example of investment analysis paper

8/17/2019 Example of Investment Analysis Paper

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International Conference

The 14th ICMSS

Investment Analysis

Kerria & Brothers

Universitas Indonesia

PT Malindo Feedmill Tbk.


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Stock Price Movement

MAIN.JK JKSE

Malindo Feedmill: The Rising Star

We initiate coverage of PT Malindo Feedmill Tbk. (MAIN) with a BUY

recommendation by putting target price of IDR 2,590 reflecting potentialupside of 19.06% from current price of IDR 2,150. MAIN is able tocapitalize its main operation through strong cash flow and good business

performance. MAIN will be able strengthen its position in poultryindustry in the future by capturing more market share and profit.

Strong Opportunity in Domestic Poultry BusinessChicken is by far the most common and popular meat products forIndonesian consumers. However, chicken product consumption inIndonesia (8 kg/capita per year) remains low in comparison to otherSouth East Asian countries (16 kg – 47 kg/capita per year). The market

still has a lot room to grow and the consumption will potentially increase by 11.63% CAGR for the next 5 years. MAIN has consistently increasedits production capacity to grasp this opportunity and this performance will

be expected to continue in the future with considerable capitalexpenditures.

Favorable Market Landscape Renders Sustainable Margin Feedmill as the main business line is exposed to raw materials pricevolatility as its main cost components, soybean meal and corn, arecommodities-related. However, final consumers are unlikely price-sensitive in that costs can be passed on farmers and end products. Inaddition, the market is oligopolistic in nature that is concentrated towardssome big players, which enables swift price adjustment. Meanwhile DOCsegment remains a challenging landscape with selling price fluctuation.But this segment acts as barrier to entry that ensures security forincumbents to grasp further market share.

New Processed Food Segment: Potential Growth DriverMAIN launched its customers processed food products in 2013 with“SunnyGold” and “Ciki Wiki” brands. MAIN is predicted to spucompetition in downstream business by targeting 2.2% market sharewithin five years, and this segment will contribute 3 – 5% of total revenue

Market Profile

Week Price Range IDR 2,045 - IDR 3,715

erage Daily Volume 5,576,121

a 0.99vidend Yield (Estimated) 0.94

ares Outstanding 1,791,000,000rket Capitaization 3,850,650,000,000

titutional Holdings 59.10%

blic Holdings 40.90%

ok Value per Share 698.19

bt to Total Capital 63.46%urn to Assets 8.87%

urn to Equity 19.01%


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Figure 1: Sales and EBITDA Margin

Business Overview

PT. Malindo Feedmill Tbk. (MAIN.JK) is a rising star within Indonesian poultry sector, established in 1997. The company went public in 2006 to be listed in the national stock exchange. Currently, 59.1% shares are held

by Dragon Amity, a Malaysian firm; while the rest of shares are held by public. Initially, MAIN ’s lines of business comprise of feedmill division, breeder division, and broiler division. But since 2013, the companyadded another line of business: processed food division through itssubsidiary, PT. Malindo Food Delight.

The company has operations through plants and firms across Indonesiaas indicated in Figure 3.

Business segments – the company’s main business segments aresegregated into following divisions:

– F eedmill division: the main driver of revenue is from thissegment, accounting for 68.7% of total revenue. Feedmilldivision has a total production capacity amounting 900.000 tpa.MAIN provides variety of feeds for broilers, layers, commercialmeat ducklings, and other livestock.

– Br eeder divi sion: the product of this division is day-old chicks(DOC). The production capacity for this product is 200 millionschickens per annum, making up 20.4% of total revenue in 2013.

– Br oiler division: as an integrated company, MAIN also raisesand produces broilers with capacity of 28millionskg per anum,contributing 10.7% of total revenue.

– F oods processing divi sion: MAIN introduced the division assupporting unit for its downstream business, under the brands“SunnyGold” and “Ciki Wiki”. Its current production capacity isonly 9,000 tpa with contribution for total revenue of 0.2%.

MAIN is currently tailing behind two big players in the industry:Charoen Pokphand (CP) and Japfa. In feedmill segment, MAIN holds8% market share while CP and Jpafa hold 32% and 24%, respectively. InDOC segment, MAIN ’s market share is 9%, behind Charoen (30%), and

Japfa (9%).

Company strategy – MAIN strives to excel in growing poultry marketthrough expansions in every of its product segment. It keeps expandingits marketing coverage over animal feeds, and broadens market

penetration by vigorous establishment of new feedmill, new breadingfarms, and food processing factories.

Source: Company Data

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M i l l i o n s

Sales EBITDA Margin

68.7%

20.4%

10.7% 0.2%

Feedmill DOC

Broiler Processed Foods

Figure 2: Breakdown of 2013 Sales Segments

Figure 3: Area of Operations




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Industry Analysis

ECONOMIC FUNDAMENTALS UPHOLDING GROWTH

Resilient macroeconomic outlook – Indonesian economy remains

subdued this year following slowdown in 2013. Depreciation of rupiah,increase in fuel price in mid-2013 and mid-2014 have triggered hike ininterest rate (7.75%) that has deterred economic growth. Economicgrowth is forecasted to be 5.3% in 2014. Although inflation is likely to

be 7%, private consumption remains robust as the main driver ofeconomic growth. Strong domestic consumption will support demand forfoods as daily necessities, in which chicken is very common and popularamong most Indonesians.

