TEXT-Fitch Affirms Indonesia's Japfa at 'A+(idn)'; Outlook Stable

Mon Oct 15, 2012 12:16am EDT

(The following was released by the rating agency)

JAKARTA/SINGAPORE/SYDNEY, October 15 (Fitch) Fitch Ratings has affirmed Indonesia-based PT Japfa Comfeed Indonesia Tbk's (Japfa) National Long-Term Rating at 'A+(idn)' with Stable Outlook. At the same time, the agency has affirmed Japfa's bond programme I/2012 and IDR1.5tn 2012 bonds tranche I and II due in 2017, issued under the programme, at 'A+(idn)'.

The ratings reflect Japfa's position as the second-largest supplier of animal feed and day-old-chicks (DOC) by market share in Indonesia. An established track record, high brand awareness, and widespread distribution networks have helped defend their market share and earned them close relationship with end buyers. Japfa's ability to pass on raw material costs and foreign exchange fluctuations to its end buyers enables it to protect its feed margins.

Margin stability stems from its market leadership; Japfa, together with its closest competitor, PT Charoen Pokphand Indonesia (CPIN), controls over 50% of the Indonesian animal feed and DOC market. Importantly, Japfa sources 70% of its corn requirement domestically and invests in corn dryers, thereby reducing reliance on imported raw materials.

Japfa's long-term prospects are underpinned by Indonesia's rising consumer spending power and its much lower per capita consumption of chicken compared with neighboring countries. High price disparity between chicken and other protein sources makes chicken an attractive alternative, particularly given the country's large Muslim population.

As of 1 July 2012, Japfa merged with its 73.4% subsidiary: PT Multibreeder Aditama Indonesia (MBAI) as part of a corporate reorganisation. With this reorganisation completed, management expects to gain higher operating efficiencies, streamline the supply chain, and extend its foothold in the Indonesian poultry business. The ratings also capture the company's susceptibility to disease outbreaks which have a direct impact on profitability. However, this risk is partly mitigated by Japfa's improved health security measures and diversified breeding locations.

The Stable Outlook reflects Fitch's expectation that Japfa will be able to maintain its current financial profile over the next 12 to 24 months. This is characterised by EBITDA margins ranging between 9%-10%, manageable net debt to EBITDA of less than 2.5x, and comfortable liquidity position. What could trigger a rating action? Negative: Future developments that may, individually or collectively, lead to negative rating action include: - net debt to EBITDA exceeding 2.5x on a sustained basis - EBITDA margin falling below 8% on a sustained basis Rating upside is limited given the constraints of Japfa's limited operating scale and inherent risks to disease outbreaks.

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