held by INDF, or through Indofood Agri, a subsidiary listed on the Singapore Exchange. In addition, INDF has completed the acquisition of all shares of PT Pepsi-Cola Indobeverages, which later changed its name to PT Prima Cahaya Indobeverages      .

Hufftt.. Okay, we've finished? Not yet! In this 2014, through the SIMP and ICBP, INDF still have a lot of business expansion plans, especially since the two subsidiaries are still holding large cash from their IPOs (per First Quarter of 2014, SIMP holding cash of Rp2.2 trillion, while ICBP Rp6.3 trillion). Because INDF plays at the field of fast moving consumer goods, causing the company, especially through the ICBP, always has a huge cash. So it was no wonder if the expansions are done through ICBP (in early 2014, ICBP acquire bottled drinking water under the brand 'Club'). However SIMP also working on some business expansions, especially by planting the land that have been acquired previously with oil palm, rubber, sugar cane, to tea, and by set up factories to process crude palm oil (CPO) into cooking oil and margarine.

While INDF itself, after successfully acquired China Minzhong, then in the future the company will again acquire other companies if the opportunity is available, but the management never telling any story. Beyond that, the market of Indomie is now even reaching Morocco and Kazakhstan. So yeah, this company’s long-term outlook is very attractive, because the management never stopped working to grow the company, while INDF itself is already the largest and the most established food company in the country.

Here are some points that make INDF worth for investment, especially if you are a large investor (or representing institutional investors) who do not want to invest in penny or crap stocks:

1. INDF has a long and good history since the 1970s as the leading food company in Indonesia, which the company continues to grow and have never had a major turmoil even at the event of monetary crisis of 1998.
2. INDF is managed directly by the owner, Mr. Anthoni Salim, who occupies the position as president director. If you notice any other large companies in the Indonesia Stock Exchange that owned by large groups, most of the owners never sit in the management of the company. For example, in the company of the Bakrie Group, you would never find the name of Aburizal Bakrie or Nirwan Bakrie in the board of directors or commissioners. However, if we use the example of Warren Buffett, this legendary investor is also take part in the companies that he acquired by becoming the director, or in other words, he does not mind to directly manage the company (not just behind the screen).
3. For the efficiency of performance, INDF also has business units in the area of distribution including have some ships for logistics. Salim Group also actually has a lot of companies in the field of retails, so to make Indomie, for example, the Salim Group has controlled everything where the wheat flour for raw materials, factory, distribution, until the stores to sell Indomie in retails, it's all their own (Indomaret and Superindo also belongs to the Salim Group). However, only the distribution business units that are placed under INDF.
4. The company regularly pays annual dividends in a reasonable amount, which is about half of the company's net income in the year, and this shows that management is in favor to investors. Value of the dividend itself continues to rise from Rp45 per share in 2008, to Rp142 for fiscal year 2013.
5. Return on Equity (ROE) of the company always maintained at the level of 15 - 20% each year, although INDF’ equity increased significantly in recent years (especially since the IPO of its two subsidiaries, ICBP and SIMP). Only in 2013 the company's profit was down due to lower CPO prices, and consequently its ROE also fell, but during other years, including 2014, the ROE kept at the profitable range. The complete data can be seen in the table below. Note that 'equity' is the equity belonged to the company's shareholder (beyond non-controlling interests), and 'net profit' is the net profit attributable to the equity holders of the parent entity.

Year	2014*)	2013	2012	2011	2010	2009
Equity (Rp billion)	24,228	23,649	21,209	18,676	16,785	10,149
Net Profit (Rp billion)	1,373	2,504	3,261	3,077	2,953	2,076
ROE (%)	22.7	10.6	15.4	16.5	17.6	20.5
*) net profit is for first quarter only, the ROE is annualized

If you notice, with PER 10.9 and PBV 2.5 times at the price of Rp6,775 per share, then INDF is one of the blue chip stocks in the market that is fairly priced. The stocks tends to sideways over the last year in the range of 6,500 and 7,500 (INDF once dropped to below 6,000 in August 2013 when the Jakarta Composite Index fell to its lowest position, but immediately bounce back after the bear period is done), and it is because the company's performance in 2013 was down due to the declining performance of its subsidiaries in the field of oil palm plantations and its derivatives, due to lower CPO prices. In 2012, INDF had net profit of Rp3.3 trillion, which fell to Rp2.5 trillion in 2013. However because since the beginning the valuation of INDF are not too expensive for the size of the blue chip stocks, then the shares weren’t dropped.