Stabilizing exchange rate – rupiah depreciated by 30% since January2013. Nevertheless, it has stabilized and is currently entering a new

equilibrium at around Rp 12,500/USD. This is a favorable outlook forMAIN and poultry industry in general as raw materials are mainlyimported therefore change in exchange rate will affect margin.

Rising disposable income and middle-class – in the past five yearsGDP per capita of Indonesia has seen a 53% increase, currently at USD3,475. The emerging economy is also indicated by growing middle-classsociety, in which currently there are 74 millions out of 250 millions

population. The number of middle-class is predicted to increase by 8 –millions per year, making up roughly 141 millions in 2020. This is in linewith the surge of demand for food chicken in two ways: the number ofconsumption of chicken per capita and consumption penetration as nowthere are more affluent customers pouring the market.

HUGE POTENTIAL DEMAND FOR POULTRY SECTOR

Strong domestic chicken consumption – chicken is by far the mos preferred meat product as majority of Indonesian consumers are Muslimthat are barred in consuming pork, and beef remains a very expensivealternative. However, chicken product consumption in Indonesia remainslow compared to other South East Asian countries. In 2013, chickenconsumption was around 8kg/year, far below four neighboring countries:

Brunei, Singapore, Malaysia and Thailand. The consumption rate ofthese nations are at 47kg, 38kg, 38kg and 16kg per year respectively.However, according to Poultry Breeding Firms Association ( GPPU ), thlevel of consumption will increase by 11.63% CAGR for the next 5years. Resulting from the increasing number of consumer spending anddemand for more nutritious food. This condition implies that Indonesian

poultry sector has tremendous space for players to rake in profit.

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GDP Per Capita GDP Growth

Figure 4: Indonesian GDP per Capita and GDP Growth

Source: World Bank

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2012 2020

Figure 5: Indoensian Demographic Transition

Source: Boston Consulting Group, Team Estimate

Figure 6: Indonesian Chicken Consumption

Source: Poultry Breeding Firms Association (GPPU)


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Potential expansion across Indonesian wide regions – poultry markis concentrated in Java 56% - 67% of poultry farms are located in Javaisland. This offers a wider cross-regional expansion as chicken is alsostrongly consumed in other regions outside Java, with the most potentiallies within Northern part of Sumatera and Kalimantan. MAIN has

sufficient capability supported by its vast distribution networks.Infrastructure support remains a main constraint for logistics but the newIndonesian government seems to improve the landscape.

MODERATING MARGIN IN BUSINESS SEGMENTS

Long-term stable margin in feedmill – the main components of cost forfeedmill (70% contributor of total revenue) are soybean meal and corns,whose prices fluctuate in commodities market. Surging commodities

prices have affected margin in 2013 and 2014. However, we expect themargin will be lenient in the future based on three things: 1) final

consumers have robust demands that are willing to accept higher prices,as well as farmers who accept higher feed price; 2) the market isconcentrated into three players controlling 50% market share (CharoenPhokphand, Japfa, Malindo Feedmill), enabling them to adjust selling

prices accordingly; 3) big players also have ample inventories thus highinventory period allows more time to adjust selling prices.

Challenging DOC landscape – margin in this segment used to be verylucrative (more than 20% in 2010) but it had leveled out due tooversupply. Selling price can swing from IDR 2.000/DOC to above IDR6.000/DOC, making this a challenging market. In Q3 2014, ASP for

DOC is IDR 2.980/DOC while company needs IDR 4.000/DOC to breakeven, which is caused by oversupply in market after Eid-ul Fitr. Wedo not expect margin to be sustainable in the future but this segment istactical consequence embraced by big players as barriers to entry for newentrants. DOC is usually used as bundles to penetrate in new marketareas in further enlarging market shares.

Special gift from Japan in 2014 year-end - Indonesia was banned toexport its poultry product to Japan due to Avian Influenza outbreak in2014. This penalty has caused millions of dollars in loss to the nationalexport income for the last decade. However, with the exposure of

Chinese processing scandal, which was also one of their importingsources, caused the Japanese government to seek new alternativesources. In August 2014, the Japanese and Indonesian government werein talk of resuming chicken processed food trade agreement.

In the late of December 2014, Japan’s Ministry of Agriculture, Forestry,and Fishery has officially opened its chicken processed food market toIndonesia three big players: CP, Japfa, and MAIN. According to

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Figure 7: Chicken Consumption Countries Comparison

Figure 8: Regional Distribution of Chicken Farms

Source: Statistics Indonesia, Ministry of Agriculture

Source: World Bank, USDA

Figure 9: Corn and Soybean Meal Prices

Source: Bloomberg


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Indonesia Poultry Breeders Association (GAPPI), this export agreementcould potentially grab US$2 billion per year or equal to 10% of Japanese

poultry market.

Competitive Positioning

MAIN ’s position in the market is driven by its business segments. In thiscompetitive analysis, we initially provide landscape analysis usingPorter’s Five Forces, than we identify MAIN ’s competitiveness in thefollowing sections: strength in feedmill segment, capacity expansion inDOC and broiler segments, and launch of processed foods segment.

Porter’s Five Forces analysis – in this paper, we use Porter’s FiveForces model to distingusih five external forces driving competitive

position of MAIN in poultry market and measure magnitude of eachfactors.

