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10/6/2015 Ultrajaya Milk Industry & Trading Company | ULTJ | Saham .WS
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JUNE 19, 2013 • Indo
Ultrajaya Milk Industry & Trading Company | ULTJ
Ultrajaya Milk Industry & Trading Company | ULTJ IJ | Last Rp3,825 | Market Cap US$1.1bn |
Average Trading Value US$1m
Background.Leading Indonesia F&B player, Ultrajaya produces beverages manufactured with
ultra high temperature (UHT) technology and packaged in aseptic packaging material (tetra
pack). It is most popular for its UHT milk, known as Ultra Milk; in addition, Ultrajaya also
offersfruit juices, tea and traditional drinks, and health tonics beverages – other strong brand
names include Teh Kotak (very popular too like Ultra Milk), Teh Bunga, Sari Asem, and Sari
Kacang Ijo (Health Drinks). Ultrajaya also produce some food products ie sweetened condensed
milk (Cap Sapi brand), butter and powdered milk. Production facility located in Bandung,
Ultrajaya also contract manufactures juice drink beverage – Buavita/Go-Go for Unilever
Indonesia, which Ultrajaya sold back in 2008, and powder milk Morinaga for Sanghyang Perkasa
(Kalbe Farma). Ultrajaya owns a 30% stake in Ultrajaya Kraft Indonesia.
UHT beverage currently makes up >90% of Ultrajaya sales (2/3 milk, ~20% packaged tea), and
that according to Ultrajaya, gives the company55% market share in the UHT beverage industry
(50+% UHT Milk, 60% UHT Tea market share, according to AC Nielsen segmentation of UHT
beverage market). Last year, revenues grew 34% yoy to Rp2.8trn, with earnings growing a
stunning 175% yoy.
Fastest growing dairy subsegment, amidst low milk consumption rate. Just like any other
consumer product,Indonesia annual per capita milk consumption is lowat 12-13kg. Other ASEAN
countries, eg. SIngapore, Malaysia, Thailand consume 3-4 times more, but that too, to begin with,
as a region, ASEAN isnt even consuming much (see attached Milk Consumption Per Capita
Global Mapping) when compared to the world at large. Even India, though may be pretty similar
to Indonesia in many respects, be it volatile currency, long-term infrastructure growth prospects
etc, Indians actually consume 7-8X more milk per capita vs Indonesians…. Hardly surprising
then, the Indonesian government/milk producers have embarked on this huge ‘drink milk’
HOME Business About
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campaign, with Indonesia government coming out with a blueprint: not only to educate the
public the health benefits of drinking milk, but also to get Indonesians to consume more milk
and raise milk consumption per capita levels to 15 litres by 2014 from 10 litres back in 2010. This
growth, just like other consumer product in Indonesia, will be underpinned by the country’s
rising urbanisation and per capita increase….
What is even more positive is the fact that the dairy subsegment Ultrajaya been competing ie
liquid milk has been fastest growing in recent years. There are three main dairy
subsegments: liquid ready-to-drink UHT milk (26%), which Ultrajaya is a dominant player,
sweetened condensed milk (35%) and powdered milk (29%). According to World Bank, in the last
six years, liquid ready-to-drink UHT milk grew fastest by 17% annually, while sweetened
condensed milk grew by much lesser 4.7% pa.
While one can argue the higher growth been driven by consumers’ preference to consume more
fresh and natural products, structurally, the fact that Indonesia has over 17,000 widely
distributed islands, makes it challenging to distribute perishable produce to major urban centres
in Indonesia’s 33 provinces. Currently, most of the distribution of local products is based around
seaports and regional depots, and companies have problems to maintain a cold chain system
for perishable products made from milk, for example, lack of refrigeration and an inferior
distribution system. This makes UHT milk the most feasible product for milk consumption in
Indonesia (these beverages are heated at 140 Celsius for 3-4 seconds, so they become sterile and
then packed in aseptic carton packaging which shelf life can go as long as one year),
contributing to its higher growth rates. Ultrajaya expects Indonesia milk consumption to grow
by 8% pa for the next ten years, partly driven by UHT milk, of which the company says will grow
even faster at 20% pa least in next 5 years (note: this was actually raised from mgmt previous
projection back in 2009 for 7-8% milk consumption growth next 10 years and 18% growth next 5
years).
