Thursday, September 16, 2010

Prospect of Indofood CBP IPO

Indofood (INDF) is identical with Indomie, because that's their flagship product, which until now seems have no rival (Wings Food indeed is trying to shift the Indomie with Mie Sedaap, but so far apparently not been successful). But actually, business scope of INDF is much broader than simply selling instant noodle with Indomie brand. As the name implies: Indofood, INDF is one of the largest integrated food company in Indonesia, which controls the food sector from upstream to downstream.

As a big company, INDF has a lot of subsidiaries. Below are subsidiaries of INDF with assets above Rp 1 trillion.

1. PT Salim Ivomas Pratama, oil palm plantation companies and their processed products (cooking oil).
2. PT Indomarco Adi Prima, a distributor company
3. Drayton Pte Ltd (Singapore), an investment company
4. Indofood Oil & Fats (Singapore), a cooking oil an margarine company
5. Indofood Agri Resources ( Singapore ), palm oil plantation company. Listed on the Singapore Stock Exchange (SGX)
6. PT PP London Sumatra, palm oil plantation company. Listed on the IDX with ticker LSIP
7. PT Lajuperdana Indah, sugar cane company
8. PT Indolakto, dairies (with brand of Indomilk)

In addition to these companies, INDF also has a subsidiary that is not placed as a subsidiary, but the division, namely Bogasari (producer of wheat flour). Overall, INDF produces and sells wheat flour, instant noodles, milk, flavoring, snack (chiki, crisps and biscuits), nutritious food, cooking oil, and plantation crops and its processed products (including syrup and soy sauce, from sugar cane and soy beans plantations). 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 famous brand is Bimoli.

INDF's business is also integrated. For example, to send a piece of instant noodles to your hands, then the company has wheat flour processing plants, making noodle factories, manufacture of packaging and cardboard box, until the distributors. Everything is owned by the company. imagine big INDF is? Even one of famous mini store in Indonesia, Indomaret, though not under the INDF, but is also owned by Mr. Anthoni Salim, the owner of INDF.

Back to INDF subsidiaries. Then where the Indofood CBP?

Indofood CBP (ICBP) is actually established in the year 2009, which functioned as the parent company of several subsidiaries of INDF engaged in instant noodles, snacks, flavor, nutritional foods, and milk, including Drayton Pte Ltd and PT Indolakto. So the analogy is, if INDF is the CEO, the ICBP is the director, and Drayton and Indolakto are managers under the ICBP. In the INDF corporate structure, ICBP is under Bogasari. Before the ICBP was founded, instant noodle production was handled directly by the INDF itself.

Then how big the size of the ICBP? In 1H10, total assets placed under the ICBP was 11.2 trillion, or only 26.6% of total assets INDF amounted to 42.1 trillion. So from here also shows that the main business of INDF is not in instant noodles, but cooking oil.

What about the performance of ICBP?

Because the products of Indomie, milk, and chiki are always in demand of the market, the ICBP performance is fairly good. In 1H10, ICBP reported sales of 8.9 trillion, or 49.2% of total sales of INDF. Its ne profit recorded 800 billion, or 56.7% of total net profit of INDF. For a company with the size of asset only a quarter of its parent company, then the revenue contribution by more than half of the total income of the parent, are remarkable. Thanks to the price of Indomie which never fell. In contrast to the world price of CPO that often fluctuating, which led to INDF revenue from cooking oil business sometimes higher, sometimes dropped.

The problem is, INDF as a parent company of ICBP has quite a lot of debts. In 1H10, the total liabilities of INDF recorded Rp 25.8 trillion, or 2.5 times of the equity which only 10.7 trillion. Well, from the total debts, 8.9 trillion aka 34.5% were placed in the ICBP. So from ICBP total assets amounted to 11.2 trillion, most are debts. ICBP equity is recorded 1.9 trillion, or only 17.9% of the total equity of INDF. So it seems that ICBP was established only as a place to accommodate the debts of its parent company, INDF.

And indeed it is reflected by the purpose of the IPO, where 70 - 80% of the proceeds from the IPO will be used to pay debts. Thus, the IPO of ICBP will make the financial balance of its parent company, INDF, be healthier, because the debts would reduced. But then what about the ICBP itself? In general, the IPO is certainly not going to have a significant influence for the performance of ICBP, because only 20 - 30% of the IPO proceeds will be used for capital expenditure. But as heICBP performance from the beginning is already good (thanks to the Indomie), then ICBP still have bright prospects for the future.

Salim Group as the INDF owner INDF, is known as conservative business group, aka prefer to do business in the real sector rather than playing with investor funds in the market (quite different from Bakrie Group). So it was somewhat questionable, why now they use IPO in finding money to pay debts. By the way in the financial world, the IPO is the most delicious way to looking for fresh funds, because these funds do not need to be returned to the owners (investors). In contrast to the issuance of bonds or loan from banks.

But on the bright side, now the fans of Indomie are no longer need to invest their money to INDF , but could directly into ICBP. We could say, INDF performance is good enough because it is underpinned by its instant noodle products. So if now ICBP is set to become a specialized company of instant noodle, then the investors could transfer their funds from INDF into ICBP. INDF performance can be easily affected by the global prices of CPO, but the ICBP performance certainly will almost continue to soar, even though the parents forbid their children not to eat Indomie too much (I remember when I was a child, haha).

The IPO price reached 4.300 to 5.500, fair enough?

Well, if viewed from here, INDF as the parent company of ICBP is outrageous. With the lowest price lowest, 4.300, then the market cap of ICBP is 25.1 trillion, aka 2.2 times of the total assets of ICBP. That's expensive! Moreover, most of ICBP assets are debts. It seems that the securities who taking care of the IPO are too confident with the prospect of ICBP, which is actually good, or maybe they are too impose to get funds Rp 5.0 to 6.4 trillion from the public. But if the price is that expensive, then ICBP stock might be a bit difficult to rose sharply on its first trading days, because from the beginning it is already high.

What about the fundamental valuation fundamental? Because ICBP record huge net profits, then the price 4.300 will print annualized PER 7.15 times. Reasonable? yes, although it is still expensive for the size of newcomers stock. Well, what about its PBV? Because ICBP equity are very small, then the price of 4.300 reflected PBV 13.0 times, certainly high enough, so the price of 4.300 is indeed quite expensive, especially 5.500.

In the future, ICBP may be an option for long term investing. But if ICBP still want to sell its shares at a price of 4.300, then maybe you should wait and see. Unlike the case if the price is at levels of 3.000, just take it!

Indofood CBP
Performance rating in 1H10: AA
Shares rating at 4.300: BBB

1 comment:

Anonymous said...

Thank you Pak Teguh for sharing this invaluable info with us. It certainly comes handy for a beginner investor like myself. I am looking forward to read more articles from you. All the best...Rgds, Rieneke