– Bargaini ng power of suppli er :Raw materials such as corns andsoybeans are mainly importedfrom feoreign supplier.MAIN isdealing with high bargaining power of foreign suppliers in termsof foreign exchange and commodity price volatility, and in termsof amount of supply.

– Bargaining power of customers : The bargaining power oMAIN is considered as medium-to-high due to the nature o

poultry industry. Most of revenues are generated from related

parties that already have business partnership with MAIN(business-to-business). However, there is always risk that

business customers move to other competitors. – Thr eats of new entr ants : By nature, poultry is high-capitalized

industry with considerable barriers to entry. The decliningnumbers of company from 1464 players in 2004 to 176 playersin 2013. We consider the threats of new entrants is medium-tolow .

– Threats of substi tutes :there is currently no direct substitute for poultry feeds. While chicken is main consumption where othermeat alternative such as beef remains highly expensive.Therefore, the threat of substitute is low.

– Rivalr y among exi sting competitors : As industry getting moreconcetrated, each player tries to maximize their market share thatcreates stiff competition among big players in poultry industry.Concentration ratio reaches approximately 70% as quite toughrivalry exists among existing competitors. Thus, we put highthis type of forces.

Figure 10: DOC Selling Prices

Source: Association of Poultry Society ( PINSAR)

Figure 11: Porter's Five Forces

Source: Team Estimate


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Competitive position in feedmill market – we can identify severafactors affecting competition among players in feedmill segment:

– DOC bundli ng: bundling strategy is used to attract farmers to buy feed as chicken growth is assured by quality DOC and profit

for farmers is maximized by dealing with only one supplier for both feed and DOC.

– Post-sales service: guidance of best practice in farming willenhance customer loyalty.

– Di str ibuti on networks: vast distribution networks not only reachlarger nationwide markets but strategic location near will alsocreate cost advantage.

– Br and equity: brand is indicator of feed quality and consistentyield result.

These competitive factors are difficult to fulfill and possessed by big players in market. It also creates barriers to entry for new competitors.

Strong commitment for capacity expansion – historically, MAIN haconsistently increased its production capacity in order to capture growingmarket demand. The most recent additions of capacity was in 20: onefeedmill with 450.000 tpa capacity, two DOC farms with 15 millionschicken per annum capacity, and one GPS (grand parent stock) with720.000 PS (parent stock) capacity. Currently MAIN has 80-90%utilization rate in each segment production plants. The expansioncontinues with establishment of feedmill in Central Java and Makasarwith 600.000 tpa total capacity addition, breeder farms with 30 millions

DOC, broiler farm with 6.000.000 kg, and food processing plant with15.000 tpa capacity addition. MAIN has competitive edge to keepmaking investments for capital expenditure (capex), even it has recentlymade rights issuance to further flow its funding.

Introduction of downstream business: food processing – MAINlaunched its customers processed food products in 2013 with“SunnyGold” and “Ciki Wiki” brands. The segment merely contributes0.2% of company total revenues in 2013 and is expected to contribute1.1% in 2014F. Its market share in this new segment is barely 1%, but itis already a rapid gain as processed food market is crowded by small

players with each having below 1% market share. MAIN is predicted tostand its presence in this market by grasping 2.2% market share withinfive years, and this segment will contribute 3 – 5% of total revenue.

Figure 12: Peers Competitive Comparison



Figure 13: Production Capacity


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Financial Analysis

2014: the turning point - MAIN experiences declining in return onearning (ROE) as equity multiplier began to slump 2012. As company tryto correct its leverage due to high amount of debt compared to equity,

ROE began to stabilize after 2014. Going forward, ROE will normalizenear to industry ROE of 16.3% as earning power begin to surge.

Strong growth despite low caps – In 2014, MAIN experience lowest profit margin due to deteriorated margin caused by soaring raw material prices by 28% in 2013 and 25% in 2014. Notwithstanding the pastexperience, MAIN has recorded strong growth from 2009 to 2013 by17.54% CAGR. We are optimistic that revenue will continue to growthat pace of 11.76% CAGR from 2014 to 2018. This growth are propelledmainly by feedmill segment in which we believe it will reach Rp 5trillion sales in 2018 with aprroximately 70% by total revenue.

Better maintenance of leverage – From 2008, MAIN has beenimproving its leverage by lowering its debt-to-equity ratio from 3.73 in2009 to 1.13. Going forward, we are optimistic that MAIN will continueuntil the number reach 0.42, near to industry median debt-to-equity ratioof 0.21. While maintaining leverage, MAIN has been and will be alsoimproving its interest coverage. As per data in Appendix, its ability tomeet interest payment increased from 2.71 in 2009 to 5.58 in 2013.

Cash position in the aftermath of 2014 – In spite of the fluctuation ocash flow before, in the turning point of 2014, MAIN is able to generatehuge amount of cash flow due to its massive change in equity andinventory. In the aftermath, we are sure that MAIN can improve its cash

position by pushing its operating cash flow to increase its capability ofmeeting its short term liabilities, expansion project, and dividend

payment.

Valuation

Discounted Cash Flow ValuationWe used Discounted Free Cash Flow to Firm (FCFF) method todetermine MAIN fair price. We believe this method reflects thefundamental value of the company and captures its long-term

perspective growth within the industry. This method involvesestimating the firm’s value and adjusting it for the net debt and excesscash to arrive at equity value.

