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Japfa Group is a holding company which owns 52% of PT Japfa Comfeed (Comfeed), and 100% of its Animal Protein Others, Dairy, and Consumer Foods (APODC) segments. But because Comfeed is 100% consolidated into the results – except for profits and shareholder equity -- at the Group level, it is difficult to understand how these separate businesses are doing.
Separating the results of Comfeed and APODC is possible because Comfeed – as a listed company on Indonesian Exchange – makes public its financial statements. To be able to separate Comfeed and APODC, the numbers from Comfeed – which are denominated in IDR -- were converted to USD, based on the year’s average IDR/USD rate. There might be some inaccuracies in using such a crude method, but it is less tedious and should not be too wide off the mark. APODC numbers were then derived by subtracting Japfa Group numbers from Comfeed numbers. Some data are incomplete as Comfeed has yet to disclose its FY18 cashflow numbers.
The results of APODC are not possible to separate as there are no disclosed financial statements (P&L, BS, CF) for Animal Protein Other, Dairy, or the Consumer Food segment. Though limited information on revenue, profit, and assets/liabilities are available in the segment reporting.
Separating the results of Comfeed and APODC provided some interesting findings.
1. Comfeed is doing most of the heavy lifting
APODC generates low ROA, is highly levered (loans to assets), and is largely cashflow negative. Businesses that are growing may sometimes be cashflow negative and levered. But the poor returns from the APODC segment makes large expansion and use of debt seem to be a poor idea. Its book value saw no meaningful growth. Its total net profit from FY11 to FY18 is US$145m.
APODC ROA (%) Leverage (%) FCF (mil USD) Equity (mil USD)
FY11: 3.2 52 -116 318
FY12: 0.8 95 -102 90
FY13: 4.5 120 -25 50
FY14: 2.6 74 -170 543
FY15: 5.6 69 10 589
FY16: 3.2 47 18 425
FY17: -2.2 42 -51 333
FY18: 1.6 58 na 416
Average 2.4 nm -62 nm
Since Comfeed was already listed on IDX for a long time prior to Japfa’s listing on SGX in 2014, it can be argued that the purpose of Japfa’s listing was mainly to raise money for the APODC segment. But because APODC’s numbers were so bad, it is unlikely the market will be willing to give it a high valuation, or even be interested at all, if the controlling Santosa family wishes to sell some of its shares. So how do you get people to buy something that looks so bad? Fruit sellers and investment bankers alike will give you the same advice, “throw in some of the good stuff with the bad to make it all look better!”
Comfeed ROA (%) Leverage (%) FCF (mil USD) Equity (mil USD)
FY11: 7.4 42 -54 378
FY12: 9.0 29 -112 508
FY13: 3.9 23 -130 446
FY14: 2.4 19 -1 401
FY15: 3.0 15 57 419
FY16: 11.2 22 169 663
FY17: 5.2 28 -44 689
FY18: 9.7 29 na 714
Average 6.5 nm -16 nm
Comfeed generates a moderate return, uses less leverage, and is far less negative on its cash flow. Its book value almost doubled from FY11 to FY18. During the same period, Comfeed also paid about US$270m of dividends. So the shareholder returns, in USD terms, were more than double. Its total net profit is US$638m; about 4 times that of APODC. This means APODC contributed only a fifth to Japfa’s total profits from FY11 to FY18.
2. Japfa Group may have difficulties in increasing its dividend (payout ratio)
Since Japfa Group relies on Comfeed for profits and dividends, so long as APODC does not go into losses, Japfa Group should be able to pay out dividends received from Comfeed. But Japfa Group is unlikely to pass on all the economic benefits of the dividends it received from Comfeed, to its own shareholders. There are a few reasons for this.
The first is the issue of long-term appreciation of USD against IDR. The average USD/IDR in 2011 is 8,764. This rose to 14,304 in 2018. As Comfeed’s function currency is the IDR, this means that Comfeed will have to work harder just to contribute/pay the same level of profit/dividend to parent Japfa Group, if USD is to continue its appreciation against the IDR. How much harder did Comfeed had to work, from 2011 to 2018, just to contribute/pay the same level of profit/dividend to parent Japfa Group? Since the USD appreciated 63% against the IDR from 2011 to 2018, Comfeed had to increase its profit/dividend by 63% as well.
So while Comfeed’s business may be growing in IDR terms, the growth will be lower when viewed in USD terms. This is especially the case if Comfeed retains some of its IDR profits, to plough back as working capital. From FY11 to FY18, Comfeed’s profits totalled IDR 8,649 billion, but only paid out IDR 3,202 billion as dividends; a 37% payout ratio. Therefore as Comfeed’s book value in IDR grew by 208% -- from IDR 3,317 billion in FY11, to IDR 10,214 billion in FY18 -- its book value in USD grew by only 88%, from US$378m in FY11 to US$714m in FY18.
