Wonderful Company: Ultrajaya Milk Industry

With only 17 liters per capita, Indonesia’s milk consumption is one of the lowests in the world, but the volume of milk production in the country is even lower, that about 75% of domestic milk needs are supplied by imports, mainly from Australia. This is a very good advantage for PT Ultrajaya Milk Industry, Tbk (ULTJ), one of the largest local milk producers in country, who never have any significant difficulties in marketing their dairy products, which is of course sold at lower prices than imported milk but with similar quality, or even better. As a result, the company’s revenue consistently increased every year. And with 24.4% annualized return of equity as of first quarter 2019, ULTJ is one of the most profitable companies which listed in the Indonesia Stock Exchange.

The history of Ultrajaya began when the late Mr. Achmad Prawirawidjaja produces ready-to-drink milk at his home in Bandung City, West Java, with the milk ingredients mainly purchased from cattle farms in Pangalengan, Bandung Regency. The business was quite successful, but there was one problem: The packaged milk could only last for a few days, so there were cases that the milk had been stale before it could be sold or consumed.

Products of Ultrajaya

Until in 1975, the company for the first time applied the UHT (ultra high temperature) milk processing technology, and worked with Swedish Tetra Pak to use aseptic packaging, which enabled the milk products to be much more durable. The innovation was a great success, that the company adopted ‘Ultrajaya’ as their official name. In the following years ULTJ began producing other types of beverages (fruit juice, tea, etc.) which also used UHT technology and aseptic packaging. Today, ULTJ has one large-scale production plant in Padalarang, West Java, which produces milk with 'Ultramilk' brand, sweet condensed milk, tea drink under the brand 'Teh Kotak' , Sari Kacang Ijo drinks, Sari Asem Asli, and fruit juice drinks. ULTJ also produces milk for other companies including for exports, and produces fruit juice with 'Buavita' brand for PT Unilever Indonesia, Tbk. The company focuses its business on producing and selling drinks, with more than 95% of them being UHT drinks. Currently the company is run directly by Mr. Sabana Prawirawidjaja (as Chairman), the son of late Mr. Achmad, and also Samudera Prawirawidjaja (as Director), the son of Mr. Sabana. Counted from Mr. Achmad as the founder of the company, Ultrajaya have had experience of more than 50 years in the milk industry, thus make it one of the most established companies in its field.

And these are some facts of Ultrajaya:

1. With 42% of market share, the brand of ‘Ultramilk’ is the market leader of UHT milk in Indonesia,
2. In the past, Ultrajaya didn’t have their own farm, so they must buy raw milk from farmers in Pangalengan, or by import. But since 2010 they have their own cattle farm in Brastagi, North Sumatera, and Pangalengan, so that they are now no longer too dependent on raw milk supply from farmers (although the company still buying milk from them), and the company’s profitability also increased,
3. Besides having its of cattle farm, Ultajaya also have their own distribution chain. And because of very huge cashflow compared to it’s total assets, Ultrajaya never needed loans from bank, thus there are no costs of interests. As the results, the company have great pre-tax income margin, ie more than 25% of its revenue.

So here we have a well-established dairy company, with strong local brands, the market leader in its field, managed directly by the company's founding family, and has bright long-term prospects because as mentioned above, the milk consumption in Indonesia is still very low. The company's dividend policy, where ULTJ only pays around 15 - 20% of its annual net income as dividends, also shows that management still has long-term plans for company development. The only problem is that precisely because of the lack of milk production from cattle farmers in the country, including from Ultrajaya’s own farms, the company never able expand its business to milk derivative products like butter or cheese, because they are still struggling in bulding its raw milk supply, and increasing their UHT milk production to met the demand. The Prawirawidjaja have an ice cream business though, with brand ‘Campina’, but it is placed in another company (PT Campina Ice Cream Industry, Tbk).

But still, even with its current business, I think Ultrajaya is a wonderful company according to Warren Buffett version of ‘wonderful company’, and I even think that, if Berkshire Hathaway expanded its portfolio to third world countries like Indonesia, then almost certainly they would acquire this Ultrajaya. Because at price to earnings ratio of 12.5 times at the price of Rp1,300 per share, ULTJ is currently one of the most cheapests consumer goods stocks in Indonesia, or probably in the world. However, you are not Buffett, so please add your own analysis and consideration before deciding.

Disclosure: When this column was written, the author had position in ULTJ at purchasing price of Rp1,275 per share. This position could change at any time without prior notice.

Teguh Hidayat is an investor, author, and fund manager. Having invests in Indonesian stocks since 2009, his specialty is value investing, trying to find prospective investments at lowest possible price. To read more of his works, please visit www.teguhhidayat.com, or find him in Instagram, @teguhidx.