Figure 14: Du Pont Identity

Source: Company Data and Team Estimate

Figure 15: Revenue Segment Growth

Source: Company Data and Team Estimate

Figure 16: Profit Margin Peer-To-Peer



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In applying this valuation, we forecasted MAIN NOPLAT willincrease by 35% CAGR 2014F-2018F, slightly higher compared tohistorical growth 27% CAGR 2008-2013. This is mainly affected bythe increased demand of poultry products and company’sdiversification strategies. However, MAIN needs an average of 470

million Rupiah to conduct further expansion and also an average of 58million Rupiah to maintain its operation.

Cost of CapitalThe Cost of Capital for MAIN were generated from severalassumptions. We used CAPM to estimate cost of equity which arederived by: 1) 7.91% risk-free rate (using 10-year SUN); 2) Beta is0.99 which was calculated from covariance between daily returnMAIN and IDX; 3) 8.3% market risk premium was obtained fromDamodaran. For the cost of debt, we applied the average interest ratefrom MAIN long-term financial debt.

Terminal Growth RateConsidering the historical and future performance of MAIN andIndonesia economic growth, we believe the terminal growth for MAINvaluation will be at least 7%. This is supported by the current conditionof chicken consumption which is still underdeveloped, hence, givingmore opportunities for MAIN to penetrate the market.

Investment Risks

STRATEGIC RISK

Unsuccessful new food processing business (SR1) – MAIN is trying tdiversify its business segment into downstream market. If these productsdo not meet customers’ needs or tastes, company’s sales may be lowerthan forecasted. To mitigate this risk the subsidiary that runs thissegment, Malindo Food Delight, is supported by a team of experienced

personnel who focus on product development. In addition, company mayneed to review its pricing for the segment should its pricing structuredoes not offer competitive edge in the market.

FINANCIAL RISKVolatility of exchange rates (FR1) – MAIN is considerably exposed toexchange rate fluctuation: in 2013 the company made Rp109 billions netloss due change in foreign exchange, which plunged net income to Rp376 billions (16% decrease from Rp 447 billions in 2012). In addition,the company also has net liabilities denominated in foreign currency,totaling 39.8% of total liabilities, increasing from 15.3% in 2012.

Cost of CapitalRisk Free Rate 7.91%Risk premium 8.30%Beta 0.999Marginal tax rate 25%Cost of Equity 16.20%Cost of Debt 11.50%WACC 12.08%

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600,000,000

Figure 17: Revenue Breakdown Peer-To-Peer


Figure 17: MAIN’s forecasted NOPLAT


Figure 17: Cost of Capital Components



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Appendix 1: Income Statement

2012 2013 2014F 2015F 2016F 2017F 2018F

Feedmill 2,220.59 2,880.40 3,237.60 3,718.20 4,211.80 4,867.76 5,612.25DOC 657.58 855.88 784.97 901.50 1,021.17 1,180.21 1,360.72Broiler 471.39 447.83 502.63 577.24 653.87 755.71 871.29Food Processing - 8.97 135.89 163.07 195.69 234.82 281.79Total Revenue 3,349.57 4,193.08 4,661.09 5,360.01 6,082.52 7,038.50 8,126.05Cost of Revenue, Total 2,711.12 3,475.17 4,194.98 4,509.72 5,117.62 5,921.95 6,836.97Gross Profit 638.44 717.91 466.11 850.28 964.90 1,116.55 1,289.08Selling/General/Admin.Expenses, Total

175.96 226.35 251.62 289.35 328.35 379.96 438.6

Depreciation/Amortization 6.94 8.66 12.33 17.13 23.13 29.23 34.74Other Operating Expenses,Total

7.80 106.41 34.28 39.43 44.74 51.77 59.7

Total Operating Expense 2,901.83 3,816.60 4,493.21 4,855.63 5,513.84 6,382.90 7,370.15Operating Income 447.74 376.49 167.87 504.38 568.68 655.60 755.90

nterest Expense, Net Non-Operating (67.22) (67.46) (111.92) (131.19) (146.57) (154.47) (156.23)

nterest/Invest Income - Non-Operating

2.55 1.86 5.29 5.29 5.29 5.29 5.

nterest Inc.(Exp.),Net-Non-Op., Total

(64.67) (65.60) (88.62) (125.91) (141.28) (149.18) (150.95)

Net Income Before Taxes 383.08 310.89 79.25 378.47 427.40 506.41 604.95Provision for Income Taxes 80.65 69.26 17.65 84.31 95.21 112.81 134.76Net Income After Taxes 302.42 241.63 61.60 294.16 332.19 393.60 470.19Minority Interest 0.33 - - - - - Net Income Before Extra.tems