The second issue that shareholder of Japfa Group should be concerned with is that Japfa Group only owns 52% of Comfeed, which means only 52% of the dividends declared from the latter will flow to the former.
Dividends from Comfeed to Japfa Japfa to shareholders (in US$m)
FY14: 4.5 0 (IPO year)
FY15: 0 6.4
FY16: 9 12.5
FY17: 20 6.5
FY18: 41 27.2
Total 74.5 43.1
Comfeed’s latest US41m dividend to Japfa is its second biggest ever. Its biggest dividend was in FY11 when it distributed US$50m to Japfa Group. Comfeed will have to maintain its earning power to be able to maintain and increase its dividends to Japfa Group. What were Comfeed’s historical earnings?
Comfeed Profit (in US$m) (in IDR billion) Average USD/IDR
FY11: 70 617 8,764
FY12: 105 991 9,359
FY13: 56 595 10,488
FY14: 33 391 11,848
FY15: 39 524 13,385
FY16: 162 2,171 13,323
FY17: 82 1,107 13,364
FY18: 157 2,253 14,304
Clearly, there has been good years and not so good years. This is likely to be the pattern in the future as well. Though if Comfeed’s stars are well-aligned, its profits might continue to be on an upward trend. So for Japfa Group shareholders, a dividend of US$27.5m may not materialise in the next or following year, if Comfeed’s profit dips in those years.
The last issue that makes it difficult for Japfa to pay dividends is its huge debt burden. The APODC segments have a total of US$745m of bank loans, including US$252m of long-term loans at the Holding Company level. Given the poor ability of APODC to generate profits, the task of substantially paying down these US$745m loans is a tall order.
APODC Profit Bank Loans (in US$m)
FY11: 9.0 145
FY12: 4.5 506
FY13: 24.6 648
FY14: 26.1 738
FY15: 52.6 648
FY16: 34.7 512
FY17: -26.5 490
FY18: 20.7 745
Unless the APODC segments materially improve their performance, or Japfa Group disposes some of these APODC segments, the large amount of loans by APODC is likely to impede any large distribution of dividends from Japfa Group.
While the performance of Japfa Group is tied to the selling prices of animal protein, the unfavourable long-term exchange rates and heavy bank loans will likely weigh on any upside gained from improved selling prices.
Based on the points raised, perhaps shareholders of Japfa should sell Japfa and buy Comfeed instead. Though there is still the exposure to a possibly depreciating IDR.
Separating the results of Comfeed and APODC is possible because Comfeed – as a listed company on Indonesian Exchange – makes public its financial statements. To be able to separate Comfeed and APODC, the numbers from Comfeed – which are denominated in IDR -- were converted to USD, based on the year’s average IDR/USD rate. There might be some inaccuracies in using such a crude method, but it is less tedious and should not be too wide off the mark. APODC numbers were then derived by subtracting Japfa Group numbers from Comfeed numbers. Some data are incomplete as Comfeed has yet to disclose its FY18 cashflow numbers.
The results of APODC are not possible to separate as there are no disclosed financial statements (P&L, BS, CF) for Animal Protein Other, Dairy, or the Consumer Food segment. Though limited information on revenue, profit, and assets/liabilities are available in the segment reporting.
Separating the results of Comfeed and APODC provided some interesting findings.
1. Comfeed is doing most of the heavy lifting
APODC generates low ROA, is highly levered (loans to assets), and is largely cashflow negative. Businesses that are growing may sometimes be cashflow negative and levered. But the poor returns from the APODC segment makes large expansion and use of debt seem to be a poor idea. Its book value saw no meaningful growth. Its total net profit from FY11 to FY18 is US$145m.
APODC ROA (%) Leverage (%) FCF (mil USD) Equity (mil USD)
FY11: 3.2 52 -116 318
FY12: 0.8 95 -102 90
FY13: 4.5 120 -25 50
FY14: 2.6 74 -170 543
FY15: 5.6 69 10 589
FY16: 3.2 47 18 425
FY17: -2.2 42 -51 333
FY18: 1.6 58 na 416
Average 2.4 nm -62 nm
Since Comfeed was already listed on IDX for a long time prior to Japfa’s listing on SGX in 2014, it can be argued that the purpose of Japfa’s listing was mainly to raise money for the APODC segment. But because APODC’s numbers were so bad, it is unlikely the market will be willing to give it a high valuation, or even be interested at all, if the controlling Santosa family wishes to sell some of its shares. So how do you get people to buy something that looks so bad? Fruit sellers and investment bankers alike will give you the same advice, “throw in some of the good stuff with the bad to make it all look better!”
