Malindo Feedmill Protein-Induced Growth

Massive growth seen
As Indonesia still lags in terms of per capita consumption of protein, provides huge opportunities in the poultry industry given that chicken meat is one of the cheapest sources of animal protein, as well as its low per capita consumption. In tandem with increasing standards of living, broiler consumption per capita also rose from 3.5kg in 2005 to 5.0kg in 2010.

This is still considerably lower than the Philippines’ 8.1kg or Malaysia’s 37.3kg, thus providing room for higher chicken consumption. We see the company well positioned to benefit from rising protein consumption driven by growing per capita income and the rise of Indonesia’s middle income class.

Oligopolistic industry confers pricing power
The Indonesian poultry industry is controlled by two big players: Charoen Pokphand (CPIN) and Japfa Comfeed (JPFA), which hold a combined share of around 58% of the feedmill market and 64% of the day-old chicks market. We believe the oligopolistic nature of the industry gives the players pricing power, especially during a material (corn and soybean meal) costs price hike, which enable these companies to pass on at least the biggest portion of cost increase to customers.

Their selling prices also tend to be relatively inelastic and do not go down significantly when commodity prices decline. Malindo is relatively smaller than CPIN and JPFA, controlling around 5% of the chicken feed market and 9% of the DOC market

Processed food business to take off next year
Construction on Malindo’s processed food (sausages and nuggets) plant in West Java province will be completed in early 2012. In the first year, the company expects to produce a combined 2500 tonnes per year of sausages and nuggets at average selling prices ranging from IDR33,000 to 38,000/kg. Malindo expects to generate an EBIT margin of about 15% to 18% from this venture, which may lift overall margins slightly.

We have yet to include the contribution from this segment in our earnings forecast. Meanwhile, the company has just obtained IDR200bn in loan facilities from BCA at an interest cost of 10% to finance its capex needs. Although it has yet to draw on this facility, assuming that the loan is fully drawn down, the company’s net gearing will increase to a manageable 1.3x.

Still the most profitable feedmill producer in Indonesia
Of the 9M11 results among all of Indonesia’s listed feedmill producers, Malindo’s profits stood out, beating most of its peers with an ROE of 54% versus CPIN’s 44%, JPFA’s 31% and SIPD’s 2.3%. In terms of operating margin, MAIN’s was a creditable 11.2% – the second highest after CPIN’s 17.4% – and ahead of JPFA’s 7.4% and SIPD’s 2.7%. MAIN’s 9M11 y-o-y earnings growth also outclassed its peers with a 36% jump vs CPIN’s 18%, JPFA’s -15.3% and SIPD’s -56%.

Reiterate Buy call; TP IDR1,490
We maintain our Buy rating on Malindo with GGM-based target price of IDR1,490/share. We continue to like the company’s growth pace and attractive valuation. The stock is trading at only 5.7x its 2012 earnings, which is at a significant discount to CPIN’s and JPFA’s 15.1x and 7.8x respectively, based on Bloomberg consensus.