302.75 241.25 61.60 294.16 332.19 393.60 470.1

Net Income 302.75 241.25 61.60 294.16 332.19 393.60 470.19


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Appendix 2: Balance Sheet

2012 2013 2014F 2015F 2016F 2017F 2018Fsetssh and Short Term Investments 90.56 82.82 475.88 500.68 612.77 588.94 828.24al Receivables, Net 231.25 307.79 408.74 411.99 465.68 507.80 561.9al Inventory 359.60 518.94 866.32 570.04 646.88 748.55 864.2paid Expenses 7.61 9.87 39.99 45.98 52.18 60.38 69

her Current Assets, Total 205.17 77.56 95.33 109.63 124.41 143.96 166.2al Current Assets 894.20 996.98 1,886.26 1,638.32 1,901.92 2,049.63 2,490.31perty/Plant/Equipment, Total - Gross 1,258.64 1,621.97 2,051.97 2,551.97 3,107.77 3,576.23 3,972.30perty/Plant/Equipment, Total - Net 854.68 1,128.47 1,429.64 1,750.67 2,064.86 2,227.96 2,261.10cumulated Depreciation, Total (403.96) (493.49) (622.32) (801.30) (1,042.92) (1,348.26) (1,711.20)angibles, Net - - - - - - te Receivable - Long Term 14.59 42.43 37.94 43.63 49.51 57.29 66.1her Long Term Assets, Total 36.41 46.52 68.21 78.44 89.01 103.00 118.9al Assets 1,799.88 2,214.40 3,422.05 3,511.06 4,105.29 4,437.88 4,936.46

bilitiescounts Payable 175.10 241.37 526.69 412.84 533.09 547.30 623.6crued Expenses 13.67 27.24 33.90 38.99 44.24 51.20 59.tes Payable/Short Term Debt 283.89 598.50 896.52 762.08 864.81 728.89 616.27rrent Port. of LT Debt/Capital Leases 332.89 80.29 126.72 145.72 165.37 191.36 220.92her Current liabilities, Total 47.19 39.07 44.98 51.73 58.70 67.93 78.4al Current Liabilities 852.74 986.47 1,628.81 1,411.37 1,666.21 1,586.67 1,598.39al Long Term Debt 204.77 295.56 466.47 536.42 608.73 704.40 813.2al Debt 821.55 974.34 1,489.71 1,444.23 1,638.90 1,624.65 1,650.43ferred Income Tax - - - - - - nority Interest (2.83) (2.44) (2.44) (2.44) (2.44) (2.44) (2.4her Liabilities, Total 60.49 69.89 78.76 78.76 78.76 78.76 78.7

al Liabilities 1,115.18 1,349.47 2,171.60 2,024.10 2,351.25 2,367.39 2,487.94areholder’s Equity mmon Stock, Total 33.90 33.90 35.82 35.82 35.82 35.82 35.8ditional Paid-In Capital (100.33) (100.33) 233.75 233.75 233.75 233.75 233.7tained Earnings (Accumulated Deficit) 751.13 931.36 980.88 1,217.39 1,484.47 1,800.92 2,178.95her Equity, Total - - - - - - al Equity 684.70 864.93 1,250.45 1,486.96 1,754.04 2,070.49 2,448.53al Liabilities & Shareholders' Equity 1,799.88 2,214.40 3,422.05 3,511.06 4,105.29 4,437.88 4,936.46


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Appendix 3: Cash Flow

2012 2013 2014F 2015F 2016F 2017F 2018FCash Flow-Operating Activities

Net Income 302.75 241.25 61.60 294.16 332.19 393.60 470.19Depreciation and Non-Cash Items 171.13 59.34 128.83 178.97 241.62 305.35 362.94Changes in Working Capital (180.83) (191.25) 198.32 (170.72) 19.03 141.16 106.61Cash from Operating Activities 293.05 109.33 (7.89) 643.85 554.78 557.79 726.51Cash Flow-Investing ActivitiesCapital Expenditures (319.59) (353.68) (430.00) (500.00) (555.81) (468.45) (396.07)Change in non-current assets 0.48 0.75 17.20 15.92 16.45 21.77 24.77Cash from Investing Activities (319.11) (352.93) (447.20) (515.92) (572.26) (490.22) (420.84)Cash Flow-Financing ActivitiesChange in equity (149.93) 167.70 336.00 - - - -Dividends (42.38) (61.02) (12.07) (57.66) (65.11) (77.15) (92.16)Change in debt 221.82 127.08 524.23 (45.48) 194.68 (14.26) 25.78Cash from Financing Activities 29.52 233.76 848.16 (103.14) 129.57 (91.40) (66.37)

Net Change in Cash 3.38 (7.74) 393.06 24.80 112.09 (23.83) 239.30 Net Cash - Beginning Balance 87.18 90.56 82.82 475.88 500.68 612.77 588.94Net Cash - Ending Balance 90.56 82.82 475.88 500.68 612.77 588.94 828.24


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Appendix 4: Common Size Balance Sheet

% of Total Assets 2012 2013 2014F 2015F 2016F 2017F 2018FAssetsCash and Short Term Investments 5.03% 3.74% 13.91% 14.26% 14.93% 13.27% 16.78%Total Receivables, Net 12.85% 13.90% 11.94% 11.73% 11.34% 11.44% 11.38%

