Fitch Assigns Japfa Comfeed's Rupiah Bonds 'AA-(idn)' Rating
(The following statement was released by the rating agency) JAKARTA, April 19 (Fitch) Fitch Ratings Indonesia has assigned PT Japfa Comfeed Indonesia Tbk's (Japfa, AA-(idn)/Stable) proposed senior unsecured bond a National Long-Term Rating of 'AA-(idn)'. The bond issue of up to IDR1 trillion is part of the existing IDR3 trillion bond programme, which was upgraded to 'AA-(idn)' on 14 December 2016, and is consequently rated at the same level as the programme. Japfa expects to use the proceeds mainly to refinance its outstanding USD195 million 6% senior unsecured notes, which are due in 2018. 'AA' National Ratings denote expectations of very low default risk relative to other issuers or obligations in the same country. The default risk inherently differs only slightly from that of the country's highest rated issuers or obligations. KEY RATING DRIVERS Robust Margins, Lower Leverage: Japfa's EBITDA margin improved to 13.1% in 2016, from 9.1% in 2015, driven by more conducive market conditions. Profitability in the animal-feed segment was up, while sales of day-old chicks (DOC) returned to significant profit after losses in 2014-2015. Japfa's net debt-to-EBITDA leverage dropped to 0.9x, from 2.6x. We estimate leverage will remain at around 1.5x, assuming the EBITDA margin narrows from 2017. We also expect Japfa to continue to generate FCF over the next three years, with a healthy fixed-charge coverage averaging over 4x. Improved Market Conditions: The Indonesian government has taken steps to manage poultry supply since 2H15, after oversupply weakened prices for DOC and live birds in 2H14 and 1H15 - which resulted in losses at producers, including small-scale farmers. The significant jump in DOC profitability raises the risk of an increase in DOC supply that may impact prices in 2017, though we believe the likelihood of a recurrence of the oversupply situation seen earlier is low with enhanced authority from the Ministry of Agriculture to manage the domestic chicken supply. Fitch also sees robust growth prospects for chicken demand in Indonesia as per capita poultry consumption is low, and the agency expects GDP growth to accelerate. Cost Pass-Through Ability: Japfa is able to mitigate its exposure to rising raw material costs through a strong ability to pass through cost increases to customers in the animal-feed segment. This is due to its high market share and its ability to retain corn inventory and adjust output. PT Charoen Pokphand Indonesia Tbk (CPIN) and Japfa together control about 50% of Indonesia's poultry feed market, and react similarly to increases in raw material costs by seeking to raise prices. Japfa's corn dryers also allow it to store dried corn for up to four months, providing some flexibility in production. Debt Maturities Being Addressed: Japfa repaid IDR1.5 trillion of bonds in January and February 2017, using its cash balance of IDR2.7 trillion as of end-2016. The company issued IDR1 trillion of bonds with tenors of three and five years in November 2016 under its IDR3 trillion bond programme. Liquidity also improved due to an injection of IDR702 billion of cash by global investment firm KKR. In August 2016, KKR took a 12% stake in Japfa through a combination of primary and secondary share purchases. We estimate that Japfa will be able to repurchase or repay the USD195 million of its notes maturing in 2018, using proceeds from the latest US dollar bond and the proposed issuance under its Indonesian rupiah bond programme. DERIVATION SUMMARY Japfa's rating is well positioned relative to PT Sumber Alfaria Trijaya Tbk (Alfamart; AA-(idn)/Stable) and PT Sri Rejeki Isman Tbk (Sritex; A+(idn)/Stable). Fitch believes that both Japfa and Alfamart have strong market positions - Japfa is one of the leading poultry players in Indonesia, and Alfamart is Indonesia's largest mini-market operator by number of stores. Fitch views that Alfamart's larger EBITDA scale is offset by Japfa's lower leverage and higher interest coverage in 2017-2018. Compared to Sritex, Fitch believes that Japfa's larger EBITDA scale and lower leverage warrants a one-notch differential between the ratings of the two companies. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Animal-feed sales volume to rise by 3% annually from 2017 - Average annual sales volume growth of 3%-5% for DOC and live poultry from 2017 - EBITDA margin narrows to around 9% from 2017 - Capex of around IDR700 billion from 2017 RATING SENSITIVITIES Developments that may, individually or collectively, lead to positive rating action include: - Leverage (net debt/EBITDA) below 1.5x on a sustained basis (2016: 0.9x) - No significant weakening of industry fundamentals and Japfa's market position Developments that may, individually or collectively, lead to negative rating action include: - Leverage above 2.5x on a sustained basis - Significant reduction in size of the animal-feed segment, which would be demonstrated by its share of total revenue falling below 30% (2016: 36%) - Failure to adequately address the maturity of its US dollar bonds in 2018. Contact: Bernard Kie Associate Director +62 21 29886815 PT Fitch Ratings Indonesia DBS Bank Tower, 24th Floor, Suite 2403 Jl Prof Dr Satrio Kav 3-5 Jakarta 12940 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Date of Relevant Rating Committee: 13 December 2016 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(idn)' for National ratings in Indonesia. Specific letter grades are not therefore internationally comparable. 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