The good news, INDF kicked off the year of 2014 by making net profit of Rp1.4 trillion in the first quarter of 2014, compared to Rp722 billion in the same period in 2013, or an increase of 90.1%. This increase is certainly contributed by the rise of oil palm plantation business which successfully generate huge profits after the prices of CPO began to rebound (in addition to the CPO production volume that keep rising). If this up-trend continues, added by additional revenue from China Minzhong, then INDF is obviously interesting, and that's not including the additional potential revenue from other expansion projects that are being and the company would do.

However, there is another thing that you have to notice, ie the company’s huge debts. Various expansion over the last few years certainly requires substantial funds, so the company decided to sell a portion of ICBP and SIMP to the stock market to raise a total of Rp10 trillion, but even that is not enough. So INDF also take long-term bank debts, and most recently, the company issued bonds worth Rp2 trillion to pay off previous bonds. In the first quarter of 2014, the total liability of INDF was Rp42 trillion, quite large compared to the value of the company's equity that is Rp24 trillion (while INDF’ total assets were Rp81 trillion or about US$ 8 billion). If we learn the history, the Salim Group successfully defended INDF when the monetary crisis occured in 1998, but was forced to sell Bank BCA (BBCA), Indocement (INTP), and several other companies, because they’d bear considerable debts.

And today, the Group again make the same steps that could be a mistake. Uncle Anton may have his own view on this matter, where INDF today has many subsidiaries in overseas so it lower the risk related to the decline of Indonesia’s currency, ie Rupiah, because these subsidiaries posted revenue and earnings in the currency of their countries respectively (such as China Minzhong, which posted their profits in Renminbi/RMB), while we know that the 1998 monetary crisis occurred because of the sudden weakening of Rupiah suddenly from Rp2,500 to 15,000 per U.S. Dollar. But still, you have to take a look at this debt issue if you want to be a shareholder of the company.

Anyway, now we talk about the ideal buying price for the stock. As I mentioned above, the current position of INDF is fairly reasonable, so if you want acquire it then wait until the cost became lower, let say in the range of Rp6,000 to 6,500 per share, which INDF is very likely to fall to the positions if the JCI went down. After that, then you can just sit back and waiting. Target price of 9,000 for INDF is fairly realistic for a period of 2 - 3 years, or less, as long as the company have no problem in managing its debts properly. The risk of the declining financial performance due to lower price of CPO is very small as the price is already low after continue to declining in the last two years.

Then if there is a question, which is better? To buy INDF or any of its subsidiaries, like ICBP, SIMP, or LSIP? So the answer is, you have to look at their valuation. From the side of PBV, SIMP is the cheapest among all of them, but that's because SIMP so far has a low level of profitability because most of its plantation assets are immature or even have not been planted yet (from nearly half a million hectares of plantations owned by SIMP, only half of which that have been planted), and because the margin of cooking oil and margarine is smaller than CPO (SIMP subsidiary, namely LSIP, only selling CPO). If viewed from the company's ability to generate earnings, then ICBP and LSIP are the best choice, but these prices are premium. So if you want to take the middle option, then you might buy INDF, of course, if you can get in at the ideal price.

In mid-2012, the price share of INDF was stuck at 4,500’s for some long period (about eight months), although it was a low price consider that the PBV is less than 2.0 times (remember that INDF is a good quality blue chip stocks, which can not be valued too low). And now, almost two years later, INDF already at the level of 6,500 to 7,000, an increase of approximately 50%. This suggests that if we buy good stocks at bargain prices, then even though you might have to wait for quite a long time, yet the stock will eventually rise. The good news, it is still not too late to buy INDF if the purpose is for long term investment, let say for 2 - 3 years.

PT. Indofood Sukses Makmur, Tbk

Performance in Q1 2014 Rating: A

Shares at 6.775 Rating: A