Total Inventory 19.98% 23.43% 25.32% 16.24% 15.76% 16.87% 17.51%Prepaid Expenses 0.42% 0.45% 1.17% 1.31% 1.27% 1.36% 1.41%Other Current Assets, Total 11.40% 3.50% 2.79% 3.12% 3.03% 3.24% 3.37%Total Current Assets 49.68% 45.02% 55.12% 46.66% 46.33% 46.18% 50.45%Property/Plant/Equipment, Total - Gross 69.93% 73.25% 59.96% 72.68% 75.70% 80.58% 80.47%Property/Plant/Equipment, Total – Net 47.49% 50.96% 41.78% 49.86% 50.30% 50.20% 45.80%Accumulated Depreciation, Total -22.44% -22.29% -18.19% -22.82% -25.40% -30.38% -34.66%Intangibles, Net 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Note Receivable - Long Term 0.81% 1.92% 1.11% 1.24% 1.21% 1.29% 1.34%Other Long Term Assets, Total 2.02% 2.10% 1.99% 2.23% 2.17% 2.32% 2.41%Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Liabilities

Accounts Payable 9.73% 10.90% 15.39% 11.76% 12.99% 12.33% 12.63%Accrued Expenses 0.76% 1.23% 0.99% 1.11% 1.08% 1.15% 1.20% Notes Payable/Short Term Debt 15.77% 27.03% 26.20% 21.71% 21.07% 16.42% 12.48%Current Port. of LT Debt/Capital Leases 18.50% 3.63% 3.70% 4.15% 4.03% 4.31% 4.48%Other Current liabilities, Total 2.62% 1.76% 1.31% 1.47% 1.43% 1.53% 1.59%Total Current Liabilities 47.38% 44.55% 47.60% 40.20% 40.59% 35.75% 32.38%Total Long Term Debt 11.38% 13.35% 13.63% 15.28% 14.83% 15.87% 16.47%Total Debt 45.64% 44.00% 43.53% 41.13% 39.92% 36.61% 33.43%Deferred Income Tax 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Minority Interest -0.16% -0.11% -0.07% -0.07% -0.06% -0.06% -0.05%Other Liabilities, Total 3.36% 3.16% 2.30% 2.24% 1.92% 1.77% 1.60%Total Liabilities 61.96% 60.94% 63.46% 57.65% 57.27% 53.34% 50.40%

0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Shareholder’s Equity 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Common Stock, Total 1.88% 1.53% 1.05% 1.02% 0.87% 0.81% 0.73%Additional Paid-In Capital -5.57% -4.53% 6.83% 6.66% 5.69% 5.27% 4.74%Retained Earnings (Accumulated Deficit) 41.73% 42.06% 28.66% 34.67% 36.16% 40.58% 44.14%Other Equity, Total 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Total Equity 38.04% 39.06% 36.54% 42.35% 42.73% 46.66% 49.60%Total Liabilities & Shareholders' Equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%


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Appendix 5: Common-Size Income Statement

2012 2013 2014F 2015F 2016F 2017F 2018FTotal Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of Revenue, Total 80.94% 82.88% 90.00% 84.14% 84.14% 84.14% 84.14%Gross Profit 19.06% 17.12% 10.00% 15.86% 15.86% 15.86% 15.86%

Selling/General/Admin. Expenses, Total 5.25% 5.40% 5.40% 5.40% 5.40% 5.40% 5.40%Depreciation/Amortization 0.21% 0.21% 0.26% 0.32% 0.38% 0.42% 0.43%Other Operating Expenses, Total 0.23% 2.54% 0.74% 0.74% 0.74% 0.74% 0.74%Total Operating Expense 86.63% 91.02% 96.40% 90.59% 90.65% 90.69% 90.70%Operating Income 13.37% 8.98% 3.60% 9.41% 9.35% 9.31% 9.30%Interest Expense, Net Non-Operating -2.01% -1.61% -2.40% -2.45% -2.41% -2.19% -1.92%Interest/Invest Income - Non-Operating 0.08% 0.04% 0.11% 0.10% 0.09% 0.08% 0.07%Interest Inc.(Exp.),Net-Non-Op., Total -1.93% -1.56% -1.90% -2.35% -2.32% -2.12% -1.86%Net Income Before Taxes 11.44% 7.41% 1.70% 7.06% 7.03% 7.19% 7.44%Provision for Income Taxes 2.41% 1.65% 0.38% 1.57% 1.57% 1.60% 1.66%

Net Income After Taxes 9.03% 5.76% 1.32% 5.49% 5.46% 5.59% 5.79%Minority Interest 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Net Income Before Extra. Items 9.04% 5.75% 1.32% 5.49% 5.46% 5.59% 5.79%

Net Income 9.04% 5.75% 1.32% 5.49% 5.46% 5.59% 5.79%


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Appendix 6: Key Financial Ratios

2012 2013 2014F 2015F 2016F 2017F 2018F

Liquidity Ratios

Current Ratios 1.05 1.01 1.16 1.16 1.14 1.29 1.56

Quick Ratio 0.48 0.35 0.47 0.53 0.53 0.55 0.65Cash Ratio 0.11 0.08 0.29 0.35 0.37 0.37 0.52

Efficiency Ratios

Total Assets Turnover 1.86 1.89 1.36 1.53 1.48 1.59 1.65

Fixed Assets Turnover 3.92 3.72 3.26 3.06 2.95 3.16 3.59 NWC Turnover 80.79 398.98 18.11 23.62 25.81 15.2 9.11

Account Receivable Turnover 16.52 15.56 13.01 13.06 13.86 14.46 15.19

Days Sales in Receivable 22 23 28 28 26 25 24Inventory Turnover 7.88 7.91 6.06 6.28 8.41 8.49 8.48

