Malindo Feedmill: Poultry

The Company

Established in 1997, Malindo Feedmill (MAIN), which is involved in the production and distribution of poultry feed, has become a rising star within the growing poultry sector due to a low penetration rate. MAIN was formerly known as Gymtech Feedmill Indonesia, a subsidiary of two listed Malaysian companies, Leong Hup Holdings Berhad and Emivest Berhad. In 2000, MAIN acquired a feed mill processing plant with an installed capacity of 150m tonnes per annum (tpa) from Subur Group and changed its name to Malindo Feedmill. To add production capacity, MAIN continued to acquire more facilities and eventually gained sufficient size to list on the Indonesian Stock Exchange (IDX) in 2006. MAIN is Indonesia’s third-largest poultry company both in terms of size and market capitalisation. Its business divisions include poultry feed (9M13: 70% of revenues; 8% market share), day-old chicks (DOC, 19% of revenues; 9% market share), broiler chicken (8%), processed chicken and others (duck breeding and aquaculture, 3%). In 2010, MAIN added one feed mill with a capacity of 450,000 tpa, two DOC farms with a total capacity of 15m chickens per annum, and one farm GPS with a capacity of 720,000 PS. The company has a feed mill capacity of 900,000 tpa, DOC capacity of 181.8m per annum, broiler chicken capacity of 19.4m tpa, and processed food capacity of 9000 tpa.

Development Strategy

In 2013, MAIN commenced food processing under the brand “Sunny Gold” chicken nuggets and sausages, with a capacity of 9000 tpa. In 2013, the division, having only produced around 500 tpa, was still making a loss due to its lack of economies of scale. In 2014, we expect processed food production will be increased to around 1500-2000 tpa, before jumping to 3500-4000 tpa, allowing the division to generate profit. The management has been proactive in cutting marketing expenses by promoting its products through direct marketing and traditional markets (65%). MAIN also supplies chicken nuggets to the likes of 7-Eleven and Lawson. Leading up to the elections in 2014, we believe chicken consumption will increase as most of the political parties have the tendency to provide meals with chicken for campaign attendees.

To anticipate the increase in consumption, MAIN plans to raise its feed mill capacity by 420,000 tpa to 1.32m tpa by 2014, expanding their feed mill in Makassar by 240,000 tpa and Central Java by 180,000 tpa. MAIN also plans to increase their breeder farm capacity by 15m-30m DOC per annum and set aside around Rp100bn ($10m) for the purpose of capex expansion.

As we estimate the prices of DOC (4Q13 average: Rp3900, $0.39, up 85% year-on-year), broiler chicken (4Q13 average: Rp18,300, $1.83, up 24% y-o-y) and feed (up 20% y-o-y) to remain strong in 2014, MAIN should see operating support going forward.

Forecast

Driven by Indonesia’s low per capita chicken consumption compared to neighbouring countries, there is a huge potential consumption which will support MAIN’s long-term promising growth. On a per capita basis Indonesians only consume 7 kg of chicken per annum, which represents only one-fifth of Malaysia’s 37 kg of chicken per annum, whose income per capita is twice the size of Indonesia’s. The Indonesian and Malaysian populations are mainly Muslim and do not consume pork, pointing to greater consumption of chicken as income per capita rises further.

As for costs, decreasing soybean oil and corn prices have supported poultry players’ gross margins to remain attractive. Currency depreciation has recorded a large forex loss (Rp150bn, $15m) in 2013 for Malindo as the company still imports all of its raw materials. MAIN should record negative earnings growth (-9% y-o-y) in 2013, although the company’s top line growth remains positive (+24% y-o-y). To anticipate forex fluctuations, MAIN plans to hedge their short-term loans ($22.3m as of September 2013, around 70% short-term borrowings). On valuation, however, MAIN remains attractive on 2014 P/E of 12.6x given rapid growth, rupiah appreciation and also stable commodity prices. Therefore, at our target price of Rp4200 ($0.42), MAIN would trade at 15.6x P/E, still some 10% discount to the sector.