Japfa Comfeed Indonesia: Agriculture

THE COMPANY: Japfa Comfeed Indonesia (JPFA) was established in 1971 by the Santosa family, under the name Java Pelletising Factory, with copra pellets as its main product. Listed in 1989, the company acquired four poultry feed producers in 1990, resulting in a business shift and name change to Japfa Comfeed Indonesia. It has continued to acquire more poultry feed companies and expanded into cattle breeding as well as other poultry-related businesses to become the second-largest poultry player in Indonesia.

JPFA has varied poultry businesses, including animal feeds manufacturing, chicken breeding/day-old chicks (DOCs), commercial chicken farms, processed chicken, aquaculture, cattle breeding and trading. Currently, the company has a feed-mill capacity of 2.8m tonnes per annum, commercial chicken farms with a total capacity of 150m chickens per annum and breeding capacity of DOC of 500m per annum, cattle farming capacity of 63,000 cattle per cycle and a cattle breeding capacity of 9000 tonnes, and 300,000-tonne capacity in aquaculture. As the second-largest poultry company in the country, JPFA has market shares of around 23% in the animal feed industry, 25% in DOC and 28% in aquaculture, as well as 18% in imported cattle farming industry, making it the market leader. As a listed company, JPFA’s market capitalisation is the second-largest among all poultry companies listed on the Indonesia Stock Exchange, with a total market capitalisation of around Rp13.4trn ($1.34bn).

DEVELOPMENT STRATEGY: In July 2012 JPFA merged with its subsidiary, Multibreeder Adirama Indonesia (MBAI), which breeds DOC. Through this merger, JPFA will receive borrowing rates of 7-9% – lower than the previous rates of 10-10.5% that MBAI received on its own. With a lower cost of funding, the DOC division expanded its production to 500m DOCs in 2012. Greater commercial farm production will follow from higher DOC production. Moving ahead, JPFA aims to grow organically by adding 3m tonnes to its poultry feed capacity through expansions in Makassar, Lampung, Padang and Banjarmasin, as well as by adding two more feed mills in East and West Java that will support a 2013 top line of Rp20.5trn ($2.05bn), up 13% year-on-year.

FORECAST: Given Indonesia’s largely Muslim population with minimal pork consumption and relatively low GDP per capita of $3495 in 2011, poultry will likely remain one of the most affordable meats, creating strong domestic demand for chicken products. Currently, Indonesians only consume 6.3 kg of chicken per annum on average – lower than neighbouring countries like Vietnam and the Philippines, which have lower GDP per capita, but higher chicken consumption per capita of 7.2 kg and 8.4 kg, respectively. This suggests that JPFA will continue to grow as chicken consumption rises alongside increasing GDP per capita.

Despite 50,000 ducklings from Australia dying from bird flu in November 2012, and the government stopping the import of poultry products and meat and bone meal (poultry feed raw materials) from Australia, JPFA should emerge unscathed because it can produce its own vaccine. It should be noted that JPFA is the only company in the sector with the capability to produce vaccines through animal vaccine producer Vaksindo Satwa Nusantara, which it acquired in 2008. Additionally, with its sophisticated biosecurity, JPFA should be able to minimise the spread of bird flu within its farms.

On the cost front, price fluctuations in corn and soybean meals, which are mainly imported, raise concerns on margins. Despite these cost pressures, JPFA has the ability to pass on higher prices to its customers, enabling margin maintenance. At present, JPFA is able to secure four months’ worth of corn and soybean meal inventories from its suppliers in North and South America. The company also makes bulk purchases of raw materials to lower its shipping costs and obtain higher discounts, which provides margin support.

As a result, JPFA should record earnings growth of 19%, higher than the sector’s 17.6% rise. This, coupled with cheap valuation of 2013 price to earnings ratio of 11x, will mean further upside potential for JPFA.