Days Sales in Inventory 46 46 60 58 43 43 43Account Payable Turnover 13.82 16.69 10.92 9.6 10.82 10.96 11.68

Profitability Ratios

Gross Profit Margin 19.10% 17.10% 10.00% 15.90% 15.90% 15.90% 15.90%EBIT Margin 13.40% 9.00% 3.60% 9.40% 9.30% 9.30% 9.30%

EBITDA Margin 13.60% 9.20% 3.90% 9.70% 9.70% 9.70% 9.70%

Net Profit Margin 9.00% 5.80% 1.30% 5.50% 5.50% 5.60% 5.80%Return on Assets (ROA) 16.80% 10.90% 1.80% 8.40% 8.10% 8.90% 9.50%

Return on Equity (ROE) 44.20% 27.90% 4.90% 19.80% 18.90% 19.00% 19.20%

Solvency Ratios

Debt to Assets Ratio 0.46 0.44 0.44 0.41 0.4 0.37 0.33

Debt to Equity Ratio 1.2 1.13 1.19 0.97 0.93 0.78 0.67Equity Multiplier 2.63 2.56 2.74 2.36 2.34 2.14 2.02

Interest Coverage Ratio 6.66 5.58 1.5 3.84 3.88 4.24 4.84

Long-term Debt to Equity Ratio 0.3 0.34 0.37 0.36 0.35 0.34 0.33

Cash Flow Ratio

OCF to Sales Ratio 0.09 0.03 0 0.12 0.09 0.08 0.09

Short Term Debt Coverage 1.03 0.18 -0.01 0.84 0.64 0.77 1.18

Dividend Coverage (CFO/Dividend) 6.92 1.79 -0.65 11.17 8.52 7.23 7.88Capex coverage (CFO/CAPEX) 0.92 0.31 -0.02 1.29 1 1.19 1.83

Du Pont Identity

ROE = 0.44 0.28 0.05 0.2 0.19 0.19 0.19 Net Profit Margin x 9.00% 5.80% 1.30% 5.50% 5.50% 5.60% 5.80%

Assets Turnover x 1.86 1.89 1.36 1.53 1.48 1.59 1.65


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Equity Multiplier 2.63 2.56 2.74 2.36 2.34 2.14 2.02

Appendix 7: DCF Analysis

2014F 2015F 2016F 2017F 2018FEBIT 167,874,733 504,380,434 568,681,728 655,595,260 755,897,738Tax on EBIT 37,396,697 112,358,555 126,682,664 146,044,000 168,387,931NOPLAT 130,478,035 392,021,879 441,999,064 509,551,260 587,509,807Depreciation 128,828,583 178,972,313 241,621,789 305,347,537 362,935,531Capex (430,000,000) (500,000,000) (555,806,756) (468,451,821) (396,069,405)Changes in WorkingCapital 198,319,605 (170,718,387) 19,032,774 141,155,689 106,612,799FCFF (369,012,987) 241,712,579 108,781,324 205,291,287 447,763,134Terminal Value 9,424,968,598Discounted FCFF andTerminal Value (329,230,794) 192,405,219 77,255,736 130,078,557 5,581,248,070

Enterprise Value 5,651,756,788Excess Cash 475,883,068Outstanding Debt 1,489,709,480Equity Value 4,637,930,375Outstanding Share 1,791,000Equity Value per share 2,590


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Appendix 8: DCF Assumptions

Weighted Average Cost of Capital

Variable Value Basis

Risk Free Rate 7.91% 10-year Government Bond

Risk premium 8.30% Damodaran

Beta 0.999 Team Computations

Marginal tax rate 25% Corporate Income tax in Indonesia

Cost of Equity 16.20% Team Computations

Cost of Debt 11.50% Interest rate on company’s financial debt

WACC 12.08% Team Computation

1. Risk-free rate

The risk-free rate was based on 10-year Indonesia government Bonds with yield of 7.91% as of27 December 2014.

2. Beta

The value of beta was derived by computing covariance of daily return MAIN with IDX fromDecember 2009 to December 2014.

3. Market Risk Premium

The market risk premium is based total equity risk premium of Damodaran.

4. Capital Structure

Capital Structure is based on Company’s disclosure in 2013 Annual Report. The portion of debtand equity to total capital is 54.37% and 45.63% respectivel


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Sales

Feedmill, DOC, and Broiler Divisions were forecasted using chicken consumption growth rate byGPPU while Processed Food Division was projected using conservative processed food growthfrom Euromonitor.

Capital Expenditure

Capital Expenditure for 2014 fiscal year is based on management allocation which wasannounced in 3Q2013. For 2015 fiscal years, we forecasted the capital expenditure will increaseas company’s diversification strategy to expand its chicken processed food strategy .

Depreciation

Depreciation was estimated using proportion of historical depreciation to total gross fixed

assets. The depreciation also takes into account capital expenditure for each year.