Interestingly, according to Ultrajaya, the company has been to some extent positively surprised
with the very strong demand esp in recent 12-18 months. This is so much so that Ultrajaya
management was completely caught off guard back in 2011 (explaining the only 2011’s revenue
growth of 12% then), though Ultrajaya mgmt did eventually ride on this stronger demand by
posting 2012’s very strong 34% yoy topline growth. 2013 may in fact be the first time Ultrajaya is
seeing second year of consecutive 20+% UHT volume growth (1Q13 volume up 20+% yoy), strong
demand continuing from 2012’s strong volume growth 25.6% yoy (note: 2011 volume grew 10% vs
2010’s 18.2% yoy, similar to 2009’s 10.2% and 2008’s 23.2% respectively).
Dominant UHT milk player, price leader.Though the industry looks fragmented with over 30
milk processing-related companies in Indonesia, really,only few dairy processors dominate the
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industry, with Ultrajaya the largest in the liquid milk market. Below, we list out the dairy product
segments, along with the dominant players, as well as the number of players in the segment.
1) Liquid – Ultrajaya, Indomilk, Frisian Flag, Nestle, Greenfield (13)
2) Sweetened Condensed Milk – Frisian Flag, Indolakto (4)
3) Powdered – Nestle, Sari Husada, Indomilk and Frisian Flag (12)
4) Ice–Cream – Unilever, Indomilk, Campina, Diamond (4)
5) Yoghurt – Yakult, Yummy, Danone, Diamond, Cimory (6)
As seen in the table below,Ultrajaya commands ~30% of the liquid milk market in Indonesia
(though mgmt says it is 42%!). This dominance, plus Ultrajaya well-entrenched UHT brand- been
in the market since mid 1970s, gives Ultrajaya strong pricing power, often seen as a price leader.
In fact, back end-2011 when Ultrajaya raised price by 5%, UHT beverage product volume still
grew by 26% the following year!
Generally, Ultrajaya has been continuously raising prices by 3-5% yearly, where it raised prices
in four out of the last five years (2009, 2010, end-2011, March 2013). In 2012, Ultrajaya did raise
prices too, though mainly to factor in/differentiate higher logistics costs for rural provinces vs
cities (hence the differential pricing between rural and cities now).
Strong earnings growth, underpinned by continued debottlenecking efforts as well as rising
dairy product prices. In part by expanding their dairy farm, and increasing purchase from dairy
cooperatives (Ultrajaya currently cooperate with 8-10 ‘150-200 tons/day’ cooperatives), Ultrajaya
is looking to accelerate its overall production capacity by 20-25%(note Ultrajaya generally look
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to raise capacity by 20% each year). This, and more plant facility debottlenecking efforts, should
underpin its min 20% revenue growth target for this year, which already, 1Q revenues grew +25%
yoy to Rp803bn.
What was equally impressive was the rise in its 1Q13 margins – 17.4% vs 1Q12’s 13.7%. Though not
all these higher margins may be sustainable – Ultrajaya raised dairy prices by 3-5% early March
in anticipation of higher milk raw materials costs (main cost production), which as seen below,
milk raw material prices did rise lately, mainly due to bad draught in New Zealand resulting in
fewer land available for grazing and raising cattle feed price, still, we expect Ultrajaya to see
higher 2013 margins driven by better efficiency and strong cost management. Generally, unless
there are major shocks as seen during GFC (more about this later), Ultrajaya has historically
been able to pass on most of its cost increases given Ultrajaya mainly sells to the more affluent
middle-income class consumers. This is most evident by its stable GP margins in last 3 years,
notwithstanding the relatively volatile milk commodity prices. The strong 1Q13 topline and
margins supported the 61% pre-tax growth, with net profit rising a stunning 147% to Rp115bn, vs
1Q12’s Rp47bn (though note 1Q12 weigh down by high tax expense).