Comfeed ROA (%) Leverage (%) FCF (mil USD) Equity (mil USD)
FY11: 7.4 42 -54 378
FY12: 9.0 29 -112 508
FY13: 3.9 23 -130 446
FY14: 2.4 19 -1 401
FY15: 3.0 15 57 419
FY16: 11.2 22 169 663
FY17: 5.2 28 -44 689
FY18: 9.7 29 na 714
Average 6.5 nm -16 nm
Comfeed generates a moderate return, uses less leverage, and is far less negative on its cash flow. Its book value almost doubled from FY11 to FY18. During the same period, Comfeed also paid about US$270m of dividends. So the shareholder returns, in USD terms, were more than double. Its total net profit is US$638m; about 4 times that of APODC. This means APODC contributed only a fifth to Japfa’s total profits from FY11 to FY18.
2. Japfa Group may have difficulties in increasing its dividend (payout ratio)
Since Japfa Group relies on Comfeed for profits and dividends, so long as APODC does not go into losses, Japfa Group should be able to pay out dividends received from Comfeed. But Japfa Group is unlikely to pass on all the economic benefits of the dividends it received from Comfeed, to its own shareholders. There are a few reasons for this.
The first is the issue of long-term appreciation of USD against IDR. The average USD/IDR in 2011 is 8,764. This rose to 14,304 in 2018. As Comfeed’s function currency is the IDR, this means that Comfeed will have to work harder just to contribute/pay the same level of profit/dividend to parent Japfa Group, if USD is to continue its appreciation against the IDR. How much harder did Comfeed had to work, from 2011 to 2018, just to contribute/pay the same level of profit/dividend to parent Japfa Group? Since the USD appreciated 63% against the IDR from 2011 to 2018, Comfeed had to increase its profit/dividend by 63% as well.
So while Comfeed’s business may be growing in IDR terms, the growth will be lower when viewed in USD terms. This is especially the case if Comfeed retains some of its IDR profits, to plough back as working capital. From FY11 to FY18, Comfeed’s profits totalled IDR 8,649 billion, but only paid out IDR 3,202 billion as dividends; a 37% payout ratio. Therefore as Comfeed’s book value in IDR grew by 208% -- from IDR 3,317 billion in FY11, to IDR 10,214 billion in FY18 -- its book value in USD grew by only 88%, from US$378m in FY11 to US$714m in FY18.
The second issue that shareholder of Japfa Group should be concerned with is that Japfa Group only owns 52% of Comfeed, which means only 52% of the dividends declared from the latter will flow to the former.
Dividends from Comfeed to Japfa Japfa to shareholders (in US$m)
FY14: 4.5 0 (IPO year)
FY15: 0 6.4
FY16: 9 12.5
FY17: 20 6.5
FY18: 41 27.2
Total 74.5 43.1
Comfeed’s latest US41m dividend to Japfa is its second biggest ever. Its biggest dividend was in FY11 when it distributed US$50m to Japfa Group. Comfeed will have to maintain its earning power to be able to maintain and increase its dividends to Japfa Group. What were Comfeed’s historical earnings?
Comfeed Profit (in US$m) (in IDR billion) Average USD/IDR
FY11: 70 617 8,764
FY12: 105 991 9,359
FY13: 56 595 10,488
FY14: 33 391 11,848
FY15: 39 524 13,385
FY16: 162 2,171 13,323
FY17: 82 1,107 13,364
FY18: 157 2,253 14,304
Clearly, there has been good years and not so good years. This is likely to be the pattern in the future as well. Though if Comfeed’s stars are well-aligned, its profits might continue to be on an upward trend. So for Japfa Group shareholders, a dividend of US$27.5m may not materialise in the next or following year, if Comfeed’s profit dips in those years.
The last issue that makes it difficult for Japfa to pay dividends is its huge debt burden. The APODC segments have a total of US$745m of bank loans, including US$252m of long-term loans at the Holding Company level. Given the poor ability of APODC to generate profits, the task of substantially paying down these US$745m loans is a tall order.
APODC Profit Bank Loans (in US$m)
FY11: 9.0 145
FY12: 4.5 506
FY13: 24.6 648
FY14: 26.1 738
FY15: 52.6 648
FY16: 34.7 512
FY17: -26.5 490
FY18: 20.7 745
Unless the APODC segments materially improve their performance, or Japfa Group disposes some of these APODC segments, the large amount of loans by APODC is likely to impede any large distribution of dividends from Japfa Group.
While the performance of Japfa Group is tied to the selling prices of animal protein, the unfavourable long-term exchange rates and heavy bank loans will likely weigh on any upside gained from improved selling prices.
Based on the points raised, perhaps shareholders of Japfa should sell Japfa and buy Comfeed instead. Though there is still the exposure to a possibly depreciating IDR.