2013 2014F 2015F 2016F 2017F 2018Fctory Depreciation 81,770,644.00 116,496,670.13 161,840,471.50 218,492,925.61 276,118,626.69 328,194,100.73lling and Gen. Adm 8,655,942.00 12,331,912.41 17,131,841.77 23,128,863.84 29,228,910.29 34,741,429.95

otal 90,426,586.00 128,828,582.55 178,972,313.27 241,621,789.46 305,347,536.97 362,935,530.68

2013 2014F 2015F 2016F 2017F 2018Fedmill 2,880,396,549 3,237,595,425 3,718,201,365 4,211,796,656 4,867,758,818 5,612,254,334edmill Growth 29.7% 12.4% 14.8% 13.3% 15.6% 15.3%

OC 855,884,536 784,970,451 901,495,653 1,021,170,185 1,180,211,339 1,360,717,828OC Growth 30.16% -8.29% 14.84% 13.28% 15.57% 15.29%oiler 447,829,873 502,628,624 577,241,499 653,870,939 755,707,430 871,288,504oiler Growth -5.00% 12.24% 14.84% 13.28% 15.57% 15.29%od Processing 8,971,507 135,892,622 163,071,147 195,685,376 234,822,451 281,786,942od Processing Growth 1414.7% 20.0% 20.0% 20.0% 20.0%tal Revenue 4,193,082,465 4,661,087,122 5,360,009,664 6,082,523,155 7,038,500,039 8,126,047,608venue Growth 25.18% 11.16% 14.99% 13.48% 15.72% 15.45%venue Drivericken Consumption byPU (kg/capita)

8.6 9.97 11.45 12.97 14.99 17.2826336

icken Consumptionowth

16.85% 15.93% 14.84% 13.28% 15.57% 15.29%

ocessed Foods GrowthEuromonitor

10.50% 10.50% 20.00% 20.00% 20.00% 20.00%


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30%

21%7%

10%

9%

23%

Day Old Chick (DOC) Market ShareMarket Share

CPIN JPFA SIPD CJ MAIN Others

Appendix 9: Revenue Breakdown and Market Share

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F

Revenue Breakdown 2009 - 2018FFeedmill DOC Broiler Food Processing

32%

24%8%

6%

6%

24%

Feedmill Industry Market Share

CPIN JPFA MAIN CJ SIPD Others


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Appendix 10: Capacity Expansion Plans

From company data, we can see the breakdown of capital expenditures into establishment of feedmill inCentral Java and Makasar, breeder farms, broiler farms, and food processing.

Expenditures (billions)

Capacity/year 2013 2014F 2015FFeedmill (Central Java) 360,000 tpa 90 120 5

Feedmill (Makassar) 240,000 tpa 20 160 120

Breeder farms 30,000,000 chickens 150 150 80

Broiler farm 6,000,000 kgs 35 70

Processed foods 15,000 tpa 225

Total capex 295 430 500

From this point of view, we can see that IDR 215 billions is expended for feedmill in Central Java, IDR300 billions for feedmill in Makasar making it IDR 515 billions for feedmill capacity addition. Breederfarms spend IDR 380 billions; broiler farms spend IDR 105 billions, and IDR 225 billions for processedfoods.

Hereafter, we can use extrapolation to deduce proportion of capex for each project in the future, which is42% for feedmill, 31% for breeder farms, 9% for broiler, and 18% for processed foods. Then we cangenerate the project breakdown of capex in our forecasting periods:

Expenditures (billions)

2013 2014F 2015F 2016F 2017F 2018FFeedmill 110 280 125 233.5 196.6 166.3

Breeder farms 150 150 80 172.4 145.1 122.8Broiler farm 35 70 47.8 40.2 34.1

Food processing 225 102.3 86.1 72.9Total capex 295 430 500 556 468 396

Based on known capacity expansion plans in 2013 – 2015, we can estimate costs for building production plants to generate each capacity addition. This cost per unit measurement can be utilized to estimate

additional capacity generated.

Cost for Adding Capacity (IDR thousands)

Feedmill 923.6 per tpaBreeder

12.67per chicken

Broiler17.50

per kgs


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FP15,000

per tpa

Knowing cost for adding capacity we can get the result of capacity addition in forecasted periods:

2013 2014F 2015F Mid-Total 2016F 2017F 2018FFeedmill (tpa)

128,155 326,214 145,631 600,000 252,834 212,817 180,076Breeder farms(chicken) 11,842,105 11,842,105 6,315,789 30,000,000 13,607,368 11,453,684 9,691,579Broiler farm(kgs) 2,000,000 - 4,000,000 6,000,000 2,732,343 2,299,886 1,946,057Food processing(tpa) 15,000 15,000 6,820 5,741 4,858

With additional capacity for each period, we can know the total production capacity for company in eachyear (note that previously was capacity addition for each period, now it is total production capacity thatmeans current production capacity added by accumulated capacity addition in each year):

2013 2014 2015 2016 2017 2018Feedmill (tpa)

848,155 1,174,369 1,320,000 1,572,834 1,785,651 1,965,726Breeder farms(chicken) 175,282,105 187,124,211 193,440,000 207,047,368 218,501,053 228,192,632Broiler farm(kgs) 24,400,000 24,400,000 28,400,000 31,132,343 33,432,229 35,378,286Food processing(tpa) 7,200 7,200 22,200 29,020 34,761 39,619

Utilization:

For plant utilization rates, we make assumption based on the following table. Each plant established in acertain year period will operate in 50% utilization rate for its first year, 60% in second year, and so on.Plant is expected to utilize 90% capacity in the fourth year of its establishment and is assumed to havestable utilization rate of 90% in the long-term.

Year 1 2 3 4 5Utilization Rate 50% 60% 80% 90% 90%


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