In our call with Ultrajaya mgmt two weeks back, while mgmt did not give specific earnings
guidance, mgmt did flag Ultrajaya targets for at least 20% topline growth every year. Assuming
Ultrajaya repeats its 1QFY13 earnings next three quarters, this works out to ~Rp460m, implying
30% yoy earnings growth this year. This may well pale in comparison to last year’s record
growth, but still, comparing against the ASEAN F&B universe, this will be the strongest F&B
company growth in the region!
Strong free cashflow generation with no major capex plans (at least till 2016) could balloon
cash coffers, potentially higher dividends on card. Given the strong 1Q13 earnings, Ultrajaya
saw strong 1Q13 free cashflow generation of Rp149bn, and this drove net cash to Rp677bn (~6%
market cap), vs 4Q12’s Rp433bn (note Ultrajaya paid down some debt in 1Q13). With no real
capacity expansion plans near-term, having just had one in 2010/2011, this cash coffers could
balloon further, translating to potentially higher dividends or perhaps M&A to further accelerate
its growth (though we doubt it would be the latter given how Ultrajaya mgmt has preferred in
the past to grow their own brands). Ultrajaya currently has a production capacity of 300m litres;
apart from higher utilisation, mgmt believes it can optimise this capacity further via
debottlenecking to meet future years’ demand (eg. add on tankers, reconfiguring production
lines). It will be sometime in 2016/2017, before Ultrajaya expects to invest in a new plant, of
which mgmt says the future location will likely be away from its existing Bandung facility
(probably Jakarta). Ultrajaya mgmt did not give any indication of the size of the plant.
Again, assuming Ultrajaya maintains its strong 1Q13 FCF generation for next three
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quarters,estimated FCF yield could be potentially 5%, and end-2013 net cash could swell well to
Rp1.1trn or ~10% market cap. OK, this is perhaps little too aggressive, but hope you get the point
that Ultrajaya free cashflows momentum is very strong, building on from last year where it saw
its free cashflow expand significantly to Rp472bn (2012) vs 2011/2010’s Rp58/70bn respectively…
Biggest (and probably only) risk: imported milk powder raw material cost, be it due to
depreciating Rupiah or volatile milk powder prices. As Indonesia is not self sufficient in terms
of dairy production, Ultrajaya rely on imported milk powder to meet its dairy raw material
requirement needs (milk powder-liquid milk conversion ratio is at 7-8X). The imported milk
powder, which easily makes up more than half of Ultrajaya requirement, generally come from
Australia/New Zealand – exposing Ultrajaya not only to international milk powder prices but
also forex volatility.To Ultrajaya’s credit, the company has been trying to manage its overall raw
material sourcing/price volatility risk by working more closely with cooperatives around
Bandung, as well as managing its owned farm with some 2,900 milking cows, but still, given the
significant shortfall, the company will have to rely on the international dairy market (note its
owned farm contribute 1/4 of its local supply, rest coming from farmers cooperatives)….
This risk was in fact most pronounced back in 2008 when both the Rupiah and milk powder
prices trended unfavourably against Ultrajaya. This hit profitability hard, swinging its operating
margins from 2007/2006’s +7-8% to -5% that dreadful year – only time it had operating loss,
clearly showing how bad the risk can be for the dairy producer. This year thus far, while onshore
Rupiah has been only slightly weaker ytd against US$ (we do note offshore Rupiah rate way
higher above Rp10,000/US$), international milk powder prices have also been higher in 2Q vs 1Q
(though now coming off – see chart above). Though this may appear negative since it should
directly hit Ultrajaya profitability like it did back in 2008, mgmt responded when we asked by
citing Ultrajaya already anticipating the temporary spike in milk prices (recall it raised prices
earlier this year in anticipation of higher raw material milk prices), hence the company has to
some extent been stocking up (and thus less likely to buy during high price periods like now)…
Ultrajaya mgmt did not provide breakdown of its COGS, but speaking to other dairy producers in
Indonesia, milk raw material costs represents 35% of sales. A simple back-of-envelope earnings
sensitivity would suggest every 10% increase in Rupiah or milk raw material could translate to
3.5% margin hit, though in reality, it may not be that much depending on the company’s raw
material inventory stocking strategy and potential increase in selling price…..
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